Buying or Selling a Home

How to Refinance Your House

Written by Whitney Bennett

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Learn how, why, and when to refinance your home with our all inclusive guide.

Refinancing your house, like most parts of the home buying and owning process, can be complicated. You might have a lot of questions, like when the best time to refinance your mortgage would be and how to actually make sure you’re getting a good deal. There’s a lot that the average homeowner doesn’t know about refinancing a home, and that’s OK! This guide will walk you through the when, why, and how to refinance a home. Some of this information may even surprise you, like learning that it’s an excellent time to get a home warranty plan while you’re refinancing your home!

What Does It Mean to Refinance Your Home or Mortgage?

Refinancing your home means getting a new mortgage from a new lender.

When you hear things about refinancing your home (or, in shortened terms, “getting a ‘re-fi’”), it means you are getting a brand new mortgage on your home and using the money you’re borrowing on that mortgage to pay off the original mortgage you opened to purchase your home. In the simplest of terms, you’re just re-buying your home using a different mortgage lender.

There are lot of reasons homeowners decide to get a re-fi on their mortgage. Some of these motivations may be less financially sound than others.

Why Refinance Your Mortgage?

Do not get a re-fi on your home to get some extra cash in a cash-out refinance.

Click to download the full infographic.

One of the worst reasons to refinance your home is to get a “cash-out” refinance (which we will discuss later in this article), where you borrow money on your home’s equity and use that money for something unnecessary. Here are some good reasons to refinance your mortgage:

Lower Your Interest Rate

If you do your research on your home’s re-fi, you should be able to get a better interest rate on the money you owe. Not only does this mean you’ll be paying less on your month-to-month payments, you’ll be able to pay off your debt sooner and not pay as much in interest on your home in total.

Shorten Your Loan Term

Getting a shorter loan term is another great reason to refinance. If you move to refinance your home loan and you can afford the extra few hundred dollars on your loan payment, you can end up paying off your mortgage faster and paying less in interest overall. Granted, some of these shortened loan terms mean up to 25% more on your monthly mortgage payments, which might not be sustainable for every homeowner. If you don’t want to go through the hassle of refinancing your loan but want a shorter loan term to pay less interest, consider paying a bit more than the minimum payment every month. That amount of money will pay directly onto your principle, and help you pay off your mortgage faster. 

Get Rid of Mortgage Insurance

Mortgage insurance is usually a necessary part of your mortgage payment if you purchased a home and put less than 20% down on your down payment. If you have Federal Housing Administration insurance, you have to refinance to a non- FHA mortgage to get rid of that payment. You also must own at least 20% equity in your house to refinance.

Move From an Adjustable Rate Mortgage to a Fixed-Rate Mortgage

An adjustable rate mortgage is one that starts out with a lower interest rate for the first few years of your loan and then adjusts the rate depending on the market, which usually means it increases over time. One way to get rid of these inevitable high interest rates is to refinance to a fixed-rate mortgage that has a locked in (and hopefully satisfactory) interest rate.

As you can see, these can be excellent reasons to refinance your home, but they depend largely on a homeowner’s current financial situation. That’s why it’s important to understand when you should be refinancing your home.

When Should You Refinance Your Home?

Do not get a re-fi on your home when you have bad credit or a high debt to income ratio, as you may not get great rates.

Click to download the full infographic.

Refinance when your credit is good.

Refinancing with bad credit can lead to higher interest rates and less flexible options for loans. Remember, this is just like originally buying your home, but you’re just buying it from one mortgage lender and moving to another. That means the same principles apply that applied when you initially bought your home. If your credit is less than stellar, refinancing can end up costing your more money in the long run.

Refinance when your debt to income ratio is low.

If you have a lower debt-to-income ratio, refinancing is a great option. (That means you have a lot more income coming into your bank account than going out to pay off your debts.) If you want to refinance, make sure you have paid off credit card debts and personal loans.

Refinance when you’re going to end up paying less.

You never want to refinance your home and end up paying more money in the long run. Refinancing by doing a “cash-out” refinance can end up costing you significantly more money, especially if the housing market crashes. Don’t swap out a smaller monthly payment for extending your loan term though; you’ll most likely pay more, even though your monthly payment is less.

Refinance if you are putting money into your home.

If you are refinancing with a “cash-in” method, this means you have a lump sum of money you have saved up or received that you want to put towards your mortgage, almost like a second down payment. This can help you to get a shorter loan term, lower monthly payments, and lower interest rates overall.

Refinance if you are planning on staying in the home for a long time.

Don’t refinance if you’re going to end up leaving the home and selling in a few years. The origination fees and closings costs associated with refinancing can take a few years to recoup.

How to Refinance a House

Different reasons you may refinance your home.

Click to download the full infographic.

There are a number of different ways to refinance your home:

Rate Refinance

A refinance to lower the interest rate (and monthly payment) while extending or keeping the same loan term.

Term Refinance

A mortgage refinance to lower the length of the loan’s term, while continuing the same monthly payment, but saving money in the long run on interest.

Cash-Out Refinance

A mortgage refinance based on a home’s current appraisal value and equity, providing cash to the homeowner from the home’s equity. This can often backfire on homeowners, who will take out the equity they have in the home plus the amount of money that the home has appreciated in value and use it. Then when they go to sell the home, it is appraised for less or the market crashes, and they end up owing much more than the home is worth.

Cash-In Refinance

A refinance where you have a large sum of money that you use like a second down payment on a home, reducing the monthly payment and loan term.

Mortgage Insurance Refinance

A home re-fi where you own 20% equity of the home, and you want to reduce your monthly payment by removing FHA mortgage insurance.

Refinancing your house is remarkably similar to purchasing a home to begin with and getting pre-approved for a mortgage. The only difference is that you don’t have to house hunt! You already have your home, you just want to save money.

How to refinance your home; a step by step guide.

Click to download the full infographic.

Here are the steps in how to refinance your home mortgage:

  1. Get Your Credit Score

Make sure your financial data is in order and you have good credit before embarking on this quest to refinance your home’s mortgage.

  1. Get Your Home’s Value

Make sure you know how much your home is worth and how much you have already paid on the principle of the home. Getting the home appraised is a part of the refinancing process, just like it is for a new home buyer.

  1. Get a Great Mortgage Rate

Once you’ve been pre-approved for a new mortgage, begin shopping for a great new (lower) mortgage rate or term.

  1. Factor in Costs

As you begin looking at your options, make sure to factor in the closing costs and fees associated with refinancing. Refinancing can sometimes be more expensive than you would expect.

  1. Lock in Your Rate

Once you find a good mortgage lender and a rate and term that works for you, lock in your rate.

  1. “Close” on Your Home Mortgage

Refinancing is much like closing on your home. You’ll need the same paperwork, financial data, and closing costs. Make sure to ask your mortgage lender what you need to bring to the closing to ensure the process goes smoothly.

Get a Home Warranty When You Refinance Your House

Get home warranty protection on your home when you refinance.

Click to download the full infographic.

As you consider the options of refinancing, make sure to look into getting a home warranty plan while you’re refinancing. Often times, a home’s systems and appliances begin failing around 10 years old, and that is often around the time most homeowners begin to think about refinancing their house. A home warranty can repair or replace a home’s systems and appliances when they fail from normal wear and tear. When those systems and appliances reach their intended lifespan, they tend to break down easily. A home warranty plan can protect you from these expensive repairs and replacements.

A home warranty can be added onto your closing costs or included in your new mortgage. A home warranty costs around $300-$600 on average, which can easily be merged into your mortgage plan and help protect your older systems and appliances. Learn more about why you should get a home warranty when you refinance your home here. You can purchase a home warranty plan for your home’s refinance by going to www.landmarkhw.com/order/realEstate.

The full infographic of how to refinance your home.

Click to download the full infographic.

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