Refinancing

Refinancing means getting a new mortgage and using some or all of the proceeds to pay off the old mortgage. Homeowners may refinance for several reasons:

• To take advantage of lower interest rates and lower your monthly payment
  If interest rates have gone down since you obtained your original mortgage, you could save money over the life of your loan, while reducing your monthly mortgage payment.

• To switch mortgage types
  You may want to switch from an adjustable-rate to a fixed interest rate, or vice versa. If you have a balloon/reset mortgage, you must either pay the mortgage in full at the end of the 5- or 7- year term, start procedures to reset your mortgage to a fixed-rate mortgage, or refinance with a new mortgage.  Be very cautious of switching from a fixed-rate to an adjustable rate if you think it may save you money.  Adjustable rates change and could cost you more than you can afford in the future.  Do your homework and make sure a change in mortgage type makes sense in the long term.

• To shorten mortgage terms
  You may want to refinance to shorten the term of your loan. This would allow you to pay less interest over the life of the loan because the money is borrowed for a shorter period of time, and builds up equity in your home more quickly.

• To get "cash out"
  Some lenders will let you borrow more money than the balance of your original mortgage, based on the equity you have in your home. A portion of the money left after the original mortgage is paid off goes to you to use for things like paying for a child's education or home remodeling. However, remember that you'll have a new mortgage, at a higher amount, which will eventually need to be paid off.  You need to be aware that if you take cash out of your home, you’re reducing the home equity you’ve built up over the years.  Make sure you fully understand the implications of reducing your equity so that you do not risk your home or your future. 

The Refinancing Process

Refinancing is very similar to getting the first mortgage on your current home. You should follow the same steps as when you obtained your original mortgage.

• Research mortgage products
  Look at the different types of mortgages and compare each to find which works best for you.

• Work with a lender
  Find a lender and know what lenders look at when evaluating mortgage applicants.

• Apply for a mortgage
  Know the steps in the application process.

Refinancing Do’s and Don’ts

Refinancing can be a valuable tool to save money or use the equity in your home for large expenses like college tuition.  However there are some things to be aware of:

• Don’t refinance to use equity for regular expenses
  If you are having financial difficulty, make an appointment with a credit counselor to help you create a plan.  Stripping your home of its equity because you are overextended can create more problems than it solves.

• Do your homework
  Predatory lenders often target homeowners who are having financial difficulty.  Be wary of unsolicited offers in the mail or over the phone.  Research the mortgage organization you are planning on working with. 

• Don’t fall for a deal that is too good to be true
  If it sounds too good to be true, it probably is.  Don’t be pressured to sign any documents and talk to a trusted advisor before committing yourself to something if you are unsure.  

• Do make sure your documents are in order
  Make sure all blanks on your mortgage documents are filled in before signing.  Double check all the numbers and information to make sure it is correct.