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What Is a Mortgage Refinance?

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The mortgage you first sign on your home isn't always the loan you're stuck with forever. In some cases, you may be able to refinance to a home loan with more favorable borrowing terms. Here, we'll review how mortgage refinancing works and why it could pay to do it.

What is refinancing?

Refinancing means swapping one loan for another, and it doesn't just apply to mortgages. You can refinance other types of loans, which generally makes sense when you can secure more favorable terms, like a lower interest rate.

How does mortgage refinancing work?

When you refinance a mortgage, you swap your existing home loan for a new one. Your old mortgage will be paid off as part of your mortgage refinance. You'll then need to repay your new mortgage loan according to the terms you agree to with your lender.

There are many benefits to refinancing. You may, for example, choose to refinance a 30-year mortgage to another 30-year loan with a lower interest rate. Or, you might choose to shorten or lengthen your repayment period -- for example, go from a 30-year mortgage to a 15-year loan, or vice versa. This guide to refinancing will tell you more.

Just as you need to apply for a regular mortgage when you buy a home, so too must you apply to refinance. You won't qualify for a refinance automatically just because you have an existing mortgage. You can refinance using your current mortgage lender, or you can refinance with a new lender.

Also, you're allowed to refinance a mortgage more than once. You may need to wait at least six months from when you sign or refinance your mortgage before you can refinance with your current lender. But you may be able to refinance with a different lender sooner.

Why refinance your mortgage

The point of refinancing a mortgage is to secure more favorable borrowing terms -- usually, to save money.

Lower interest rate

Generally, that means lowering the interest rate on your loan. In doing so, you may be able to shrink your monthly mortgage payment and save money on an ongoing basis. Also, by lowering the interest rate on your mortgage, you'll spend less on total interest in the course of paying off your home.

A lower interest rate on your mortgage refinance might help save money over time, but it might not lower your monthly payment. If you refinance from a 30-year mortgage to a 15-year loan at a lower interest rate, your payments will likely go up. That's because you're now paying off your loan in half the time. The upside is you'll spend less on interest over the life of your loan.

Longer repayment term

Refinancing may also help make your mortgage more affordable even if you don't manage to lower your interest rate. For example, if you're finding it difficult to keep up with the monthly payment on a 15-year mortgage, you may decide to refinance to a 30-year mortgage. That 30-year home loan may come with a higher interest rate. But because you're paying off your loan balance in double the time, your monthly payment will be lower.

Switch to a fixed-rate mortgage

You may also want to refinance if you have an adjustable-rate mortgage, or ARM. With an adjustable-rate mortgage, you're only guaranteed your initial interest rate for a certain period of time. You may want to refinance to a fixed-rate mortgage before your mortgage rate goes up.

Take cash out of your equity

Finally, you might look into refinancing if you need money for another purpose and have a lot of home equity. In that case, you may qualify for a cash out refinance. This is where you borrow more than you owe on your mortgage balance and get the rest of the money in cash that you can use as you want.

All told, refinancing only makes sense when you can gain something from it, whether it's a lower interest rate on your refinanced mortgage or a lower monthly payment by lengthening your loan term. You're more likely to snag a competitive interest rate on your refinance if you're a strong borrowing candidate. You'll need a high credit score, a low debt-to-income ratio, and a steady income. To increase your chances of getting a great refinance rate, be sure to shop around for different loan offers. You can start by reaching out to your current mortgage company, but also, try getting refinancing options from some of the best mortgage refinance lenders out there.

Still have questions?

Here are some other questions we've answered:

The Ascent's best mortgage refinance lenders

Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.

FAQs

  • With a mortgage refinance, you swap your existing home loan for a new one with borrowing terms that work better for you. Often, that means lowering the interest rate on your mortgage.

  • When you refinance, your old mortgage balance is paid off in full. You then become responsible for paying off your new loan. You apply to refinance just as you would for an initial home loan.

  • Refinancing a mortgage makes sense when rates come down and you're eligible to snag a lower interest rate on your home loan. If your credit score improves a lot from when you first sign your mortgage, it could also pay to refinance, even if mortgage refinance rates haven't dropped across the board. Finally, refinancing makes sense if you need to alter the terms of your loan -- for example, extend your repayment period to lower your monthly payments.

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