What Does It Mean To Refinance a House?

Top reasons to refinance a mortgage

Not sure if refinancing is the right move? Here are some common reasons for a mortgage refinance: 

• Lower your mortgage rate: One of the most common reasons people refinance is to reduce their interest rate. Lowering the percentage of your interest rate may translate into savings over the life of the loan. Remember that the current refinance rates available to you need to be lower than your current rate for you to potentially save money this way.
• Refinance to take out equity: Another common reason for a refinance is to pull equity out of your home through what’s known as a cash out refinance. If you have substantial equity, you may be able to access cash to improve your home, pay off debt, or fund a large purchase.
• Cancel mortgage insurance: Typically, private mortgage insurance (PMI) may be required if someone puts down less than 20% as a down payment on a new home. Suppose your home has appreciated in value, or you’ve built enough equity to push you over that 20% equity threshold. In that case, a refinance may remove mortgage insurance payments and potentially save you hundreds of dollars a year.
• Change your term length: Another reason you might want to refinance is to change your loan term. You may wish to lengthen your term if it results in a lower monthly payment or shorten your term if you can pay off your home faster. Work with your lender of choice to determine what may work best for you. 

If any of these reasons sound like they may help you achieve your financial goals, try using a refinance savings calculator so you can get a better idea of how much a mortgage refinance might impact your finances.

When to refinance your home

Beyond that, the best times to refinance your home may be:

• When you can lower your interest rate. If market interest rates are notably lower than the rate you’re paying now, you might be able to refinance your mortgage with a new, more affordable rate.
• When you have improved your credit or income. If your credit profile or your income has improved since you got your original mortgage, a refinance may allow you to take advantage of lower interest rates. 
• When you can shorten your loan term. If you’re able to shorten your loan term from a 30-year mortgage to a 15-year mortgage, you may pay off your home more quickly and pay less interest over the lifespan of your loan. Of course, this may increase your monthly mortgage payments, but the savings across the loan can make this an appealing option for refinancers.
• When your equity has increased. If you’ve built equity in your home, you might be able to take out a lump sum of cash during the refinancing process.

Types of mortgage refinances

If you’re looking to refinance your mortgage, there are many ways to do so.

• Cash out refinance: A cash out refinance lets you replace your current mortgage with a larger one and receive the difference between these two amounts in cash. You can use that money for anything, from paying debts to vacationing.
• Conventional refinance: A conventional refinance, also known as a rate and term refinance, allows you to change the interest rate and the length of your loan. Conventional refinances may be used to lower your monthly payment, making them a popular option.
• Streamline refinance: A streamline refinance is similar to a conventional refinance, except it only applies to federally backed loans, such as Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and U.S. Department of Veterans Affairs (VA) loans. Streamline refinances may let you keep your federally backed mortgage while reducing your monthly payment due to a lower interest rate or more favorable loan term.
• Reverse mortgage: Reverse mortgages may be a good way for seniors to supplement their retirement income. When you take out a reverse mortgage, instead of paying the mortgage lender each month, the mortgage lender pays you every month by pulling equity from your home. A reverse mortgage may provide a steady source of cash flow for seniors to pay for their day-to-day expenses. 
• Cash-in refinance: A cash-in refinance might let you lower your monthly payment. As the name suggests, it requires you to put additional money into your home when closing. You can make a lump sum payment on your loan while potentially lowering the interest rate or changing the loan term.

What are the closing costs on a mortgage refinance?

Refinancing closing costs can range from 2-6% of your loan amount. On a $200,000 mortgage, refinancing may cost from $4,000 to $12,000. Your lender might cover some or all your closing costs.

If you have to pay closing costs, you’ll want to determine your break-even point so refinancing makes financial sense. This is when your savings from refinancing cover the costs of refinancing. The break-even point is different for everyone and depends on your loan’s terms. 

What are some alternatives to refinancing?

There are two main alternatives to refinancing: home equity loans or home equity lines of credit (HELOCs).

• A home equity loan lets you borrow a fixed amount, secured by the equity in your home, and get money in one lump sum upfront. Many borrowers like that home equity loans act as a second mortgage without impacting their original mortgage. In other words, if you already have a low rate on your mortgage and want to keep it, a home equity loan may allow you to do that while still taking money from your equity.
• HELOCs, on the other hand, let a borrower tap into their equity as needed for a fixed period and up to a predetermined credit limit. A home equity loan typically has a fixed interest rate, whereas a HELOC typically has a variable rate.

Both HELOCs and home equity loans will have you paying back your original mortgage and give you a second bill to pay off the new loan or line of credit.

Cash out refinancing, by contrast, bundles both your current mortgage loan payment and what you borrow from your home equity into one monthly payment. 

Refinancing your mortgage and important research tips

Refinancing your mortgage may be a smart financial move when done strategically and with proper research. 

Here are a few details you may want to consider before you apply: 

• Understand your current mortgage terms. Review your existing mortgage agreement to understand your current rates, loan terms, and any prepayment penalties that may apply.
• Determine your financial goals. Identify the primary reasons for refinancing your mortgage, such as lowering your monthly payment, shortening your loan term, or tapping into your home equity.
• Check your credit score. Your credit score may play a role in determining your eligibility for refinancing and the interest rates you may be offered.
• Check your credit report: Review your full credit report ahead of time so you can address any discrepancies or errors before applying for a refinance.
• Research current market rates. Keep an eye on current mortgage interest rates to identify the best time to refinance. Timing your refinance when rates are low may save you money over the life of your loan.
• Compare multiple lenders. Shop around and obtain quotes from multiple lenders to ensure you’re refinancing in a way that works best for you.
• Consider closing costs. Refinancing can come with closing costs. Factor these into your decision-making process and determine if the potential savings from a refinance will outweigh the expenses.