Must Know: How Does Mortgage Refinancing Work?
Refinancing a mortgage helps homeowners take a new loan on their mortgage to replace their current loan. Most people refinance their loans to lower the rate of interest and bring down their mortgage payments, helping them save thousands of dollars in the process. But that’s just one of the reasons to refinance your mortgage.
Many people also refinance their mortgage to tap into the equity they’ve built in their homes – this helps them pay for substantial expenses that they may not have planned for.
How Does Mortgage Refinancing Work?
Mortgage refinancing involves getting a new mortgage loan and replacing your current loan with it. When you refinance your loan, the process you will have to follow is similar to what you did when buying your home. The only difference is that instead of using the money you got to buy a new home, you will be using it to repay your mortgage.
Refinancing erases the entire debt on your current home loan. In its place, you will have a new mortgage loan, hopefully at a lower rate of interest. Once the refinancing is complete, you continue making payments towards your home – but instead of trying to repay your original loan, you will be repaying the new loan. Keep in mind that refinancing does not mean you’ve actually repaid your home loan debt – the loan has simply moved from one lender to the other. You still owe money on the loan and you should be making payments towards the loan to avoid foreclosure.
How a Mortgage Refinance Helps Homeowners
Your personal finances are likely to change over the years. You’ll build home equity; your income may go up; maybe you’ll pay off debts and improve your credit score.
If rates have fallen since you got your home loan, there’s a good chance you can refinance to a lower rate loan and save a good amount of money — even if your finances haven’t changed much since when you got the loan. If you do decide to refinance your loan, make sure to compare your options and refinance to a suitable loan.