What is mortgage refinancing?
A mortgage refinance is when you get a new mortgage that pays off your current mortgage. Most people do this to lower their interest rate or reduce their monthly payment, sometimes both. It's important to note that this doesn't add any additional debt to the existing loan. It completely pays off the current loan with a new one.
Why should I refinance my mortgage?
There are 4 primary reasons that you would want to refinance your mortgage.
- To save money. If you can find a lower interest rate to refinance your current mortgage, you can pay off your existing loan with a new loan at a lower rate and save money in the long run.
- Lower your monthly payment. This usually happens when you have a lower interest rate, but not always. It just depends on the exact situation of how much you owe and what type of loan you're taking. If you're looking to lower your monthly mortgage payment, doing a refinance could accomplish that as well.
- Get cash out. For example, if you owe $200,000 on your home, but the home is worth $400,000; theoretically, you could do a new mortgage at $400,000 and get cash out, called a cash-out refinance, to do other things such as pay off medical bills, consolidate debt, make home improvements, and more.
- Shorten or lengthen your loan term. If you have a 30-year mortgage and want to pay it off in 10 years, you can refinance your home loan with a 10-year mortgage. Often this is going to come with a lower rate anyway, but if your primary goal is to reduce the amount of time you have left on your home loan, you can do that through a refinance,
How does mortgage refinancing work?
A mortgage refinance is relatively simple. You first need to find a lender that offers refinancing, and you'll go through the same process that you would when getting your first mortgage. So you'll need to verify your income. You'll need to go through all of the steps to make sure you qualify for the home loan.
It's just like getting a new mortgage. However, once the mortgage is approved and the loan is funded, it will pay off the existing loan and replace it with the new one. You'll still have to have things like an appraisal and finalize a closing date.
However, you're not buying the home from another buyer. You're essentially buying it from yourself, just with a new loan. The new loan will eventually replace the old one, and you'll have a new interest rate, a new monthly payment, and a new term.
3 Recommended Refinancing Lenders
Below are some of our top recommended lenders for mortgage refinancing.
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AmeriSave Mortgage has funded about $55 billion in loans. They're very well known for making their application process streamlined and online. One of the things I like about AmeriSave is that you don't need a social security number to get pre-approved rates. They also offer home loan refinancing as well as a wide range of additional loan options. The one downside is that they are not licensed in the state of New York. So if you live there, you're out of luck.
Quicken Loans is America's largest mortgage lender. They have closed almost $145 billion in mortgages in just 2019 alone. According to Quicken, about 98% of their home loans originated through its Rocket Mortgage digital platform. Rocket Mortgage is an app that allows you to quickly get a mortgage or refinance your mortgage through Quicken Loans.
Better mortgage was founded in 2014. It's financially backed by some huge investors like Goldman Sachs, American Express, and Citi. It has originated more than two billion in conventional mortgage loans, but they also offer refinancing. One cool thing about Better Mortgage is that they leverage technology to make sure your mortgage process is fast and transparent, and it's all digital.
What is a cash-out refinance?
A cash-out refinance is when you refinance your home loan for more than you owe, and you take the difference as cash. Most people will use a cash-out refinance to consolidate debt or pay for home improvements or some other type of purpose because it often acts like a large, personal loan.
One thing to be aware of with a cash-out refinance is that it will likely increase your mortgage payment, so you need to make sure that you're able to make the new monthly mortgage payment and be okay with a more extended period to pay off your mortgage potentially.
That being said, if you can get a good rate to consolidate your debt or to pay for home improvements that will increase the value of your home, sometimes a cash-out refinance makes sense.
How do you qualify for refinancing?
Every lender is going to be different in terms of how to qualify for refinancing. Still, there are a couple of things that are common across all lenders:
- Credit score. You need to make sure that your credit score is up to par if you want to get the lowest rates available. That's not to say that if you have poor credit, you can't get approved for a refinance, but your rate will probably not be as good.
- An income. Make sure that you can prove income to make the new mortgage payment, even if it's less because it's like applying for a new mortgage. You'll probably need a W2 and a couple of pay stubs to prove your income.
- Owe less than the value of your home. To qualify for refinancing, you'll also need to make sure that your home is worth more than what you owe on it. For example, if you owe $350,000, but your home is only worth $200,000, the lender will not give you a loan for more than the home is worth.
You'll also need to make sure that you have money for closing costs and any associated fees. Again, because a refinance is like getting a new mortgage, there are fees associated with it. Sometimes you can roll those fees directly into the loan. However, it’s recommended to pay those out of pocket upfront if you can.
What are some reasons not to refinance my mortgage?
There are a couple of scenarios in which refinancing isn’t recommended:
- If your home's value has gone down for some reason, and you owe more than your home is worth, you won't qualify for a mortgage refinance.
- If the refinance cost is greater than the cost of just keeping the loan.
For example, If you plan to pay your mortgage off faster than the total term, say 30 years, then you may not realize the full value of a refinance. Let's say you have 25 years left on your mortgage, but you have the money to be able to pay it off in seven years.
In that case, refinancing it at a lower rate and paying the fees to do so may not make sense. Instead, you're better off just paying it off quicker. Other than those two reasons, though, you'll be hard-pressed to find a reason not to refinance at a lower interest rate.
Now that you have a better understanding of mortgage refinancing, the next step is to check out and compare our recommended lenders to see if you can qualify for a lower rate on your mortgage than you're paying today.