What Does It Mean To Refinance My Mortgage?

What Does It Mean To Refinance My Mortgage?

Written by Jeanette Arnholt
6 minute read

What Does It Mean To Refinance My Mortgage?

Buying your first home is meant to be exciting, and mortgage loans are meant to take the financial burden off of your pockets so you can access the home of your dreams with accessible monthly payments. But sometimes, life can get in the way, and even these monthly payments can be tough to make each month.

When this happens, you have a few options. But by far, the most popular and beneficial is refinancing. Refinancing your home allows you to bring down your interest, change the terms of your loan, and much more.

If you’re thinking about refinancing, there are a few important facts to know before jumping right into things. Here’s everything you need to know about what it means to refinance your mortgage.


What is Refinancing?

When you take out a mortgage loan, many people call this “financing” your home. With that in mind, “refinancing” means replacing your existing home loan with a new one. It’s an easy way to help remember.

You can refinance through the same lender, but most people will shop around at other lenders to find a new mortgage that has better loan terms or a lower interest rate. When the process is said and done, the end result usually means that you’re saving money in some way, shape, or form.

You can refinance other types of loans besides a mortgage. In fact, many people refinance their car loans or student loans as well.


Why Should You Refinance?

Refinancing is an appropriate solution for a number of situations. If you’re thinking about refinancing, now might be the time to do it. Interest rates are exceptionally low due to COVID-19s housing market disruptions, and the number of Americans refinancing their homes is at its highest rate since 2003.

Here are a few common examples of when it might make sense for you.


To Get a Lower Interest Rate

The main reason that most people refinance is to gain a lower interest rate. When you take out a mortgage loan (or any loan), there are two elements: The principal and the interest. The principal is the amount of money you took out, and interest is a percentage of that balance that the lender charges to gain some profit.

Mortgage interest rates can change within the week, day, or even hour. That means that when you get the original loan, the interest rates may have been higher at that point than they are in the present.

Refinancing with current interest loans can help save you a ton of money on monthly payments, which can be helpful just to have extra cash in your pocket each month.

However, it can also save you in a pinch if you’re struggling to make mortgage payments because of high interest.


To Eliminate PMI or FHA Loans

Most lenders like for you to make at least a 20% down payment on your home to give them a cushion in case you start to struggle to make payments. However, that’s a lot of money upfront. If you’re snagging a $200,000 home, you’ll need $40,000 right off the bat, not including other closing costs.

If you can’t hit that threshold, you’ll probably need to pay private mortgage insurance (PMI). This protects the lender (not you) in the event that you are unable to make payments on your home. Although you can request to waive this fee once you reach 20% of your home’s equity, refinancing may allow you to opt-out of these payments early.

Additionally, FHA loans require mortgage insurance premiums (MIPs) if you don’t put at least 10% down on your home. This fee is required every year for the entire life of your loan, but refinancing into a conventional mortgage can eliminate this cost.


To Gain More Favorable Loan Features

Refinances can also be used to help change the terms or features of your mortgage. For example, if you’re currently locked in a 30-year mortgage that doesn’t allow you to make extra principal payments to expedite repayment, you can refinance into a 15-year mortgage instead.

The only issue is that when you refinance, the terms of that refinance start anew. For instance, if you refinance into a different 30-year mortgage with 25 years left on your existing one, you’ll need to start over on a 30-year repayment plan.

Additionally, refinancing can let you switch from an adjustable-rate mortgage to a fixed-rate loan or vice versa. Many people will decide to switch from an adjustable-rate to a fixed-rate after the initial fixed-rate period when interest rates tend to rise.

However, there may be times where it’s advantageous to go from a fixed rate to an adjustable rate, namely if you plan to sell your home in a few years.


To Access Your Home’s Equity

One type of refinancing, known as “cash-out” refinancing, allows you to replace your current mortgage with a larger one. You can tap into your home’s equity because you’re able to keep the difference between the two mortgages.

For example, if you still owe $50,000 on your home and “cash-out refinance” a $65,000 loan, you get to use the extra $15,000 for any other expenses you choose.

While it means you might owe more in interest, this is a great option for those looking to do renovations or pay off other debt.


Benefits of Refinancing

The largest benefit of refinancing is that you’ll likely be able to lock in a lower interest rate. This can save you a ton of money and stress for the entire life of your loan. Plus, you might also be able to switch from a risky adjustable-rate loan to a fixed-rate loan or even shorten the length of time that you need to pay off your mortgage.

Additionally, you might be able to pay off your mortgage sooner by refinancing into a 15-year mortgage. This can help alleviate the financial burden and strengthen your credit once you no longer have debts to owe.

Finally, if you decide to go with a “cash-out” refinance, you can tap into the equity you’ve built up on your home that you’d otherwise not be able to have access to.

This can be helpful for any time-sensitive payments that you’ve want, or need, to make.


Drawbacks of Refinancing

Refinancing is a bit of a double-edged sword. While refinancing into a shorter loan term can save you interest in the long term because you’ll be paying off the current loan faster, it does mean that you’ll be making larger monthly payments in order to make up some of the difference.

Refinancing is also not a free process. Similar to applying for your first home loan, there are fees associated with refinancing, such as closing costs but Network Capital does not charge lender fees, so that’s the good news!


Types of Refinancing

Refinancing isn’t as cut and dry as it may seem. In fact, there are many different types of refinances that each work in different ways. Understanding them can help you make a more informed decision about which is right for you.


Rate and Term

A rate and term refinance is probably the most common type of refinancing. These change the interest rates and/ or the terms of your loan. For instance, if your current mortgage has a 4% interest rate and you refinance into one with a 2.5% rate, this is known as a rate and term refinance.


Cash Out

As mentioned briefly earlier, a “cash-out” refinance works by replacing your existing loan with a larger one so that you can use the extra funds for your own personal purchases. That extra money can be used for anything, but people often use it to pay off other debt or make renovations to their homes.


In Conclusion

Refinancing a mortgage can feel like a stressful and daunting task, but it can also alleviate a lot of financial pressure. When most people refinance, they’re looking to replace their existing mortgage with a new one in order to gain lower interest rates and more desirable features.

Another great thing about refinancing is that you can shop around at multiple lenders to find one that works best within your budget and preferences.

At Network Capital, our competitive rates and streamlined application process can remove the stress and headaches associated with refinancing so you can focus on what matters most. It’s just one of many ways that we can help you live better.


Sources:
What is private mortgage insurance? | Consumer Financial Protection Bureau
Refinance Trends in the First Half of 2021 | FreddieMac
National Mortgage Assistance Center (NMAC) Official Website | National Mortgage Assistance Center