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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.
There are 4 primary reasons that you would want to refinance your mortgage.
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.
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.
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:
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.
There are a couple of scenarios in which refinancing isn’t recommended:
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.
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