Learn How to Refinance Your Home Mortgage

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Refinancing is the process of converting an existing mortgage into a new loan. Usually, refinancing is done for one of three reasons: to save money, to convert the existing mortgage to a new type, or to exchange some of the equity in the property for cash.

Thinking of refinancing? It is no more complicated than obtaining that initial mortgage, but the process is not exactly the same, and there are a few extra things to think about if you are toying with the idea of refinancing your existing mortgage.

#1: Is refinancing the best option?

First on the list of things to do is to decide if you should refinance, or if there is a better option for your needs. Refinancing is not always the best solution. In some cases there is an easier and more cost effective alternative that will suit your financial situation better.

Before making any moves, ask yourself what it is that you want to accomplish by refinancing. Contemplate if there is a better way to achieve whatever your goal happens to be rather than refinancing. If you want to take advantage of lower mortgage rates or switch to a different type of mortgage, then obviously refinancing is the only way to do that, but for other types of goals, refinancing may not always the best option.

So if, for example, you want to exchange some of the equity in your home for cash, say for a kitchen or bathroom remodel, then you must ask yourself if refinancing your home is the best way to do this, or if a home equity loan or line of credit might work out better. For instance, if current mortgage rates are high, then a loan or credit line might end up being a better alternative to refinancing.

#2: Is it a good time to refinance?

If you have decided that refinancing is the best way to achieve your personal financial goal, the next thing to think about is whether it is a good time to refinance. There are both financial and personal considerations to examine here.

First, the financial aspect. Compare the interest rate on your current mortgage with the interest rate you can realistically achieve if you refinance. If the new interest rate will be one to two percent lower, then refinancing is probably going to work out as a financially favorable option. If not, then it is unlikely that refinancing your mortgage will allow you to save any money. This is not a hard-and-fast rule, of course. Everyone’s personal circumstances are different, so it is definitely worthwhile to look into the possibility of refinancing more deeply if it is something you really want to do.

Second, the personal aspect. Ask yourself if you are planning to stay in your home long-term, or if moving to a new home is a possibility in the next few years. When you refinance, you must pay a new round of closing costs and lender fees, and that means you generally have to stay in the home for between three and five years to recoup those closing costs from the money you save with your lower monthly mortgage repayment.

#3: Should you change lenders?

There is no reason you have to stay with the same lender who owns your current mortgage when refinancing. It is certainly more convenient to do so, but if you find a better deal elsewhere, there is absolutely nothing stopping you from switching to that new lender. Do not feel that you are obligated to stick with your current lender if you can save more money by shopping around.

If you want the convenience of the same lender as well as a better deal, shop around other lenders until you find the mortgage you want, and then ask your current lender if they are willing to match those terms. You will not lose anything if they say no, but if they agree you could end up with the best of both worlds.

Alternatively, ask your lender if they are willing to renegotiate your existing mortgage. There are some fees associated with this, but often you can avoid paying closing costs, which means you will save most of the costs of refinancing.

#4: Should you stick with the same kind of mortgage?

One of the most popular reasons for refinancing is to switch to a different type of mortgage. Most commonly, this switch is from an adjustable rate mortgage to a fixed rate mortgage. Obtaining an adjustable rate loan with a view of making the switch later on can be very beneficial because it allows you to take advantage of the initial low rates of the adjustable mortgage, then switch before the adjustable period actually kicks in.

Alternatively, you can change the terms of your mortgage while sticking with the same type of mortgage. For example, you might have a thirty-year fixed rate mortgage and refinance to a twenty or fifteen year mortgage. You do not necessarily get lower repayments with this option, but by paying off your mortgage more quickly you save thousands in interest over the life of the loan.

One final option is to keep the same mortgage terms and conditions, and exchange some of the equity in your home for cash. The option you choose will depend largely on what you want to achieve with the refinance, so it is a highly personal decision, as well as a financial one.

Ryan Anderson is a freelance writer who writes about topics and pertaining to the mortgage industry such as refinancing home mortgage.