Understanding Mortgage Refinancing
The term refinancing is one steeped in mystery for many people. In the case of mortgages, refinancing simply means to finance your home again, typically with a new loan at a lower rate of interest. When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one. That’s why there are many refinancing questions borrowers are afraid to ask.
It’s completely normal to feel overwhelmed or confused by the refinancing process. Perhaps you have a lot of questions or aren’t even sure of what questions to ask. That’s OK! That’s where trusted mortgage professionals can come in and help guide you. The following are common questions about refinancing that many homebuyers and homeowners are too afraid to ask:
Common Questions About Refinancing
1. Question 1: What is Mortgage Refinancing?
The answer to this question will depend on your personal situation. It’s best to take this question to a mortgage professional who can evaluate your current situation and determine if refinancing is the best course of action to take. Like home buying, refinancing is a complicated and sometimes convoluted process, so be sure to find a professional who is happy to take you through scenarios and explain everything to you—they should be playing the role of teacher, not a salesperson.
Building on that point, don’t ever feel like you’re bugging a mortgage professional with questions. Refinancing is a scary process that you may only go through once or twice in your life, but these professionals handle them every day and can provide valuable guidance and insight.
It’s worth noting that refinancing also depends on your equity—the term for essentially what you’ve paid into your home—and your credit score. If your score is lower than when you purchased your home, you may not get approval from your lender.
2. Can or should I refinance a home more than once?
There are no regulations that limit how often you can refinance your home, but lenders typically set their own limits. The first thing you need to think about when you ask this question is how long you plan to stay in your current home. If you’re living in what you believe will be your forever home, it can make sense in certain scenarios to refinance (sometimes multiple times) and save money on loan interest.
Conversely, if you plan to move in a few years, refinancing might not save you money. There are costs associated with refinancing and if you’re not recouping them before you move, you’re not really saving any money even if refinancing lowered your monthly mortgage payments.
In the end, much of this decision will come down to your long-term goals for your life in general and for your finances. A mortgage professional can help you determine if refinancing will help you meet those goals.
3. Does it matter what type of loan I have to refinance?
Depending on what kind of loan you have, refinancing may prove beneficial down the line. For example, loans guaranteed by the Federal Housing Administration, known as FHA loans, come with conditions that make them ideal for refinancing. FHA loans have mortgage insurance costs that will remain for the lifetime of the loan unless certain conditions are met. Mortgage insurance is an insurance policy that protects the lender if you default on payments, pass away, or cannot meet the contractual obligations of your mortgage.
Traditional home loans often require buyers to acquire mortgage insurance if they cannot meet the minimum down payment—typically 20% of the home price. Once the buyers have made mortgage payments that total 20% of the home costs, the mortgage insurance will typically be removed, thus lowering the overall monthly payment.
It is possible to refinance your FHA loan into another type of FHA loan or even into a conventional one at the same or higher interest rate and, in doing so, drop the mortgage insurance and save money in the long run. If you refinance your FHA loan into another type of FHA loan, you are eligible for a refund of your mortgage insurance costs. That said, it’s better to refinance sooner rather than later after you’ve purchased your home because the FHA reduces a borrower’s eligible refund amount by two percentage points for each month after the initial closing date.
One notable thing about 2020 and now 2021 is that homes are gaining value more quickly than normal. So if you purchased a house last year, you’ve already gained quite a bit of equity in your home. If you were looking to mortgage refinance, an appraisal would show a higher value than what you paid for your home. That means you could potentially see your mortgage insurance costs drop off more quickly than normal. So even if your loan interest rate stays the same, you could still save $100 to $300 a month depending on how big your loan is.
4. If I want to refinance my home, do I need to get it appraised again?
It depends. You may or may not need an appraisal depending on your loan type, credit score, and other factors. Typically, you will need to get an appraisal when you refinance. Keep in mind the appraisal protects the bank by confirming that it’s not lending you more money than your property is worth.
5. Do I have to pay closing costs?
Yes, you will need to pay them again. There are still taxes and fees associated with your refinancing—such as recording your mortgage with local government offices—so there will be charges to cover these costs.
6. What will refinance cost me out of pocket?
A majority of refinancing doesn’t involve out-of-pocket costs. Depending on your type of loan or refinancing, you may be able to roll the closing costs and other charges into your new loan. This results in higher payments but won’t hit your checkbook with a big charge.
These questions are only the tip of the iceberg when it comes to navigating and understanding the mortgage refinancing process. Be sure to reach out to a trusted mortgage professional with any questions or concerns you have about refinancing your home. Together, you’ll be able to determine if refinancing really is the best option for your and your dream life.
We covered 6 refinancing questions borrowers are afraid to ask. Do you have more refinancing questions borrowers are afraid to ask that need an answer? Let us know and we will answer them for you.