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Refinancing a mortgage may seem like a daunting task, but it offers you a unique way to handle your home’s lingering cost. Understanding why people refinance their mortgages and how they do it will provide you better insight into the process. Keep in mind, there are a few ways to go about refinancing. Here’s everything you need to know.
What Is Refinancing?
You can refinance just about any loan or debt you have. It’s a process that involves developing a different payment plan. Often, refinancing helps people cater more to their financial needs and situation. Mortgages are a key part of refinancing for new or long-time homeowners.
When you purchase a home, you receive a mortgage that you eventually have to pay off over a specific period. The money then goes to the home seller.
Most commonly, you pay off your mortgage monthly until the very end of the loan. Then you’re all set. Before that happens, though, people sometimes run into issues that require them to refinance.
When you refinance, you change how you pay off your mortgage loan — often by acquiring a new loan. The new one is usually to help pay off your mortgage, so instead of the money going to the seller, it goes directly toward the mortgage.
From there, you’ll find that refinancing comes with some pros and cons.
Why Should You Refinance?
People refinance for many different reasons. It can help with interest, duration, and payments.
One of the most common reasons to refinance is to lower your monthly rent. If you can secure a loan with a lower interest rate, or if you can extend the loan, then your monthly payments will likely decrease. However, be aware that elongating your mortgage may bring higher interest payments over time.
On the other hand, if you’d like to pay off the loan faster, refinancing can help you do that, too. For instance, if you turn a 30-year mortgage loan into a 15-year one, you’ll pay it off sooner. With this method, though, you’ll likely pay more per month as you’ll be paying the same amount, just at a faster rate.
Another reason to refinance is to get rid of your Federal Housing Administration (FHA) loan. There are two ways to cancel this loan — selling your home or refinancing it once you have enough equity. You gain equity by paying off your mortgage or increasing your home’s value.
One way to refinance well is through changing your loan type. An adjustable-rate loan can increase over time, but a fixed-rate loan will stay the same throughout your payments.
As you decide which path to pursue, you can move onto taking action.
How to Refinance Your Mortgage
With the right tools, you can get your mortgage under control in a way that works for you.
First, you’ll need to choose your path. Why are you refinancing? Do you want to shorten your timeline? Do you want more affordable payments? Once you have a goal, you can work toward it.
Look around for the best refinance rates for mortgages. Remember, percentages and costs will vary depending on your state. Using a mortgage calculator to find out what your options are can be invaluable during this process.
A tip for calculations — find your break-even point. This is the point where your savings will exceed your refinancing costs and the closing expenses.
Next, find the right lender for you. Compare multiple and see what they can offer you. If you are going to apply to several, do it relatively quickly to keep your credit performing well. Choose the best option for your particular situation.
Finally, choose the loan. Pay it off and then pay the closing costs. Your mortgage will then be complete!
Refinancing Made Easy
Your mortgage will stick with you for a while. It can be an intimidating thing for first-time or continuing homeowners. There’s no need to worry, though — with the right steps and trajectory, you can become an expert in refinancing your mortgage to make it work for you.