What is a Mortgage Refinance – Best Explanation
Refinancing is the process of replacing an existing mortgage with a new loan or a new load plan. Basically, people refinance their mortgage or do a mortgage refinance, in order to reduce their monthly payments, lower their interest rate, or change their loan program from an adjustable rate mortgage to a fixed-rate mortgage. Additionally, in case o home refinance, some people need access to cash in order to fund home renovation projects or paying off various other kinds of debts and will leverage the equity in their house to obtain a cash-out refinance. This is when most people ask when should one refinance a home mortgage.
How Does Refinancing Work?
Basic Question is How does Refinancing works? Refinancing works by giving a homeowner access to a new mortgage loan which replaces its existing one. The details of the new mortgage loan are customizable by the homeowner, which include the new loan’s mortgage rate, loan length in years, and the amount borrowed by the applicant. Mortgage refinances can be used to reduce a homeowner’s monthly mortgage payment; to take cash out for home improvements; and, to cancel mortgage insurance premiums, among other uses.
What Is A Mortgage Refinance?
Guys as we know, a mortgage is a loan used generally for real estate purchasing purposes. What mortgage refinance does is, that it gives people a chance to change and ease out the terms of loan taken by them in form of a mortgage. They’re available via banks, credit unions, and online lenders. Hundreds of billions of dollars worth of mortgage loans are given each year. But, mortgages aren’t one-size-fits-all. Mortgages are customizable.
For example, you can choose the number of years in your loan (i.e. term); you can choose the nature of your interest rate (i.e. fixed-rate or adjustable-rate); and, you can even choose what you pay in mortgage closing costs. Your needs as a homeowner today, though, may be different from your needs tomorrow. In the future, you may not like mortgage terms you created for yourself.
Thankfully, there’s an option to change your mortgage loan terms. It’s known as a “refinance” or “mortgage refinance”.
Important features of Mortgage Refinance
- To refinance your home means to replace your current mortgage loan with a new one, ie. mortgage refinance.
- Refinances are seen commonly these days, whether current mortgage rates are rising or falling, also you get to choose any bank of your choice, you can get mortgage refinance from any bank.
- You’re not limited to working with your current mortgage lender.
- Some of the reasons homeowners refinance include a desire to get a lower mortgage rate; to pay their home off more quickly; or, to use their home equity for paying credit cards or funding home improvement.
- Refinances typically close more quickly than a purchase mortgage loan and can require far less paperwork.
Types Of Refinance Mortgages
Refinance mortgage comes in three varieties — rate-and-term, cash-out, and cash-in. The refinance type that suit’s best for you will depend on your individual circumstance. Refinance mortgage rates can be classified into the following three types.
1. Rate-And-Term Mortgage Refinance
- In a rate-and-term refinance, the only terms of the new loan which differ from the original one are either the mortgage rate, the loan term, or both.
- Loan term is the length of the mortgage.
- For example, in a rate-and-term refinance, a homeowner may refinance from a 30-year fixed rate mortgage into a 15-year fixed rate mortgage; or, may refinance from a 30-year fixed rate mortgage at 6 percent mortgage rate to a new, 30-year mortgage rate at 4 percent.
- With a rate-and-term refinance, a refinancing homeowner may walk away from closing with some cash, but not more than $2,000 in cash.
- “No cash out” refinance mortgages allow for closing costs to be added to the loan balance, so that the homeowner doesn’t have to pay costs out-of-pocket.
- Most refinances are rate-and-term refinances —, especially in a falling mortgage rate environment.
2. Cash-Out Mortgage Refinance
- In a cash-out refinance, the refinance mortgage may optionally feature a lower mortgage rate than the original home loan; or shorter loan term, such as moving from a 30-year mortgage to a 15-year mortgage.
- However, the defining characteristic of a cash-out mortgage is an increase in the amount that’s borrowed.
- With a cash-out refinance, the loan balance of the new mortgage exceeds than the original mortgage balance by five percent or more.
- Because the homeowners only owe the original amount to the bank, the “extra” amount is paid as cash at closing, or, in the case of a debt consolidation refinance, directed to creditors such as credit card companies and student loan administrators.
- Cash-out mortgages can also be used to consolidate first and second mortgages when the second mortgage was not taken at the time of purchase.
- Cash-out mortgages represent more risk to a bank than a rate-and-term mortgage refinance and, as such, carry more strict approval standards.
- For example, a cash-out refinance may be limited to a lower loan size as compared to a rate-and-term refinance; or, may require higher credit scores at the time of application.
- Most mortgage lenders will limit the amount of “cash out” in a cash-out mortgage refinance to $250,000.
3. Cash-In Mortage Refinance
- Cash-in mortgage refinance are the opposite of the cash-out refinance.
- With a cash-in refinance, a refinancing homeowner brings cash to closing in order to pay down the loan balance and the amount owed to the bank.
- The cash-in mortgage refinancing may result in a lower mortgage rate, a shorter loan term, or both.
- There are several reasons why homeowners opt for cash-in refinance mortgages.
- The most common reason to do a cash-in refinance to get access to lower mortgage rates which are only available at lower loan-to-values. Refinance mortgage rates are often lower at 75% LTV, for example, as compared to 80% LTV.
- Another common reason to cash-in refinance is to cancel mortgage insurance premium (MIP) payments. When you pay down your loan to 80% LTV or lower on a conventional loan, your mortgage insurance premiums are no longer due.
Paperwork Required for Refinances
When you do a mortgage refinance, you are establishing a brand-new loan with brand-new terms. Typically, this subjects a mortgage refinance applicant to the same mortgage approval process as with a purchase mortgage applicant.
In other words, the mortgage refinance applicant is evaluated in three specific areas:
- Credit Score and Payment History
- Income and Employment History
- Retirement Assets and Cash Reserves
Furthermore, also like a purchase, the home being refinanced is subject to a home appraisal in order to affirm its current market value. Despite the similarities, though, borrowers can usually expect to provide less documentation for a refinance mortgage as compared to a purchase.
Paperwork required for Refinances, which can be asked to be provided, includes – proof of income using W-2s and pay stubs; proof of assets via bank statements; and proof of citizenship or U.S. residency status. Although, it might not be asked to provide information regarding to the original transfer of the home. Refinance mortgages are often ready to “close” in 30 days or fewer.
So guys, if you have any question or query regarding What is Mortgage Refinance? or How do Mortgage Refinance works? Then please feel free to ask us here in the comments section below, We will be more than happy o help you people.