Believe it or not, an estimated 13 million homeowners can save money each month by refinancing their existing home loan. However, making the decision to refinance your house isn’t as simple as you might think.
You need to understand how the process works and what you can expect from the new loan before you can tell if it’s right for you.
If you’re one of the many homeowners asking yourself, “what does it mean to refinance your home?” don’t panic. This simple guide breaks down everything you need to know to make the smartest financial decision for your needs.
How Refinancing Works
When you refinance a mortgage, you’re essentially taking out an entirely new loan on your home. The new loan pays off the amount you owe on the original mortgage and allows you to potentially lower your monthly payments or free up cash.
The process of refinancing a mortgage looks a lot like applying for your original home loan.
You’ll need to speak with your preferred lender about your options. This could be the mortgage company that originally financed your home or an entirely new bank. It’s up to you.
The lender will ask you to fill out an application to get the process started. They’ll need to understand your personal financial situation, your credit score, and the amount of equity you’ve built up in your home.
Typically, the higher your credit score is and the lower your outstanding debt is, the better your loan terms will be. If the lender approves your application and you agree to the new loan’s terms and interest rate, you’re free to accept the loan.
Keep in mind that you’re not required to accept the loan offer if you’re not happy with the loan’s terms.
Why Refinancing a Mortgage Is a Good Idea
When you applied for your original mortgage, you did so to purchase your home. So, why would you want to refinance a home in the first place? Though the answer varies from person to person, there are a few compelling situations that make refinancing your house a great option.
Take Advantage of Lower Interest Rates
Fixed-rate mortgages have interest rates that never change for the life of your loan. Even if interest rates drop, you’re stuck with the rate you agreed to when you signed the paperwork.
If the interest rates are much lower than what you’re paying currently, refinancing is in your best interest. You’ll be able to secure a loan with a much lower interest rate, thereby lowering your monthly payments.
You Need Cash to Finance Improvements
As you pay off your mortgage, you build equity in your home. Unfortunately, that equity is stuck in the home itself. If you want to access the equity you’ve built up, you’ll have to sell the house or refinance the mortgage.
When you refinance your loan, you’re able to borrow against that equity. This means you’ll borrow more than you owe on the home, but you’ll receive the cash you’ve paid on your original mortgage back.
Once you do, you’ll be able to use that money to pay for home improvements or to cover other such expenses.
You Want to Consolidate Your Debt
If you have outstanding debts that require payments to multiple lenders or credit card companies, you can consolidate that debt by refinancing your house. When you do, you’ll borrow more than you owe on the property, but you’ll be able to lock in a much lower interest rate.
Even better, the payments will be smaller because you’ll have a longer time to pay them off.
When to Stick With Your Original Mortgage
Refinancing a home isn’t the best option for everyone. You need to think about how the new loan will impact your current financial situation before you start applying.
If your credit score is lower than it was when you applied for your original mortgage or you’ve taken a financial hit, refinancing may not help your situation. You could end up with a loan that has higher monthly payments if you qualify at all.
Take a long, hard look at your finances and consider why you’re thinking of refinancing your house in the first place. Will that new loan truly improve your monthly budget or will you find it harder to make payments?
If refinancing the loan will help you save money or make it easier to pay other expenses, then it’s worth considering. However, if the new loan will lock you into the same or worse terms than your original mortgage, don’t apply.
How to Find the Best Loan for Your Needs
If you’ve decided to refinance your home, you’ll need to be cautious about the lender you work with. Do your research and make sure the lenders you’re interested in have a good reputation.
Submit applications to several lenders at once and compare the quotes they offer you. This will allow you to explore your options while also reducing the number of hard inquiries that get counted on your credit report. You’re able to apply to several lenders over the course of a few weeks without significantly damaging your credit.
Once you have a few quotes in hand, review them in detail. You’ll want to choose the lender that offers you the money you need at the lowest interest rate possible. This is how you’ll keep your monthly payments low.
So, What Does It Mean to Refinance Your Home?
When you’re starting to explore ways to save money and free up cash, the first question on your mind will likely be, “what does it mean to refinance your home?” This guide should take some of the mystery out of the process so you can focus on taking advantage of low interest rates now.
Just remember to do your due diligence and compare the terms, interest rates, and reputations of each lender you’re interested in. This way, you’ll be able to get the best loan for your needs.
Looking for more insight into saving money and making the most of your budget? Check out our latest posts.
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