Refinancing and Second Mortgages
What is Refinancing?
Refinancing your loan is the process of getting a new loan at a different interest rate or with different terms. The new loan is used to pay off the old loan.
There are many reasons that people will consider refinancing their original mortgage loan.
- Lower interest rate – Because interest rates change, it may be to your benefit to refinance your loan at a lower rate. The lower rate will affect your monthly payment so you’ll pay less interest over the life of the loan.
- Change loan type or terms – People refinance to change the length of their loan or to switch from an ARM to a fixed mortgage, or vice versa. Switching may save you a lot of money over the life of the loan.
- Improved credit rating – If the homeowner’s credit rating has greatly improved since the original mortgage was made, the individual may be eligible for a much better mortgage.
- Cashing out - Some lenders will allow a borrower to take money out of the home’s equity for other activity or to pay off other loans. This home line of equity removes money from the home and adds another loan.
Should I refinance?
Just because the interest rate has changed doesn’t mean you should refinance your loan. Refinancing incurs the same closing costs you paid with your original mortgage. Before you consider refinancing, talk to your lender. Find out what fees you would have to pay and if this is really as good of a deal as it sounds.
Your lender will ask you if you can afford the costs, how much is left of the original loan, if your mortgage has a pre-payment penalty, why you want to refinance and if you’re planning to move soon, among other questions. The lender will help you assess the situation.
Check out Fannie Mae’s document, “Is now a good time to refinance?”
How do I refinance?
Refinancing is much like the process you went through with your first mortgage loan. You should talk with lenders and find out what loans they can offer you. You must complete the loan application, which includes a credit history, verification of income, debts and assets, account information, an appraisal, title search, etc. The lender will ask about outstanding mortgage balances and the status of property tax and insurance payments.
What about cash-out refinance loans?
A cash-out refinance, or home equity line of credit, may not be the best solution for everyone. This loan taps the equity in your home, which increases your monthly mortgage payment. You can receive a loan for a value greater than your home, but in the long run it may cost you a lot in interest payments. Be sure you check out all the details of the loan, including the upfront lender fees.
"A Consumer's Guide to Mortgage Refinancings" - The Federal Reserve Board
"Refinance Overview" - KnowYourOptions.com by Fannie Mae
"Modification" - KnowYourOptions.com by Fannie Mae
"Home Affordable Modification Program (HAMP)" - KnowYourOptions.com by Fannie Mae