Refinancing Guide

Refinancing is simply an industry term for replacing your old mortgage loan with a new one.

The reasons for a refinance vary, but usually, they offer significant financial benefits to homeowners who choose them.

Some of these benefits include:

  • A lower monthly payment
  • A lower interest rate
  • A quicker repayment period
  • More consistent, reliable payments

A refinance can also be used to access cash via the equity you have in your home. This can help you cover the costs of home improvements, tuition, medical bills or other expenses you’re dealing with.


How a Refinance Works

Here’s how it works: Basically, you’ll apply for a new loan (just like you did when you initially purchased your house), and you’ll be given new terms, a new rate and a new monthly payment. You’ll also pay closing costs on the new loan.

Once approved, the new loan will be used to pay off the balance on your old one, replacing it with a new loan entirely. You’ll then pay the new loan off on a monthly basis over 10, 15 or 30 years (whatever loan term you’ve chosen).

As with your first mortgage, the rate and terms you’ll qualify for will depend on your credit profile, how much equity you have in the property and the current market.


Rate and Term Refinances

There are several types of refinances you can choose from, each with their own pros and cons.

The most common one is called a rate and term refinance. With rate and term refinance, you’ll be changing either the interest rate on your loan, the length of repayment on your loan or both. You might choose a rate and term refinance because:

  • Market interest rates have dropped below your current loan’s interest rate – When this occurs, refinancing into a lower-rate loan can save you in interest costs over the life of the loan.
  • Your credit has significantly improved – If you have better credit than you did when you initially applied for your mortgage, you’ll probably qualify for a better rate on a new loan. This can save you on interest over time.
  • You want to lower your monthly payment – There are two ways you can lower your payment through a rate and term refinance. First, qualifying for a lower interest rate will mean a lower payment. Second, you can choose a longer-term loan, thereby spreading your payments out more and lowering their monthly cost.
  • You want to pay off your mortgage sooner – If you’re making significantly more than you were when you took out the loan, you might also refinance into a shorter-term loan. It would mean a higher monthly payment, but it will help you pay your loan off sooner and save you on interest.

Rate and term refinances are one of the most popular types of refinancing out there, especially given the market’s current low interest rates. Data from Black Knight suggests that more than a third of 2018 homebuyers could save at least 0.75 percent via a rate and term refinance as of mid-2019.


Cash-out Refinances

In addition to rate and term refinances, there are also cash-out refinances. As the name suggests, these loans allow you to access cash by tapping the equity you already have in your home.

Here’s how it works: You’ll refinance into a loan that’s larger than the loan balance you have on your current loan. The difference between the two numbers? You’ll get that in cash, as a lump-sum payment.

Let’s look at an example: You’ve got $120,000 left on your original loan. You refinance into a loan for $200,000. Once approved, you’ll have $80,000 to spend as you see fit.

Many homeowners use cash-out refinances to help pay for:

  • A lower monthly payment
  • Home improvements and renovations
  • College tuition or educational costs
  • Medical bills
  • Unexpected repairs
  • Higher-interest debts (credit cards, etc.)

Cash-out refinances are a good way to access cash in a pinch, and they’re much more affordable than high-interest credit cards or personal loans.


Cash-in Refinances

Though they’re less common, you can also opt for cash-in refinances, which allow you to put extra money toward your home equity, rather than take money out of it.

There are a few reasons you might want to do this:

  1. You’ve come into some money (an inheritance, for example) and want to put it toward your home. If your current loan doesn’t allow for pre-payments, you might want to refinance into a new loan to put that money toward the home.
  2. You want to pay off your loan sooner. Putting extra cash into your home can help you pay off your loan faster, especially if you choose a shorter loan term simultaneously.
  3. You want a lower mortgage rate. Cash-in refinances often qualify you for lower interest rates than other loans, thanks to their lower loan-to-value ratios and, sometimes, their shorter terms.
  4. You want to cancel your mortgage insurance premiums. By putting cash into your home via a refinance, you’ll reach that 20 percent equity stake and can avoid costly mortgage insurance costs. This also means a lower monthly payment.

Cash-in refinances are rare, but if you have the financial means to make one happen, it could save you significantly in the long run.


What to Know Before Refinancing

The most important thing to know about refinancing is that you do not have to use your original mortgage lender if you’re hoping to refinance. As with your first loan, you are free to shop around for your refinance lender, and you should if you want the best rates and service.

It’s also important to note that refinancing requires most of the same paperwork as your first loan. Your lender will need documentation of your income, employment, assets, bank accounts and more, and you’ll need to authorize a credit pull on your behalf. Your lender also may order an appraisal depending on how long you’ve been in the home.

Fortunately, despite the paperwork, refinances are generally processed faster than purchase loans, and you’ll likely be done in under a month (often sooner). If you’re counting on cash from your refinance, this can be extremely beneficial.


Pro Refinance Tips

If refinancing is on your radar, take time to assess your credit before applying. Better credit will qualify you for better interest rates, which will save you significantly over time. If your credit isn’t ideal, spend a few months paying down debts, getting current on late accounts and reporting any errors you spot on your credit report. These moves can all improve your score and the rates it will qualify you for.

To maximize the benefit you’ll get from a refinance, you may also want to research local home values before applying for yours. If home values are on the rise, that means your equity is rising, too, and you can tap more cash via a refinance. If values are dropping, you may not have as much leverage as you’d like.


Getting Started on Your Refinance

If you’re thinking of refinancing your mortgage loan, then reach out to a Sunray loan expert to discuss your options. Every homeowner is different, and we’ll help you understand what refinances could benefit you and your situation best. You can also use our rate quote wizard to learn more about what mortgage rates you can expect on your refinance. Get in touch today to get started!

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