How does refinancing work?
Refinancing is the process of swapping one loan for another, and it's common in the context of mortgages. When you refinance a mortgage, your old home loan is replaced by a new one with different terms. Usually, that means a lower interest rate than the rate you've been paying. In some cases, refinancing might change the length of your repayment period. For example, you might go from a 15-year to a 30-year loan, or vice versa.
As is the case when signing a regular mortgage, you'll need good credit to refinance. You'll also be subject to closing costs, which come into play with a regular mortgage as well.
How to find the best refinance rates
Start by applying to refinance with a number of mortgage lenders. You may find that different lenders have different offers, or varying standards for qualifying for the best mortgage rates. For example, one lender may be more flexible with your credit score than another -- it pays to seek out multiple offers.
If you're going to apply to refinance with multiple lenders, do so within a 30-day period. Each time you apply to refinance, it's considered a hard inquiry, which can affect your credit score slightly. A single hard inquiry generally isn't a big deal, but multiple hard inquiries can have a larger negative impact on your credit score. Fortunately, if you apply to refinance with multiple lenders within the same short time frame, those various hard inquiries for the same purpose will be considered only a single inquiry.
When shopping around for a refinance offer, keep these things in mind:
- The interest rate you're presented with
- The closing costs you'll need to pay (you should be able to get an estimate up front)
- The terms of your loan (for example, the number of years you have to pay it off, and what happens if you pay it off early)
