Refinancing Your Mortgage – When and How to Do It

Refinancing involves switching out your current mortgage for a new loan with different terms or rates; usually involving rate, term or both changes. When refinancing, use a mortgage calculator to estimate its impact on monthly payments.

Before applying, gather necessary documentation. This could include recent pay stubs, federal tax returns and bank/brokerage statements as well as fees that can either be paid upfront or added onto the loan amount.

1. Lower Interest Rates

Refinancing can save money over time, especially if your credit has improved since taking out your original mortgage and you qualify for better terms now.

Santiago says a wise homeowner will always consider all loan options to find the one best suited to their financial goals, whether that means switching from an adjustable-rate mortgage to a fixed-rate loan or switching away from FHA mortgage insurance by switching over to conventional.

Refinancing costs between 3% to 6% of loan principal. Recouping these costs through savings generated from lower interest rates or shorter loan terms may take years, so make sure your refinanced decision has a specific goal and plan.

2. Consolidate Debt

Refinancing can help homeowners reduce monthly mortgage payments by refinancing to reduce interest rates and the monthly payment amount, but other reasons to refinance may include changing loan terms or pulling equity out for repairs or debt repayment.

Debt consolidation is one of the primary motivations to refinance your mortgage when interest rates are favorable, involving consolidating high-interest revolving debts such as credit card balances for lower rate loans to reduce payments and save thousands in interest charges over time.

However, if you plan on refinancing your mortgage for debt consolidation purposes, be careful that any new high-interest revolving debt does not arise post-refinancing – otherwise the cycle of debt accumulation will only continue.

3. Take Cash Out of Your Home’s Equity

Refinancing involves taking out a new mortgage loan to replace your current one, with the aim of changing its terms. Refinancing can help lower interest rates, which in turn could reduce monthly payments and save you money over the life of the loan. Refinancing may also change loan terms – for instance switching from 30-year mortgage terms to 15-year terms can help pay off loans faster while freeing up funds to pursue other financial goals more quickly.

Refinancing can also help you unlock home equity and turn mortgage debt into cash by using the difference between its current value and your outstanding mortgage balance as funds for home improvements or debt reduction. But be wary when considering this option; costs associated with refinancing may add up quickly – it could take years before all costs associated with closing costs and fees have been recouped.

4. Change Your Loan Terms

Refinancing can provide an ideal opportunity to customize the terms of your mortgage loan, from shortening its term or drawing out equity for repairs and debt repayment. For instance, refinancing from a 30-year conventional mortgage at present low interest rates to a 15-year loan may significantly lower monthly payments by several thousand dollars each month.

However, before changing the terms of your loan it’s essential that you carefully evaluate its costs and benefits to determine if this decision is worthwhile. For instance, shortening your loan term means faster pay off but may cost more in total interest payments.

As part of their review process, lenders conduct an appraisal and examine your credit and debt-to-income ratio when reviewing applications for mortgage refinancing. To start out, fill out an online mortgage refinance prequalification form to better understand your options, and if approved complete a refinancing application to secure your new loan.