Mortgage refinancing lets you save money

Millions of homeowners could benefit by refinancing their mortgages, even if they bought or refinanced as recently. According to the Mortgage Bankers Association, refinance applications jumped 79% Homeowners can cut their mortgage payments with refinancing. A mortgage refinance replaces your current home loan with a new one.

Often people refinance to reduce the interest rate, cut monthly payments or tap into their home’s equity. Others get a mortgage refinance to pay off the loan faster, get rid of FHA mortgage insurance or switch from an adjustable-rate to a fixed-rate loan.

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance: to obtain a lower interest rate; to shorten the term of their mortgage; to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; to tap into home equity to raise funds to deal with a financial emergency, finance a large purchase, or consolidate debt.

What happens when you refinance a mortgage?

When you buy a home, you get a mortgage to pay for it. The money goes to the home seller. When you refinance, you get a new mortgage. Instead of going to the home’s seller, the new mortgage pays off the balance of the old home loan.

Mortgage refinancing requires you to qualify for the loan, just as you had to meet the lender’s requirements for the original mortgage. You file an application, go through the underwriting process and go to closing, as you did when you bought the home.

Why and when should you refinance?

1. Reduce the monthly payment. When your goal is to pay less every month, you can refinance into a loan with a lower interest rate. Another way to reduce the monthly payment is to extend the loan term — say, from 15 years to 30. The drawback to extending the term is that you pay more interest in the long run.

2. Tap into equity. When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called a cash-out refinance. People often get a cash-out refinance and a lower interest rate at the same time.

3. Pay off the loan faster. When you refinance from a 30-year mortgage into a 15-year loan, you pay off the loan in half the time. As a result, you pay less interest over the life of the loan. There are pros and cons to a 15-year mortgage. One downside is that the monthly payments usually go up.

4. Get rid of FHA mortgage insurance. Private mortgage insurance on conventional home loans can be canceled, but the Federal Housing Administration mortgage insurance premium (MIP) you pay on FHA loans cannot in many cases. The only way to get rid of FHA mortgage insurance premiums is to sell the home or refinance the loan when you have accumulated enough equity. Estimate your home value, then subtract your mortgage balance to calculate your home equity.

5. Switch from an adjustable to a fixed-rate loan. Interest rates on adjustable-rate mortgages can go up over time. Fixed-rate loans stay the same. Refinancing from an ARM to a fixed-rate loan provides financial stability when you prefer steady payments.

Cash-out home mortgage refinancing

What is a cash-out refinance?A cash-out refinance replaces your current home loan with a new mortgage that’s higher than your outstanding loan balance. You withdraw the difference between the two mortgages in cash and put the money toward home remodeling, consolidating high-interest debt or other financial goals.

How a cash-out refinance works

When you refinance a mortgage, you simply replace the existing loan with a new one for the same amount, usually at a lower interest rate or for a shorter loan term or perhaps both.

Cash-out refinancing, however, is different because you’re withdrawing a portion of your home equity in a lump sum. You’ll pay slightly higher interest rates for a cash-out refinance because you’re increasing the loan amount. Lenders generally limit the amount you can withdraw to no more than 80 percent of your home’s value to ensure you maintain an equity cushion.

Refinancing to Shorten the Loan's Term

When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term. For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $804.62 to $817.08. However, if your'e already at 5.5% for 30 years ($568), getting, a 3.5% mortgage for 15 years would raise your payment to $715. So do the math and see what works.

Refinancing to Convert to an Adjustable-Rate or Fixed-Rate Mortgage

While ARMs often start out offering lower rates than fixed-rate mortgages, periodic adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes.

Conversely, converting from a fixed-rate loan to an ARM—which often has a lower monthly payment than a fixed-term mortgage—can be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years. These homeowners can reduce their loan's interest rate and monthly payment, but they will not have to worry about how higher rates go 30 years in the future

Refinancing to Tap Equity or Consolidate Debt

Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child's college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.

>Refinance to Pay Off Credit Cards Debt. Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea.

They accomplish this with a cash-out refinance: getting a mortgage for more than they owe on the home, taking the difference in cash and paying off high-interest debt with it. Will be good idea if you are reducing your credit cards interest, 12%, 15%, 18%, 21% etv.