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When you were younger, you thought your student loan was the biggest decision you’d ever make. Fast forward a few years, and you’ve made a lot more substantial choices, including buying a house and taking out a mortgage. Faced with this decision, all those other choices pale in comparison. Yes, it’s no exaggeration to say that taking out a mortgage may be the biggest decision anyone makes in their life, certainly their most prominent financial decision up to this point.
You’re a safe investor, so you do your research. You find a reputable lender, read the T&Cs, and customize the terms exactly to your specific financial goals and requirements. Excellent. Except for one thing. For the vast majority of people, those all-important requirements and goals that existed when they first purchased their home have changed over the years. Suddenly, your mortgage loan isn’t as picture-perfect as it was on signing day. From the interest rate you were given (which sounded reasonable at the time) to your financial standings and repayment terms, things have certainly changed over the years.
Out of luck? Hardly. This is where mortgage refinancing comes into play. Mortgage refinancing services help you get a better deal for your mortgage loan than the original one. Wondering if refinancing is the right move for you? Check out our guide to refinancing for everything you need to know, including the pros and cons of refinancing mortgages, what it takes to refinance, and where to go next.
- Protect your rate while you home shop—Lock & Shop
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How Does a Refinance Mortgage Work?
If you’re new to the field, you might be wondering how a refinance mortgage works anyway? To someone who hasn’t refinanced their home, it can be an intimidating concept. You don’t want to mess with a good thing (i.e., your current loan), but you like the idea of upgrading and possibly even saving money (more on that below). Luckily, the entire experience can be quick, simple, and even pleasant if you go with the right mortgage refinancing services.
So, how does a refinance mortgage work? It’s actually easier than you would think. Since you’ve already taken out a mortgage loan, you are already familiar with most of the steps involved because taking out a refinance mortgage is almost the same process as taking out a regular mortgage loan. The basic steps include:
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Start with a little comparison shopping
Make sure to look around for the best rates and loan terms possible. After all, you’re doing this to make money, one way or another. So be sure you are getting the best deal for your mortgage. Opt for an industry leader like SoFi, Even, or Marcus so you know you’re dealing with a reputable and reliable mortgage refinancing service. The most important things to compare are interest rates and repayment terms against your current rates and terms.
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Apply for the mortgage refinancing loan
This step is already familiar to you, since it’s pretty much the same as the first time around. You’ll need to fill out a basic application form, provide some documentation, and have a credit pull done. The good news is that since many people improve their credit over the years of owning a home (by paying off their mortgages responsibly and in a timely manner each month), you are more likely to get approved for a better rate than you received previously.
Look for any prepayment penalties that the new (and old) loan might have. Also pay attention to closing costs because these can tank your entire savings plan. Meaning, if you end up paying more in closing costs than you are saving by refinancing, the entire loan defeats its own purpose.
What is Good & Bad Credit & Why it Matters
Alright, you’re an expert now. You can answer the most important question of how does a refinance mortgage work. But you’re not quite ready to graduate. Let’s take a look at one of the most important factors that determine your eligibility for refinancing approval: credit scores.
Your credit score is a grade you are given based on your credit history. It takes several things into consideration including timely payments, your debt to income ratio, the amount of credit you have, and more. Based on all these factors, you’ll earn a score ranging from 300-850 (generally). There are different credit unions with slightly different grading systems, but the three major ones are TransUnion, Equifax, and Experian.
So what is a good credit score? Like on a test, the higher your score, the better. But most people don’t achieve a perfect score. Various lenders will have a minimum credit score they work with, but it’s a good idea to keep your score above a 660. 670-739 is considered good, 754-799 is already very good. There are lenders that will work with lower than 660, but you’ll end up paying a higher interest rate for it.
What does this have to do with the price of tea in China? Well, since your credit score can give them a good idea of your creditworthiness, mortgage refinancing services will look at your credit score as one of the deciding factors when determining your eligibility for the loan. The better the score, the more likely you are to get approved for your refinancing loan, and the lower the rate you’ll receive too.
How Refinancing Can Save You Money
Music to anyone’s ears, it’s always good to know how we can save some cash without putting in too much effort. And that’s the beauty of refinancing. It can cut back on your monthly mortgage payments and doesn’t require doing anything different on your part.
So how does a refinance mortgage work to save you money? There are actually a couple of ways it can help, including:
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Lowering your interest rate
Homeowners frequently take out a refinance mortgage to get a lower interest rate than the one they’re currently paying. As mentioned, credit often improves over time. So you are more likely to get a lower interest rate on the new loan than you did on the original one. It is also possible that the market rate has dropped since you took out your first mortgage, enabling you to save money on interest payments and monthly payments
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Changing terms
Refinancing also allows you to change the repayment terms of your loan. How does this help? Well, the longer you spread out your loan, the more interest you end up paying over time. By shortening your repayment terms, you shorten the number of months you need to pay interest on, thereby lowering your overall payment amount.
Another Reason to Refinance
Saving money is one of the benefits of refinancing mortgages, but it’s not the only one. Other homeowners will take out a refinance loan to tap into the equity of their home, pulling actual money out of the value of their homes. Here’s how that works:
Your home has a specific dollar amount value on the market. Its equity is the amount it is worth minus the amount you still owe on your mortgage loan. So if, for example, your home is valued at $250k, and you still have $50k left on your mortgage loan, your home’s equity is $200k. Now, if you wanted to get your hands on a large sum of money, you could pull it out of your home’s equity. This is frequently done in order to pay for an upgrade on the home, finance an event or trip, or to pay outstanding bills.
You might also consider a refinance mortgage if you want to switch your mortgage from an adjustable-rate to a fixed-rate. This would be helpful if you’ve been unlucky enough to have gotten saddled with a mortgage during a particularly rough market increase (where the rates keep rising and you keep paying more). Switching to a fixed rate can lock in a lower rate and save you from paying more when rates rise.
But there are pros and cons of refinancing mortgages. If you aren’t careful with your finances, you can end up losing your home because of poor financial decisions (that force you to miss payments on your refinance loan). So, only pull out equity if you are sure you can recoup your losses steadily.
A More Pleasant Option: Going With the Best Mortgage Refinancing Services
To sum up, we’ve learned how a refinance mortgage works in the real world and what it entails. You’ve discovered what a credit score is, why you want a good one, and how it affects your eligibility. You can even answer the question of how does a refinance mortgage work to save you money. If sorted out properly, refinancing mortgages can actually be spun to your financial benefit.
Refinancing is not for everyone. But for the right people, the benefits of refinancing mortgages can be a real game-changer in the way you manage your entire life finances, lifestyle, and peace of mind.
Article Topics
Mortgage Loans
Sarah Pritzker loves researching - and then sharing - all the info she can get her hand on in the world of finance. Whether it's comparing credit cards, contrasting life insurance policies, staking out investment opportunities, or investigating fraud, Sarah's got her finger on the pulse of the finance moment. She brings years of experience working for financial outlets to the table.
