The amount of money borrowed on a loan.
Glossary Term: Refinancing pays off your existing Glossary Term: mortgage and replaces it with a new one that may be a better fit for you today. But whether or not refinancing is a good choice for you will depend on your goals and whether the potential benefits outweigh the potential costs.Footnote 1
Changing your loan to a fixed rate: If you chose an Glossary Term: adjustable-rate mortgage (ARM) when you purchased your home, you might decide to refinance to a Glossary Term: fixed-rate mortgage to stabilize your Glossary Term: interest rate and your Glossary Term: monthly payment. Or if interest rates are lower now than when you purchased your home, you may want to Glossary Term: lock-in a low fixed rate.
Lowering your monthly payments: There are different ways you could do this. You might switch to another loan type, take advantage of a lower interest rate, or extend the Glossary Term: term (length) of your loan.
Paying off your mortgage faster: If you can afford the monthly payment increase, reducing your Glossary Term: loan term could help you achieve significant interest payment savings over the life of the loan.
Borrowing from your home equity: This is called a Glossary Term: cash-out refinance. If you’ve paid off enough Glossary Term: principal or your home value has increased, you may be able to borrow against a portion of the available Glossary Term: equity in your home and use the funds for something else. For example, you might want to remodel your kitchen or make home repairs. Since you would be borrowing more than you currently owe on your existing mortgage, the potential for monthly mortgage payment savings with this type of refinance is usually more difficult to achieve. If you use a cash-out refinance to pay down higher-interest rate Glossary Term: debt (like credit cards), you may achieve interest payment savings.Footnote 2
This is a new loan: You’ll go through the loan approval process again, as you did when you first bought your home. Your Glossary Term: debt-to-income ratio and Glossary Term: credit score will be re-evaluated.
Closing costs: You will also pay Glossary Term: closing costs, including Glossary Term: appraisal, Glossary Term: credit report, and other fees. Make sure you understand these costs before you sign on the dotted line.
Interest costs: Refinancing may also cost you more in interest. Why? Refinancing starts a new loan and extends the years you have to make mortgage payments, unless you choose a shorter loan term than the one you already have (for example, by moving from a 30-year loan to a 15-year loan). A longer loan term can increase the amount of interest you’ll pay over the life of the loan. Ask your mortgage loan officer to help you evaluate your individual situation.
Qualifying: Most Glossary Term: lenders require that you have a minimum of 5% equity in your home to qualify for refinancing (Glossary Term: conforming loans only). This could either come from paying down your loan principal or from home Glossary Term: appreciation.
If you’re ready to refinance, contact a lender to talk about your options. Choose a reputable mortgage lender and ask about terms, rates, costs, how your monthly payments will change, and how that could affect your finances over the full term of the loan.