Refinancing is basically a procedure where a homeowner is given access to a new mortgage loan which can be replaced by the existing one. Also, the details of the new mortgage loan can be customized by the homeowner.
What is meant by Mortgage Refinancing?
Basically, a Mortgage loan is used by the real estate. They are made available via banks, credit unions or sometimes online lenders. It is seen that hundreds of billions of dollars are given as a mortgage loan every year.
But, mortgages aren’t one-size-fits-all. Mortgages can be customized.
As mentioned above refinancing means to replace the current mortgage loan with the new one. You’re not limited to working with your current mortgage lender.
So mortgage refinancing refers to the loan that is given to the real estate people.
Types of Refinance Mortgages
Refinance mortgages come in three varieties — rate-and-term, cash-out, and cash-in. The refinance type that’s best for you will depend on your individual circumstance.
Refinance mortgage rates vary between the three types.
In this type of the mortgage refinancing the only difference in the new loan is caused by the mortgage rate, the loan term, or both. For an instance, you may refinance a 30 year fixed rate mortgage into say 10 years fixed rate mortgage. It can so happen that you can refinance a 30-year mortgage which is at 10 percent to new 30-year mortgage rate into say 6 percent. Most refinances are rate-and-term refinances –, especially in a falling mortgage rate environment.
In the Cash-Out mortgage refinancing system, one can feature a lower rate rather than the original higher rate. A person can also opt for shorter loan terms rather than long loan terms.
The characteristic of the Cash Out mortgage is that it has an increase in the amount which you have borrowed.
In the Cash Out mortgage refinancing there is a higher risk to the bank as compared to the Rate and term mortgage refinancing. This is because the Cash Out mortgage refinancing has many strict and standard approvals.
As the name suggests the Cash mortgage refinancing are totally opposite to the Cash Out mortgage refinancing. In the Cash mortgage system, the person begins to close the pay by paying the dues or the amount that he or she owed to the bank.
Whenever you opt for a mortgage refinance, you tend to establish a brand new loan with some wholly new terms and conditions. There are 3 specific areas in which the refinance applicant is evaluated and examined:
- Credit Score and Payment History
- Income and Employment History
- Retirement Assets and Cash Reserves
Some Refinances Don’t Require Verification
Yes, this is very true. There are some programs which are known as Streamlined refinances. In such programs, the refinance mortgage verifications are bypassed.
With a streamline refinance, mortgage lenders waive large parts of their “typical” refinance mortgage approval process.
There are millions of U.S citizens or the homeowners which are highly eligible for the mortgage refinancing that too at lower rates and payments.
The Bottom Line
It is said that Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. If the refinancing is used carefully it can also prove to be one of the valuable tools in getting the debt under the control.
Some things you need to ask yourself before refinancing anything. The questions include:
- How long do I plan to continue living in the house?
- And how much money will I save by refinancing? And so on.
Also, you need to keep in mind that all the refinancing will cost you 3 percent t 6 percent of the loans principal amount. The fact is that it takes years and years to recover the whole cost with the savings which are generated on the low-interest rates or may be on short terms.
If at all you plan to stay at your home for more than few years then the cost of refinancing can negate all your potential savings. It is also important to remember that a savvy homeowner is always looking for ways to reduce debt, build equity and the main is to eliminate the mortgage payment.
Also, remember that even if you take the cash out of your equity will never help you achieve the financial goals.