How Does Mortgage Refinancing Work, Anyway?
A lot of homeowners are rushing to refinance their homes right now, in order to take advantage of low interest rates before they start rising again. But how does refinancing work, anyway? What steps are involved in the process, and where does one even begin?
This is what I’d like to talk to you about today. If you are unfamiliar with the concept of refinancing, and you want to know how it works, this lesson is a great place to start.
When you refinance your mortgage, you are essentially replacing your current loan with a new one. There are several reasons to do this. Some people refinance in order to switch from an adjustable-rate mortgage to one with a fixed rate. Some people do it to pull cash out of their home’s equity. Some do it to get a lower rate on their mortgage, thus saving money in the long run.
You can combine these reasons as well. For instance, you could switch from an ARM to a fixed-rate loan while getting a lower rate in the process.
How Refinancing Works - By the Numbers
But let’s get back to the topic at hand — how refinancing works. I’ve already stated that you are replacing your current loan with a new one. Here are the basic steps involved in that process.
- The homeowner decides to refinance and starts learning about how the refinancing process works (like you’re doing right now).
- The homeowner approached a mortgage lender to apply for a refi loan. This can be done online or in person.
- The lender will review the borrower’s income, credit score and other factors to determine if they’re a candidate for refinancing.
- The lender will also need to measure the homeowner’s current equity. They do this by having the home appraised, and then subtracting the current loan balance from the value of the home.
- If the homeowner has enough equity for refinancing purposes (generally 20% or more), the process will continue.
- If the homeowner lacks the equity required to refinance, it may be the end of the road.
- If the process continues, the homeowner will review the interest rate and terms of the new loan.
- The homeowners should compare their future savings to the refinancing costs, to make sure the refi will benefit them in the long run.
- Ultimately, their will be a closing process similar to when you first purchased your home. Except, of course, there won’t be any home buyers present — just the homeowner and the mortgage rep.
Obviously, this is a simplified version of events to help you understand how mortgage refinancing works in most cases. There are more steps to the process than those listed above, and the process may vary from one lender to the next (and from one borrower to the next).
How does refinancing work and when is it a good idea? These are two of the most common questions among homeowner who are thinking about a refi. We have answered the first part of this question above, by explaining how refinancing works. The second part of the question is answered here: When should I refinance my home?
Refinancing Process | admin | 
June 30, 2009 8:00 am
