Mortgage Advice
Mortgages

Understanding Mortgages: What is Refinancing?

(07/28/2012) In the midst of one of the most uncertain real estate markets in history, it’s more important than ever to be informed. In a continuing series, we take a look at some of the most pressing questions about mortgages, refinancing, home equity, and other real estate options available to you.

As interest rates plunge to record levels, refinancing is a term that many homeowners are becoming intimately familiar with.

Simply put, refinancing is paying off one mortgage with another. Usually, refinancing is done to obtain a better interest rate, which can end up saving homeowners thousands over time. For example, if a borrower has a 30-year fixed-rate mortgage of $100,000 at 6%, but current interest rates are closer to 4%, refinancing to obtain this lower rate could result in a savings of of over $160 a month. Over the long life of this loan, this adds up quickly.

Refinancing can also be done to pay off a mortgage faster, exchanging a longer-term mortgage of 30 years for a shorter one of 15 years, or getting a different type of mortgage.

When refinancing, homeowners will replace their current home loan with a completely new one, from the same lender or from a different one. To do this, borrowers will need to qualify for a loan, going through the same application and eligibility procedures they did for the first mortgage.

Additionally, borrowers will need to pay closing cost fees, and specific refinnacing fees charged by the lender. These fees are often justifiable when looking at the savings over time that can come from refinancing. However, homeowners should be very clear on what costs are involved, including appraisal fees, lender costs, title expenses, tax service fees, document preparation fees, and others, and ensure these are doable.

It’s important to note that refinancing has become a very popular and highly-sought after option since the housing market collapse several years ago. Borrowers that are underwater on their homes, owing more than current value, are seeking to obtain more affordable loans. At the same time, the drastically reduced interest rates are enticing many to apply.

What this means for borrowers is refinancing is a more stringent process than in previous years. Applicants for a refinance will need good credit, a good amount of equity in the home, and a history of making payments on time. To determine if you are a good candidate for refinancing, and obtaining the savings that can come from the process, contact your current lender and discuss options.