Basics of Mortgage Refinancing

Most homeowners take out mortgages to pay for their homes, and sometimes people struggle to make their mortgage payments. These payments can top thousands of dollars each month and can be a major burden for 15 to 30 years. Fortunately, mortgages can be refinanced to either save you money in the long run or put more money in your pocket each month. If you refinance your mortgage during a time when interest rates are low, the savings can shorten the life of your mortgage by years. However, most people don't know the basics of mortgage refinancing, or they're unclear of when they should consider using this option. Here are a few basics you need to understand when deciding if mortgage refinancing is a good solution for you or if you need to consider a different method for alleviating your financial burden.

Frequently Asked Questions ( 8 )   Add a Question

  1. How much can you save when refinancing for a small interest rate?
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    If you have a mortgage of $400,000 that has a 3.5 percent interest rate, you will pay an extra $14,000 over the term of the loan. Refinancing your loan to get an interest rate of 2.5 percent will save you $4,000 by costing you an extra $10,000 over the life of the loan. Even bigger savings can occur on larger loans.

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  2. Why should a person refinance their mortgage in the first place?
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    Refinancing your mortgage is a good idea if you are suffering from a high interest rate. Refinancing will lower your rate and cause a lower monthly payment. You can also get a shorter-term loan that can be paid off sooner, though the monthly rate may be a little higher with this option. Choose carefully when deciding which is right for your needs.

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  3. What is rate-and-term refinancing?
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    When refinancing your mortgage, you can try rate-and-term refinancing. This option takes out a new loan, using your property as a collateral. This loan will pay off your older mortgage and provide you with either lower interest rates or a quicker payoff time. It's perfect for those who want to stay in their home for the long-term and who aren't interested in selling.

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  4. What is cash-out refinancing?
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    This type of refinancing is similar to rate-and-term financing in that you will receive a new loan that will help cover your existing mortgage and provide you with a little extra. This money can be used for any purpose, including paying closing costs and any liens you might have on the home. Choose this option if you're considering flipping your home and selling it.

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  5. How much quicker can you pay off a mortgage if you refinance?
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    Increasing your payments by even a few hundred dollars can turn your 30-year mortgage into a more reasonable 15-year model. This will help save you money in the long run by requiring less interest payments over the same period. It's possible to save nearly $50,000-$100,000 using this method, but you will pay higher monthly payments until then.

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  6. Are there secret costs when refinancing?
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    Refinancing does have some secret costs that need to be considered before trying it out. For example, while it might save you some money in the short-term to refinance with a lower interest rate, this will extend the life of the loan and may add a few thousand dollars more over the life of the loan. As a result, this option is typcally best for those who are settling in their home and don't mind paying a few extra years.

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  7. Who should refinance a loan?
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    Anyone who is struggling to pay their mortgage should investigate refinancing as a suitable option. It's best if you are capable of dropping your interest rate by at least one percentage point or if you can save over $30,000 by shortening the life of your loan.

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  8. Can you refinance after declaring bankruptcy?
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    Absolutely, but you shouldn't declare bankruptcy on your home debts. Doing so may cause you to lose your home or to pay higher interest rates. Instead, declare bankruptcy on other debts and refinance your mortgage to relieve your financial strain.

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