If you have a mortgage and a mailbox, then you’ve probably received at least one offer inviting you to consider refinancing. Frankly, you’ve probably received way more than one, so it’s only natural to wonder, “How does refinancing work?” It’s fairly simple.
How Does Refinancing Work?
How does refinancing work on a practical level? What happens when you refinance? As NerdWallet explains, when you get a home loan to buy a house, the money from your loan goes to the seller to pay for the home. When you refinance your mortgage, you take out a new loan, and that new loan is used to pay off your original home loan.
Why Do Homeowners Refinance?
Why would homeowners opt for refinancing? According to Investopedia, there are several possible reasons:
- Interest Rates: A lower interest rate means that you’re paying less to borrow money, so it can produce substantial savings over the course of a mortgage.
- Loan Terms: Extending the length of a loan generally means lower payments and a higher total cost. Shortening it may raise your monthly payment, but it often results in significant overall savings.
- Switching Between Adjustable- and Fixed-Rate Loans: Adjustable-rate loans are unpredictable, so when interest rates are low, many people prefer to swap them for the security offered by a fixed-rate loan.
- Turning Equity into Cash: Refinancing offers a chance to cash out some or all of your home equity. This is one method for gaining access to cash if you need to raise funds to deal with a financial emergency, are planning a large purchase or investment, or wish to consolidate your debts.
What Types of Refinance Loans Are Available?
With so many different reasons to refinance, it should come as no surprise that there are several different kinds of loan products available to meet these needs. As Experian reports, there are three main types of refinance loans:
- Rate-and-Term Refinance Loans: When your goal is a lower monthly mortgage payment or a switch from an adjustable rate to a fixed rate, these loans are ideal. They allow for changes in the interest rate, loan term, or both. However, the amount of the loan cannot be altered.
- Cash-Out Refinance Loans: These loans are used to access your home equity. Doing so results in cash in hand for the borrower and correspondingly higher loan amounts. Notably, this also tends to bring higher interest rates and monthly payments than comparable rate-and-term refinance loans.
- Cash-In Refinance Loans: These loans are uncommon, but they are useful. Basically, you’d bring cash to the table while refinancing to further reduce your mortgage balance. It could be a handy trick if you are eager to qualify for a better interest rate, want to keep your mortgage below a specific limit, want to eliminate the need for private mortgage insurance, or had been underwater on your mortgage.
Does Refinancing Make Sense?
If you’re trying to determine if refinancing makes sense for you, CreditKarma suggests weighing the costs and benefits. Think about how much refinancing will cost you in terms of closing costs and the potential impact on your creditworthiness. Then, consider how much you might expect to save each month. Finally, calculate how long it will take you to break even, and decide if refinancing is a move that makes sense for you.
Are you interested in learning more about how refinancing works? Turn to the loan experts at PrimeLending West Texas. With our experience and commitment to customer service, we delight in delivering useful answers to your questions, and we’re happy to serve as your guide through the mortgage process. In fact, our process is so streamlined and simple, it may only take a few minutes to see if we can help you reach your financial goals. Contact us today to learn more.