How Does Mortgage Refinancing Work?

What does refinancing mean? How does it work? Will it save me money? These are all questions that pour in from my customers. Let’s answer these and other burning questions about how mortgage refinancing works.

What is refinancing?

A mortgage refinance is when a homeowner gets a new mortgage loan that replaces their current one.

What are the benefits of refinancing?

There are several reasons to refinance, but they all depend on your personal situation and current mortgage. Most people refinance to lower their interest rate, which results in lower monthly mortgage payments. You can also refinance a mortgage into a shorter loan term, which will help you pay off your home sooner.

If rates are lower than when purchased your home by at least 1%, it might be time to look at refinancing.

How does refinancing work?

The process for refinancing is similar to when you purchased your home. You apply for a home loan like you did when buying your first home. The lender will review your credit, income, assets, debts and the equity in your home to see if you meet the requirements. Equity is an important factor. You must have a certain amount of equity in your home in order to refinance.

If approved, instead of using the loan proceeds to purchase a home, it’s used to pay off your existing mortgage and get a new one.
Next, you’ll start repayment on your new loan amount. Your payment will change based on the loan term and interest rate. For example, you may make lower monthly payments if you extend your loan term. You might also make higher monthly payments if you reduce your loan term.

Is refinancing right for me?

There are a number of reasons why refinancing your home could make sense. Here are a few you may consider:

• Lower your monthly payments: Your monthly payment will decrease if you refinance to a loan that lowers your interest rate or increases the number of years you have to pay off your mortgage.
  Lower your interest rate: With historically low interest rates, refinancing can help you lock in a lower interest rate so you pay less money in interest.
• Remove Private Mortgage Insurance (PMI): If you put less than 20% down on your home purchase you are likely paying PMI. If you have paid down your loan amount or your home has increased in value, you can likely eliminate that added mortgage expense by refinancing.
• Pay off your loan faster: When you refinance you can change the length of your loan from a 30-year mortgage to a 15-year mortgage.
• Get cash: A cash-out refinance allows you to utilize the equity you’ve accrued in your home to take out cash. A cash-out refinance replaces your existing mortgage with a new mortgage that is more than what you currently owe.

What does it cost to refinance?

While refinancing isn’t free, there are options to make it worthwhile. Just like when you bought your home, there are closing costs. This includes an application fee, appraisal fee and title fees. You can choose to pay the cost upfront or we can roll the costs into the loan so the amount is spread out in your monthly payment.

What are the steps to get started?

1. Talk to a lender
It’s important to talk to a residential lender to explore your options. Understanding what options are out there will help you make the right decision. An experienced residential lender can help you determine the refinancing options you best qualify for and if you will see a benefit.

2. Apply for refinancing
You’ll need to complete a refinancing application, similar to a mortgage. Criteria reviewed for a refinance includes:

• Income
• Credit History
• Current Debt
• Assets
• Appraisal of your current home

3. Appraisal
A licensed or certified professional will complete an appraisal of your home. The appraiser is an independent third party. A refinance appraisal ensures we don’t lend more money than the property is worth.

4. Closing on your refinanced mortgage
Closing for a refinance mortgage is very similar to the process you completed when you first bought your home. Before you arrive at closing your lender will provide you with the loan agreement to review. The closing will be with a title company, the lender and the borrower(s) (you and anyone who has co-signed for the refinancing).

Take the next step.

When thinking about any loan it’s important to know your options and understand what’s involved. Refinancing is no different. Now you know the basics to choosing your next step.

The Ambler Savings Bank Lending Team is available to help with all your home mortgage needs from beginning to end.

Visit our website here to learn more or call our office at 215-646-8400 to speak to one of our team members today.

Becky Dice is a Consumer Mortgage Loan Processor at Ambler Savings Bank.