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How Does Refinancing Work?
by Joe Taylor Jr.
CMR Columnist
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You've probably heard countless television and radio ads from lenders who want to refinance your home. Most of these ads tend to throw refinancing jargon at you as if you're already a mortgage expert. Use this guide to understand exactly what happens when you decide to refinance your home.
What Does it Mean to Refinance Your Mortgage?
In essence, a refinance is basically a new mortgage. When you received your first home loan, you used a cash down payment and your personal credit and employment history to get yourself into the home you chose. A refinance deal lets you replace your old home loan with a new one. You can adjust any of the variables that factor into your personal budget with your mortgage refinance, including:
- The length (or "term") of your loan
- The type of interest rate on your mortgage (fixed or variable)
- The amount of your mortgage interest rate
- The amount of equity in your house
- Your personal mortgage insurance requirement
- The amount of your monthly mortgage payment
Borrowers choose to refinance their mortgages for a variety of reasons. Smart investors time their refinance deal to coincide with low mortgage rates. Other families use a refinance option to free up cash or to balance their household budgets with a cash-out option.
Mortgage Refinancing: Feels Just Like Starting Over
Just like when you got approved for your first home loan, you'll have to go through a credit check and employment verification. Request a refinance lender's "good-faith estimate" based on the best mortgage rate their firm offered in the past week. Ask whether your refinance deal will be managed in your state, or at a lender's home office in another state.
In general, lenders scramble for new refinance customers, since existing homeowners tend to have more stable credit profiles than first-time home buyers. By weighing a few of the best offers, you can save some money while lowering your payment every month.
Sources
Clark Howard
How Stuff Works
About the Author
Joe Taylor Jr. coaches beginning mortgage brokers to provide better customer service and to understand creative financing opportunities.
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