How Does Mortgage Refinancing Work Anyway?

How does mortgage refinancing work anyway? That’s the subject of today’s blog post. After all, you can’t pursue the process until you understand how it works. So, here’s an explanation of how refinancing works in 500 words or less.

Basically, when you refinance your mortgage loan, you replace your current loan with a new one. People do this for a variety of reasons.The most common reasons are to (A) secure a lower interest rate, (B) shorten the term of the loan, (C) switch from an adjustable to a fixed-rate mortgage, or (D) to pull cash out of the home’s equity.

How Refinancing Works

So those are the primary reasons for refinancing a mortgage, but how does the process work? The first thing you should do is figure out how much equity you currently have in your home. Mortgage lenders will require you to have a certain amount of equity in order to refinance a home. In most cases, you’ll need at least 20% equity in your home for refinancing purposes. There are some government programs available today, such as the Making Home Affordable program, that will allow you to refinance your home with less than 20% equity. But in any case, you’re going to need positive equity for refinancing to work out.

Fortunately, it’s fairly simple to figure out how much equity you have in your home. All you need to do is subtract your current loan balance from the current value of your home. This tells you how much equity you have. Right now, a lot of people in the United States are upside down in their mortgage loans — meaning they owe more on the loan than the home is worth in the current economy. This is something you need to investigate, because if you’re upside down in your mortgage loan, refinancing probably won’t work out for you.

Once you’ve done this primary investigation work, the next step is pretty simple. You need to get refinancing quotes from lenders. It’s probably a good idea to check your credit score as well, because you know the lender is going to check it when reviewing your loan application. And if you want to get the lowest rate that the lender has to offer, you need a good credit score.

Those are the basics of how refinancing works, and how it might work for you. Let’s sum up some of the key points we talked about in this article:

• When you refinance your home, you are basically replacing the current loan with a new one.
• People refinance for a variety of reasons, such as securing a lower interest rate, shortening the term of the loan, switching from an adjustable rate to a fixed-rate mortgage, or tapping into the home’s equity for cash purposes.
• Usually, you need to have positive equity in your home in order to refinance the mortgage.
• To figure out how much equity you have, you would simply subtract your current loan balance from the current value of your house.
• It’s also a good idea to check your credit score to see if it’s good enough to qualify for the best rates. You will probably need a score of 750 or higher to get the best rates on a refinance loan.
• Once you’ve done this preliminary homework, you should start requesting quotes from mortgage lenders.

So that’s how mortgage refinancing works in today’s economy. I hope this article give you a better understanding of the process that takes place, and I wish you luck with your own refinance.

Filed under: The Refi Process