Mortgage Refinancing: What It Is and How It Works
Mortgage refinancing can be a great way to save money on your monthly mortgage payment, or to get cash out of your home for other purposes. But it’s not right for everyone. In this blog post, we will explain what mortgage refinance is, and how it works. We’ll also discuss the pros and cons of refinancing, so you can decide if it’s right for you.
What is Mortgage Refinancing?
Mortgage refinancing is when you replace your existing home loan with a new one. The new loan pays off the old one, and you start making payments on the new loan instead. Refinancing can be done for many reasons, but the most common reason is to get a lower interest rate and save money on monthly mortgage payments.
Many people opt to refinance their mortgage in order to reduce their interest rates and lower their total mortgage payments. Refinancing can also be done to cash out home equity, shorten loan terms to pay off the home early and get a new loan type.
How Does Refinancing Work?
In order to refinance, you’ll need to contact a lender and provide details about yourself and your current mortgage loan. Your lender will then determine what kind of loan you qualify for by looking at various factors such as your credit score, income, and debt-to-income ratio.
Once the lender has decided what kind of loan you are eligible for, you’ll need to review and sign off on all associated documents. These documents will include a promissory note and other loan paperwork. After signing the documents, your lender will process the refinancing transaction and then send out a check or wire transfer to pay off your existing mortgage loan.
Types of refinance mortgages
There are several types of refinancing mortgages to choose from. Some of the most popular include cash-out refinance, rate and term refinance, streamline refinance, and HARP (Home Affordable Refinance Program) loans.
Cash-out Refinance
Cash-out-refinance allows you to take out a new loan that’s larger than the balance on your current mortgage, and keep the difference in cash.
The main objective of a cash-out refinance is to allow the borrower to tap their home equity. The borrower is allowed to hold a fraction of the home’s value in equity. However, the equity is not in liquid cash and to access it, the borrower needs to take a loan against the value of the property.
Rate-and-term refinance
Rate and term refinances are a type of mortgage loan that allows borrowers to change their interest rate and the duration of their existing loan without taking out any additional funds. It is usually done to lower the overall cost of borrowing or for a shorter pay-off period.
Streamline Refinance
Streamline refinances allow borrowers to obtain lower interest rates and monthly payments by replacing an existing loan with a new one from the same lender, often times with fewer requirements. This can be beneficial if you have limited documentation or credit challenges.
HARP Loans (Home Affordable Refinance Program)
HARP loans are designed specifically for people who cannot qualify under traditional refinancing guidelines due to low home values or being underwater on their existing loans. This program allows borrowers to refinance their mortgages even if they are significantly underwater on their current loans, and oftentimes does not require any additional paperwork or fees.
When to Refinance Your Mortgage
Refinancing can cost between 3 percent and 6 percent of the total loan principal and also requires title search, appraisal, and application fee. This is why a homeowner needs to determine beforehand whether to undertake mortgage refinancing. Before are reasons why homeowners refinance;
Refinancing to Secure a Lower Interest Rate
If you can secure a better interest rate than the one you’re currently on, refinancing may help you save money in the long run.
One of the main reasons homeowners refinance is to lower interest on their existing mortgages. As a rule of thumb, it is advisable to consider refinancing if it will help you lower your interest rate by at least 2 percent.
Refinancing to Shorten Loan Terms
In some cases, you may be able to refinance in order to shorten the loan terms and pay off your home earlier. This option can also help you save on interest payments over time.
When interest rates fall, a homeowner can take another cheaper loan to pay off an existing one. This helps homeowners to shorten their loan term without much change on their monthly repayment.
Refinancing to Get Cash Equity
Another option you have when refinancing is to get cash equity. This allows you to borrow against the value of your home and use the money for any purpose. When done carefully, this can be used as a way to access funds without taking on additional debt.
However, keep in mind that borrowing against your home’s equity puts your property at risk if you are unable to make payments.
Top 10 mortgage refinance companies
Refinancing can help you save money both in the short and long run. It also allows you to borrow against your home equity. Below are the top 10 mortgage refinance companies in the U.S.
Rocket Mortgage
Rocket Mortgage is a top mortgage refinance company with deeply rooted online technology. The company has more than 3,000 home loan experts that help clients complete their loan applications.
The company offers Fannie Mae’s RefiNow and Freddie Mac’s Refi Possible refinance options for homeowners that have a debt-to-income ratio of up to 65% and who have loans with one of the government-sponsored enterprises.
Those who qualify for the program can benefit from at least a 0.5 percent reduction in interest rate. The program also offers qualifying homeowners up to $500 to cover appraisal expenses.
LoanDepot
LoanDepot is a nationwide direct lender that offers refinance options for both homeowners and buyers. The company has an online process which makes it easier to apply and get the funds quickly.
Some of their refinancing options include cash-out, rate and term, and HARP refinances. LoanDepot also provides a number of helpful resources on its website to help you better understand the mortgage refinancing process.
Quicken Loans
Quicken Loans is one of the top mortgage lenders in the United States and offers some of the best rates for home loans and refinances. They offer 15-, 20-, 25-, or 30-year fixed rate mortgages as well as five-year adjustable rate mortgages (ARMs).
One of their most popular programs is the Quicken Loans Home Value Estimator which helps you estimate the current market value of your home and find potential refinance options.
CitiMortgage
CitiMortgage offers a variety of mortgage refinance solutions to help homeowners reach their financial goals. They offer fixed-rate, adjustable-rate, and interest-only mortgages as well as cash-out refinances for both conventional and government loans.
CitiMortgage also has HARP loan options for homeowners that are underwater on their existing mortgage or owe more than their current home is worth. With CitiMortge’s HARP program, qualified borrowers may be able to get up to 97% of their home’s value.
U.S. Bank
U.S. Bank is a nationwide lender that offers competitive mortgage refinance rates and a variety of loan options for both homeowners and buyers alike. They offer fixed-rate, adjustable-rate, and cash-out refinances as well as HARP loans for those who are underwater on their mortgages.
The company also has helpful online resources such as an interest rate calculator to help you better understand the refinancing process.
Zillow
Zillow is an online real estate marketplace that offers a variety of mortgage refinancing products and services. They have fixed-rate, adjustable-rate, and cash-out refinances as well as HARP loans for those who are underwater on their mortgages.
Additionally, Zillow has helpful tools such as the Mortgage Refinance Calculator which can help you estimate how much money you may be able to save when refinancing.
Bank of America
Bank of America is one of the largest banks in the United States and offers a number of mortgage refinance options to suit your needs. They offer traditional fixed-rate mortgages, adjustable rate mortgages (ARMs), jumbo loans, home equity lines of credit (HELOCs), and cash-out refinances.
Bank of America also offers refinancing options for those who are underwater on their existing mortgages or have loans backed by the government-sponsored enterprises Fannie Mae or Freddie Mac. The bank also has a number of helpful online resources to help you better understand the mortgage refinancing process.
Better.com
Better.com is an online lender that offers a variety of mortgage refinancing products, including cash-out refinances, traditional fixed-rate mortgages, and adjustable-rate mortgages (ARMs). They offer quick approval times as well as free loan estimates so you can compare different loan options.
Additionally, Better.com has helpful calculators to help you estimate your potential savings when refinancing and even prequalify for certain loans before making a commitment.
Navy Federal Credit Union
Navy Federal Credit Union is a nationwide credit union that offers a number of mortgage refinancing products, including traditional fixed-rate mortgages, adjustable-rate mortgages (ARMs), and cash-out refinances. They also offer Home Equity Lines of Credit (HELOCs) as well as HARP loans for those who are underwater on their existing mortgages.
Navy Federal’s online resources offer helpful advice on how to get the most out of your mortgage refinance, such as understanding closing costs and exploring different loan options. With Navy Federal, you can trust that you’re getting competitive rates and excellent customer service.
Ally Financial
Ally Financial is an online lender that offers a variety of mortgage refinancing products, including traditional fixed-rate mortgages, adjustable-rate mortgages (ARMs), and cash-out refinances. They also offer HARP loans for those who are underwater on their existing mortgages.
The company has helpful online calculators to help you better understand what your potential savings may be when refinancing as well as prequalification options to get an idea of the loan amount you may be eligible for before making a commitment. Ally Financial also offers competitive rates and excellent customer service.
Conclusion
Mortgage refinancing is a great way to save money and pay off your home loan faster. By shopping around with different lenders, you can find the best mortgage refinance rates and a variety of loan options to suit your needs.
Whether you’re looking to cash out some of your home equity or just lower your monthly payment, there are plenty of reputable lenders that can help you get the most out of your mortgage refinance. With their helpful online tools and competitive rates, you can trust that you’re getting the best deal possible.
