Owning a home is a dream come true for many people. It’s good to be informed about options for future home payments, like refinancing. Homeowners who want to refinance their mortgage have options. However, they must move quickly or risk losing the equity they’ve built up in their homes. There are various reasons why someone might want to refinance their mortgage, but the most typical reason is that interest rates have dropped. You can save a lot of money on your monthly payment by refinancing to a new mortgage at a lower rate. 

Refinancing your mortgage means taking out a new loan with new terms, essentially the same as starting over. However, you do not have to choose a term based on the duration of your initial loan or the remaining payback period. Refinancing does not reset your loan’s payback period, but it does replace your existing loan with a new one. Depending on your goals, you may be able to select from a variety of loan packages, including a longer or shorter repayment term. 

It’s a good idea to refinance your mortgage, especially while interest rates are low. However, if you’re not attentive, refinancing can be risky. Higher monthly mortgage payments may arise from refinancing into a shorter-term loan. You may be able to afford it today, but you never know your financial situation in the future.

Reasons for Refinancing Mortgage

What Does Refinancing a Mortgage Mean?

When you refinance your mortgage, you acquire a new mortgage to pay off your old one when you refinance. Refinancing is similar to obtaining a mortgage to purchase a home. However, you won’t have to deal with the stress of home buying and relocating, and there will be less pressure to close by a set date. Furthermore, you have until midnight of the third business day after your loan closes to cancel the transaction if you change your mind.

According to Ellie Mae’s Origination Insight Report, the average time to refinance a conventional mortgage ranged from 38 to 48 days from April 2019 to August 2020. When interest rates fall and many homeowners hope to refinance, lenders get overburdened, which causes refinancing to take longer. FHA or VA loan refinancing can take up to a week longer than a typical refinance.

Refinancing Mortgages

What Happens to Your Old Mortgage When You Refinance?

When you refinance your home loan, you’re simply swapping in your old loan for a newer one, usually with a higher principal and a lower interest rate. Your lender then pays off the older mortgage with the younger one, leaving you with one loan and one monthly payment.

People refinance their houses for a variety of reasons. One reason is they can utilize a cash-out refinance or a rate-and-term refinance to take advantage of their home’s equity or receive a cheaper interest rate.

A refinance can also be used to get rid of a co-signer on a mortgage, which is common after a divorce. Finally, refinancing allows the option of adding someone to the mortgage.

Understanding mortgage principal: What is it? https://showcaserealty.net/what-is-a-mortgage-principal/

Refinancing Mortgages

Do You Still Pay Mortgage During Refinance?

You still pay the mortgage during refinancing, and it’s important to note that refinancing will not allow you to miss a monthly payment. When you refinance, you usually don’t make your first mortgage payment on the first of the month, and your initial loan is paid off at closing when you refinance.

What Are the Dangers of Refinancing?

While refinancing can lower your monthly payment, it can also increase the cost of your loan in the long run if you’re adding years to your loan. If you need to refinance to keep your home, paying a higher interest rate may be worth it in the long term. If your primary goal is to save money, keep in mind that a lower monthly payment does not always equate to long-term savings.

Due to fees and closing expenses, a longer loan term, or a higher interest rate related to a “no-cost” mortgage, homeowners who refinance may end up paying more over time.

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What Happens to the Principal Paid When You Refinance?

The principal balance of the existing mortgage versus the new mortgage is ignored when using the basic payback time technique. On the other hand, refinancing is not free, and refinancing charges must be paid out of pocket or, in most situations, rolled into the new mortgage’s principal balance.

When a mortgage balance rises due to a refinance transaction, the liabilities side of the household balance sheet increases, and, assuming all other factors remain constant, the household net worth falls by an amount equal to the refinance cost.

Understanding the impact on your mortgage principal is crucial when refinancing your mortgage. Learn more about mortgage principals here.

Does Refinancing Hurt Your Credit?

Taking on new debt lowers your credit score, but because refinancing replaces an existing loan with nearly the same amount, it ultimately has a minor influence on your credit score.

Once the refinancing is completed, your new loan will appear on your credit record, and your payments will be tracked. For up to a decade, your initial house loan will be included on your credit record as “closed in good standing.”

Explore this link to discover methods for preserving a healthy credit score. https://showcaserealty.net/ways-to-maintain-a-healthy-credit-score/

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How Do You Tell If I Should Refinance My Mortgage?

So, when is it a good time to refinance? 

The standard should-I-refinance-my-mortgage rule of thumb is that if you can lower your current interest rate by 1% or more, it might be worth it because of the money you’ll save.

When you’re determining whether or not to refinance, figure out how much money you’ll save each month when the loan is completed.

Unlocking mortgage points in Charlotte, NC: How do they work? Click here!

How Soon Can You Refinance a House After Buying It?

There is usually no waiting period for refinancing. You may be asked to wait six months between loans by your present lender, but you can refinance with a different lender instead. If you’re taking cash out, you must refinance six months after your most recent closing (typically 180 days).

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How Can I Avoid Closing Costs on a Refinance?

When refinancing, there are two basic strategies to avoid closing fees. You can start by looking for a no-closing-cost refinance, which means the lender will cover your closing fees in exchange for a higher interest rate. Alternatively, closing fees may be included in your new loan balance. 

Technically, you’ll still be responsible for closing charges if you use this technique. However, because they’re funded with the rest of your mortgage, you won’t have any out-of-pocket expenses on closing day. To learn about how mortgage points function in Charlotte, NC, click here.

Getting Ahead With Refinancing Your Mortgage

If you refinance your mortgage, it should be based on your circumstances, not just on whether interest rates are rising or falling.

Getting a better interest rate, raising your net value, and enhancing your short-term cash flow are all advantages of refinancing. Paying too much in closing fees, getting stuck with a higher interest rate because you don’t want to pay closing costs, losing equity on a cash-out refinance, and lowering your net worth are all disadvantages.

The impact on your household’s net worth is a more financially smart way to assess refinancing costs. To determine when refinancing is cost-effective, homeowners must compare their previous mortgage’s remaining payment schedule to the new mortgage’s amortization schedule.

If you’re thinking of selling your home or investing in a second home, make your real estate journey the best one yet with the best real estate agent in Charlotte, NC, Nancy Braun of Showcase Realty. Call 704-870-0895 now to discuss your options.


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