Refinancing 101: Everything You Need to Know
Reading time: 5 Minutes
February 19th, 2021
Are you thinking about refinancing your mortgage, but don't know where to start? We've put together a new series, Refinancing 101, to guide you through the basics you'll want to know—including what refinancing options you have and how to tell if refinancing your mortgage makes sense for you.
What is a refinance? To put it simply, it's the process of paying off an existing mortgage by taking out a new mortgage, in order to get a lower interest rate, a more advantageous repayment term, or to leverage the equity in a home to get access to cash.
If any of those benefits sounds good to you, take a look at the topics below, and dive in wherever you like. If at any point along the way you've got questions, we're here to help—you can schedule a half-hour call to speak with one of our lending experts.
What's your aim for refinancing? Are you trying to build an emergency savings fund? Pay for that dream kitchen remodel? Whatever your goals, a refinance can get you there. We explain the two main kinds of refinance, so you can know which is the best for you.
There are a lot of benefits to refinancing a mortgage, from saving money to getting out of debt faster. If you're wondering why you should be considering a mortgage refinance, read our blog "Why It's Time to Consider Refinancing" to learn more.
Refinancing can really pay off, but there are some upfront costs to consider. To find out how to calculate your break-even point, to make sure a refinance fits your specific situation, read our blog "Should I Refinance?"
Mortgage interest rates have been hitting historic lows. But is it really the right time to refinance? In our blog, "Does It Make Sense to Refinance in 2021?," we take a look at what may lie ahead in 2021, and consider a few personal situations that could call for refinancing.
When it comes to finding the best mortgage lender for your refinance, there's a lot to consider beyond just the interest rate. Read our blog "How to Choose your Lender" to learn a few important questions you should be asking prospective lenders.
If you're new to the world of refinancing, here are a few useful terms you'll want to know as you research.
Refinancing: The process of paying off an existing mortgage by taking out a new mortgage, in order to benefit from a lower rate or a more advantageous repayment term, or to leverage the equity in a home to get access to cash.
Annual percentage rate (APR): The total amount of interest paid on a mortgage, including fees, represented as a percentage. This includes the base interest rate as well as any other costs involved in the mortgage, including closing costs. When working with a lender, it's a good idea to compare your APR, rather than the basic interest rate.
Cash Out Refinance: A cash out refinance involves paying off your current mortgage with a new, larger one, using the equity built up in your home as collateral. The additional cash can be used for whatever the homeowner would like, such as repaying high-interest debt or funding a renovation project. Most lenders will generally allow qualified lenders to borrow up to as much as 80 percent of the current value of their home.
Closing (or settlement) costs: Fees charged in the closing of a mortgage loan. These fees may include application fees, attorneys' fees, recording fees, estimated costs of taxes and insurance, and appraisal fees. Closing costs typically range from 3 to 5 percent of the total amount of a refinance.
Debt to Income Ratio: A measurement of your ability to repay a mortgage, found by dividing your total monthly debt payments by your gross monthly income. Lenders use this ratio (along with other factors) to review your ability to carry the requested debt in comparison to your income.
Equity: The value of a home that belongs to the homeowner. Equity is calculated by finding the difference between the fair market value of the home and the outstanding balance on the mortgage. Equity generally goes up as the homeowner repays the mortgage, and can also be affected by changes in the house's market value. When refinancing, the equity acts as the collateral being borrowed against—the higher the equity, the larger the mortgage that can be taken out.
Loan to Value Ratio: A number that compares the amount of a potential loan against the appraised value of the property that is being financed. Lenders use loan to value ratios to measure the risk of the loan amount requested. The higher the ratio, the higher the risk.
Rate and Term Refinance: A rate-and-term refinance involves paying off an existing mortgage with a new one that has different, more beneficial terms. This can include a lower interest rate, as well as a shorter or longer repayment term. This term is used to describe the fact that there is no cash out or use of equity.
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