Explain Refinancing a Mortgage

Explain Refinancing a Mortgage - When refinancing a mortgage, you're essentially paying off your current home mortgage and replacing it with a new loan.

To illustrate the concept of refinancing a home, let's take a look at the overall process.

Why refinance?

First of all, evaluate what you hope to accomplish with a refinance, such as:

  • A lower monthly payment

  • Less interest paid over the course of the loan

  • Combining a first and second mortgage into one loan

  • Reducing the term of your loan

Is a refinance feasible?

With recent declines in the market, your home's value plays an important role in determining the viability of a refinance. If your home is valued at less than what you currently owe, a refinance may be out of the question unless you have the funds to make up the difference.

Also, what is your current debt-to-income ratio? To determine this value, list your sources of debt and monthly payments and then compare this information with your monthly income. If the ratio is higher than 36%, you may have to clean up some debt (i.e. pay off a few credit cards or a vehicle, for example) to make the percentage more favorable. Additionally, consider your overall credit worthiness. Do you have a history of late payments, foreclosures, or bankruptcies?

Is a refinance worth it?

An online mortgage refinance calculator can give you a quick snapshot of potential savings. Simply input information from your current mortgage statement along with the numbers you've gathered for potential refinance scenarios. (At this information gathering stage, it's fine to just use estimates as benchmarks.)

Now that you've completed some of the preliminary legwork, does it make sense for you to move forward in the process? Even if the answers to the above questions yielded less than favorable responses, you may still qualify for a home refinance. Don't automatically write off the possibility without speaking to a lender.

Contact lenders.

Start by getting in touch with your current lender to inquire about refinancing opportunities. Ask about the interest rate and closing cost fees, and determine if your status as a current customer entitles you to a waiver of any fees. Then, shop around and collect interest rate and fee information from several potential lenders. Next, revisit the online mortgage refinance calculator. Now that you have actual figures to plug in, you'll get a more accurate picture of which lender presents the most financially favorable refinancing opportunity.

At this point, you can contact your lender of choice about refinancing your home loan. The process will be similar to the following scenario :
  • Prequalification: The lender will ask questions to determine whether he/she can move forward with the loan. Be prepared to share your approximation of your home's value, your debt to income ratio, and any potential credit concerns. After this information is evaluated, the lender will contact you regarding the terms of the loan for which you qualify.

  • Application: During the application process, you'll receive a more thorough account of the fees associated with your loan. At this time, you can also lock in your mortgage rate.

  • Property appraisal: While an estimate of your home's value was sufficient for prequalification, the lender will need an actual appraisal of your property in order to determine whether your refinance will be approved. Expect to pay between $350-$400 for the appraisal.

  • Loan approval: After a thorough evaluation of your application and appraisal, your refinance will either be approved or declined. If approved, you'll move on to signing and settlement.

  • Signing and settlement: During this process, also known as the closing, you'll sign paperwork that will pay off your old mortgage in full. After signing, your home mortgage will be held by the new lender.
Overall, it's simple to explain refinancing a home - especially since you've already been through the home buying process. Whether or not to refinance your home is a major decision, and not one that should be taken lightly. Evaluate the costs and fees, as well as the potential savings benefits, to determine if refinancing is a sound decision for your financial situation.

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