When you refinance a loan, you essentially replace the current loan with a new loan. There are a variety of reasons to go through this process, from lowering your interest rate, to planning for life’s important milestones. Let’s look at the most common reasons homeowners refinance their mortgages, starting with reducing the monthly payment by getting a lower rate.
If you are a homeowner that is looking to reduce your monthly payment and you purchased your home with a higher interest rate than is being offered now, you may want to consider refinancing your mortgage. Lowering your interest rate has a two-fold benefit. Not only does it lower your payment, but it also increases the rate at which you build up equity in your home.
When you owe less than your home is worth, that means you have equity built up in your home. Up to 90% of the difference between what you owe and your home’s worth can go to you in cash depending on the lender’s guidelines and your qualifications. You can spend the cash on home improvements, debt consolidation, paying off student loans, or any other financial needs you may have.
Is your loan backed by the FHA or did you purchase your home with less than 20% down? If so, there is a good chance that you have PMI. Private Mortgage Insurance is used to protect lenders if a borrower falls behind on their payments. If the new loan amount you get when you refinance is less than 80% of your home’s value, you will most likely not have PMI on your new loan.
The first thing you should do is contact your local Mortgage Banker to discuss what options are available to you. After you discuss your financial situation with your Mortgage Banker, and he or she recommends that a refinance will be a good option for you, the process is very similar to applying and qualifying for a purchase mortgage. You will apply and submit documentation. Your application will then go through processing and underwriting where your information is reviewed and analyzed, and a decision is made on your application. Once an Underwriter has given the “Clear to Close” or final approval on your refinance, the closing can take place. After your three-day rescission period, your old loan will be paid off by the new lender and will be replaced by your new loan.
Try out our mortgage refinance calculator today to see if refinancing may be a good financial move for you!
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