What is a Mortgage Refinance?

what is a mortgage refinanceWhat is a mortgage refinance? A mortgage refinance refers to when an individual who originally took out a loan (mortgage) to pay for their current home effectively replaces the original mortgage loan with a new loan (mortgage) with new terms and conditions. In most instances individuals choose a mortgage refinance to lower their current monthly mortgage payment. This is usually achieved by replacing the original high interest mortgage loan with a much lower interest rate mortgage loan.

What is a Mortgage Refinance?

Homeowners can apply for a mortgage refinance through a variety of lenders including banks, credit unions, and numerous online lenders and are not required to refinance their mortgage with their current mortgage lender. In reality the best way for homeowners to maximize their monthly mortgage payment savings from a mortgage refinance is to get refi quotes from multiple lenders at one time.

What is a Mortgage Refinance – Terms & Conditions

There are several items to pay close attention to when considering the details of your mortgage refinance including:

1) Mortgage Term: Your new mortgage can be customized for the total number of years outstanding. The most common terms for mortgage refinance are 15-years and 30-years.

2) Mortgage Interest Rates: There are two primary type of interest rates associated with mortgage refinance: fixed-rate and adjustable-rate. Under a fixed-rate mortgage refinance homeowners would pay a fixed interest-rate yielding a fixed mortgage payment each month. Under an adjustable-rate mortgage refinance, homeowners would experience variability in interest rate payments and subsequently total monthly mortgage payments based on when the mortgage interest rate is scheduled to adjust. Click here to see today’s rates.

3) Closing Costs: There are fees associated with entering into a mortgage refinance. Highlighted below are some of the more notable fees.

What is a Mortgage Refinance – Closing Costs

Mortgage Application Fee: This refers to the general one-time fee you pay to refinance your mortgage. Fees typically range around $250-$500.

Loan Origination Fee: This fee is generally around 1% of the total value of your mortgage refi loan. If you refinance a balance of $300,000, for instance, your loan origination fee would be around $3,000.

Appraisal Report: Most lenders will require a house appraisal to determine whether the house is valuable enough and you have enough equity to qualify for a new mortgage refinance loan. House appraisals can costs anywhere from $250 to $650.

Document Preparation Fee: Typically ranges between $200 and $500

Title Search & Insurance: This is to guard against any potential errors with the title transfer and the fee can range anywhere between $500 and $1,000.

Recording Fee: Typically charged by the municipality the home resides in and can be as little as $25 or as much as $250 income instances,

Flood Certification: Some municipalities require a flood certification that runs between $50 and $150.

What is a Mortgage Refinance – 3 Main Types

There are three main types of mortgage refinancing available to homeowners.

1. Fixed-Rate Mortgage (FRM)

A Fixed-Rate Mortgage is typically the smart choice, especially if you opted for an adjustable-rate mortgage the first time around. For instance, if interest rates have dropped significantly since taking out your original mortgage, you will now have the ability to lock in lower interest rates, and subsequently lower monthly mortgage payments, by converting to an FRM

On the other hand, if your first mortgage was a 30-year fixed-rate mortgage, refinancing to a shorter term can mean reduced interest payments and increased equity. For instance, if you have 25 years left on your fixed-rate mortgage term, refinancing to a 15- or 20-year mortgage would increase your monthly payments, but on the whole, reduce the amount of interest you will pay over the term. This means more principal being paid off faster, thus increasing your equity in the home more quickly. Refinancing to a fixed-rate mortgage is an especially smart move for homeowners who intend on staying in their homes for the foreseeable future.

2. Adjustable-Rate Mortgage (ARM)

The main appeal of an adjustable-rate mortgage lies in the lower initial interest rate it carries as compared to many fixed-rate mortgages. However the real risk is in the fact that over time, the interest rate will fluctuate as market conditions change. How much they fluctuate will depend on the lender and the specific terms.

Refinancing to an adjustable-rate mortgage though could be a good alternative for homeowners stuck with a high interest rate on their fixed-rate mortgage. Additionally, borrowers who opted for an ARM with their original home purchase could still decide to refinance to a different type of ARM to get a lower rate.

ARMs must be considered very carefully, as rates can vary widely from lender to lender, and from month to month. If you expect to spend more than just a few years in your home, refinancing to fixed-rate mortgages will likely be the better option to build equity and save money.

3. Cash-Out Refinance

Cash-out refinancing involves taking out a new larger mortgage loan to not only pay off the original mortgage but also to provide extra cash. Homeowners that choose this option typically use the extra cash to pay for various home improvements, pay off other existing debt, pay for education, or for a variety of other expenses.

Typical cash-out refinances are limited to 90 percent of the total value of the home. In some instances you may find mortgage lenders offering a higher percentage, but with the higher percentage will come much higher risk and fees. The risks really need to be weighed in a cash-out refinancing. By borrowing against your home, you may incur extra tax consequences. More dangerously, you risk losing your home if your ability to pay the additional monthly mortgage amount is compromised.

Hopefully this article helps answer the question “What is a Mortgage Refinance”. You can access our 60-second mortgage refinance wizard here to determine if at today’s rates a mortgage refinance is right for you.

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