Mortgage refinancing means paying off an existing loan and replacing it with a new one. In simpler terms, you really are just borrowing money from the bank, any bank, under a new loan to clear the debt you owe in your current home loan.
Homeowners typically refinance a mortgage to secure more favourable interest rates or other loan features that can save them money; some on the other hand, refinance to take their equity in cash to pay for some pre-planned or unforeseen expenses. Here is what you need to know about mortgage refinancing and how it works.
What is a mortgage?
A financial term, it means a secured property loan where the collateral being used is real estate property. Different from a loan which value depreciates over time, a property value appreciates instead.
What is refinancing?
Refinancing allows you to replace an unsatisfactory or unsustainable home loan with one you can live with over the long term. The process can result in lower monthly payments and other terms that will make your payments more manageable.
How mortgage financing works?
The steps to refinancing a mortgage is similar to those you took to get your current loan.
- Determine the terms you want in your loan
Interest rates or term length you want in advance, whether your aim is to secure a lower rate, to switch to a fixed interest rate, or to extend your loan term, it’s important to establish these features in advance.
- Choosing a lender
You already have a loan provider, but that doesn’t mean you can’t shop around for one. Seek around a qualified lender who offers the terms you’re looking for and don’t be afraid to get at least three or four quotes to bargain on terms.
- Apply for a loan
Although this process varies by the lender, they’ll walk you through any unique steps in the process if there’s any. Upon approval, review the loan terms and fees in order to know what to expect and avoid any surprises.
Refinancing effectively erases the debt on your current mortgage. The result is that you continue to pay off your home, but now you’re making payments on the new loan instead of your old one. Learn more about Finsource Credit’s, gap financing, invoice financing and 2 in 1 financing solutions while you’re at it!
How mortgage financing helps?
- Lower monthly payments
Making payments for a number of years and earning equity will lower your monthly payments and free up room in your financial budget.
- Lower interest rate
If interest rates fall after you close on your loan, you can consider refinancing to take advantage of that, You could save tens of thousands depending on the length of time you’ve had your loan.
- A fixed rate
Having a locked rate can protect you from rising interest rates as the same principal and interest payment every month is way easier to plan and budget for.
- Reduce your loan term
If you can afford it, it’s best to shorten your loan term by paying more over a shorter period of time. Again, you could end up saving tens of thousands in interest over the loan and own a mortgage-free home sooner.
An alternative to a home equity loan, it can be a good idea to refinance and cash out a portion of your home equity. This allows access to a large chunk of money without needing to sell your home.
In general, mortgage refinancing makes sense when you truly benefit financially from a new loan. It can be a bad move if you’ll waste money or increase risk when you refinance, so weigh the pros and cons of your old loan against a new loan to decide whether it’s worth the cost. Do you know of a business that needs the assistance with their finances? Reach out to us or help us get in touch with SMEs by being one of our partners today!
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