Real estate refinancing is the process of taking out a new loan to pay off an existing loan secured by real estate. It is also referred to as mortgage refinancing or home loan refinancing. Refinancing is typically done to secure a lower interest rate, access cash from home equity or change loan terms such as the length of the loan or type of loan.
When refinancing a home loan, you will have to go through the same mortgage application process as you did when you got your original mortgage. This includes verifying your income, employment and credit history, as well as providing an appraisal of the property. If your refinancing is approved, your new mortgage loan pays off your existing mortgage loan and then you are responsible for paying your new loan according to the new terms.
When to Refinance Your Mortgage
There are several reasons why a homeowner might choose to refinance their mortgage:
- Reduce interest rate: Homeowners may be able to lower their monthly payments by refinancing to a lower interest rate.
- Cash out refinance: Homeowners can access the equity in their home to use for major purchases such as home improvements, medical bills, college tuition or debt consolidation.
- Change loan terms: Homeowners may want to change the length of their loan or switch from an adjustable-rate to a fixed-rate loan.
- Lower monthly payments: Refinancing to a longer term loan may help lower monthly payments, however you may pay more interest in the long run.
- Reduce total cost of loan: By paying off a loan with a higher interest rate with a new loan with a lower interest rate, homeowners can reduce the total cost of the loan.
- Avoid foreclosure: Homeowners who are having trouble making their mortgage payments may be able to refinance to a more affordable loan and avoid foreclosure.
When Not to Refinance Your Mortgage
There are several reasons why you should not refinance your mortgage.
- Closing costs and fees: Refinancing your mortgage may cost up to several thousand dollars in closing costs and fees.
- Increase in payments: Refinancing to a longer loan term may lower your monthly payments, but you will pay more interest over the life of the loan.
- Not enough equity: If you don’t have enough equity in your home, you may not qualify for a refinance.
- Unstable credit: If you have recently experienced a drop in your credit score, you may not qualify for a refinance.
- Unstable job history: If you have recently changed jobs or have gaps in your employment history, you may not qualify for a refinance.
- Negative amortization: If you refinance to an adjustable-rate loan, you may end up with a loan balance that is higher than what you owe.
Overall, real estate refinancing is a great way to save money on your monthly mortgage payments or access cash from your home equity. However, it is important to weigh the pros and cons before you decide to refinance your mortgage.