What does it mean to refinance a house?
Refinancing a house means trading in your current mortgage for a new one that offers either better rates and terms or a lump sum of cash for a home improvement project or other large expense. Kicking off the refinancing process is simple: request quotes from lenders, choose the one that’s best for you, and submit your application.
Lenders determine loan amounts, rates, and terms based on a few factors, including the equity you’ve built in your home, your credit score, and debt-to-income ratio. One of the most popular refinancing options is a cash out refinance.
How refinancing your house works
Refinancing your home starts with shopping around for quotes from different lenders to find the best rate. You can also estimate your home equity to see if a cash-out refinance is the right option for you.
Once you choose a lender and submit your application, a loan officer begins the underwriting process. They will verify your financial details and appraise your home to estimate its current value.
After the underwriting process, you’ll receive a Closing Disclosure (CD) outlining the mortgage details. Always compare your initial loan estimate with the CD to ensure the figures are the same and, if not, be sure to ask questions and understand why the numbers changed.
Top reasons to refinance your home
Not sure if refinancing is the right move? Here are the most common reasons for a refinance.
Reduce monthly payments
Standard interest rates change, and your credit score may have improved since you were first approved for a mortgage. Refinancing can lower your monthly mortgage payments through a better fixed interest rate.
You can also refinance for a longer-term mortgage for lower monthly payments, though you may end up paying more interest charges overall.
Reduce interest rates and charges
When national mortgage rates go down, you may want to refinance for a lower rate. This lets you pay less over the term of your mortgage.
Shorten term and reduce interest charges
Maybe you decided on a 30-year mortgage, but things have changed over the past five years. Now you’re making more money and can afford a bigger monthly payment.
You can refinance for a shorter-term mortgage, which will let you pay the loan off faster and save on interest.
Borrow funds through a cash out refinance
If you’re looking to complete a new home renovation, need emergency repairs on your home, or want to consolidate debt, a cash out refinance can help you get a lump sum of cash quickly using the equity in your home.
With a cash out refinance loan you take a loan for a larger amount than what you currently owe on your home, pay off your first mortgage, and keep the difference to use as you like.
What are the closing costs on a mortgage refinance?
The closing cost to refinance your mortgage is on average 2 to 5 percent of your loan amount. On a $200,000 mortgage, refinancing can cost from $4,000 to $10,000. Some lenders offer to absorb some of the closing costs.
If your refinance comes with closing costs, you’ll want to determine where your break-even point is to decide whether refinancing makes sense. This is the point when your savings from refinancing cover the costs of refinancing. The break-even point is different for everyone and depends on your loan’s terms.
What are some alternatives to refinancing?
There are two main alternatives to refinancing: home equity loans or home equity lines of credit (HELOCs).
A home equity loan lets you borrow a fixed amount, secured by the equity in your home, and get money in one lump sum upfront. Many borrowers like that home equity loans act as a second mortgage without impacting their original mortgage.
In other words, if you already have a low rate on your mortgage and want to keep it, a home equity loan can allow you to do that while still taking money from your equity.
HELOCs, on the other hand, let a borrower tap into their equity as needed for a fixed period and up to a predetermined credit limit. A home equity loan has a fixed interest rate, whereas a HELOC typically has a variable rate. Please note: Discover offers a home equity loan product, but does not offer HELOCs.
Both HELOCs and home equity loans are different forms of equity financing because of one key aspect: these types of borrowing will have you paying back your original mortgage and give you a second bill to pay off the new loan or line of credit. Cash out refinancing, by contrast, bundles both your mortgage loan payment and your borrowing into one simple monthly bill.
If you’re thinking about refinancing, Discover Home Loans offers tools and resource to help you understand your options. Use our mortgage refinance calculator or cash out refinance calculator to find out what might work best for you.
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