A refinance is when you pay off your existing mortgage with a new mortgage.
Refinancing enables you to change the terms of your mortgage. Some examples of the ways your new mortgage can change the terms of your mortgage include:
• Lower interest rate – Refinancing is the most common strategy for someone who wants to lower their mortgage interest rate. If market interest rates are lower than your mortgage interest rate, you can refinance to lock in a lower interest rate.
• Lengthen mortgage term – If you lengthen the term of your mortgage, your monthly mortgage payments will be lower. This strategy can help prevent you from falling behind on mortgage payments if you are having difficulty paying your mortgage.
• Shorten mortgage term – If you shorten the term of your mortgage, your monthly mortgage payments would be higher. This strategy can enable you to pay off your home quicker and pay less interest.
• Change loan type – It might be advantageous to change your loan type. For instance, if you have an FHA loan and you put less than 10% down, you pay mortgage insurance throughout the life of the loan. If you reach 20% equity in your home, you can switch from FHA to conventional to cancel the mortgage insurance.
• Switch to a new lender – If you do not like your current lender for any reason, you can refinance to switch to a new lender.
To refinance, shop around for a lender, submit an application to a lender, and go through the lender’s approval process. Your lender may require an appraisal and survey that you will need to purchase. At the end of the approval process, you will be provided a closing disclosure that provides you the terms of your loan and the lender’s expenses to refinance.
Once you have a lender willing to offer you a mortgage, you can find an attorney or title company to close the refinance. The attorney or title company will order a title search, lien search, and possibly more items depending on the needs of your lender. Once the closing process is complete, your old mortgage will be paid off and you will have a new mortgage on your property.