Ultimate Guide to Refinancing: When, Where, How, and Alternatives

Key takeaways

• Homeowners often consider refinancing their home mortgage when they want to reduce expenses. A refinance may allow you to eliminate private mortgage insurance, obtain a lower interest rate, shorten the length of your mortgage or even change the type of your mortgage.
• Whether you should refinance depends on your goals. If you need to cut expenses, you’ll need to determine your break-even point to know if it’s even worth it. If you need access to cash, a home equity agreement (HEA) may be better than a cash-out refinance.
• Just like the process for your initial mortgage, the refinance process requires you to pay the same fees, which include those for loan origination, home appraisal, title search and credit report. These fees can range from 2 to 6% of the total loan principal.

Homeowners are likely familiar with refinancing as a term, but many don’t know what the process entails. This guide to refinancing demystifies the process and shows you your options.

Refinancing your home loan means that you obtain an entirely new mortgage. After undergoing the mortgage application process for your initial mortgage, the thought of doing all of that over again probably sounds unappealing.

Refinancing, though, may be able to help you change your mortgage’s interest rate or term. Depending on your goals, an alternative to refinancing may be more appropriate.

How to refinance: let’s unwind the process

The home loan refinance process might seem mysterious.

You probably know plenty of other homeowners who financed their purchase with a mortgage. It may be less common that your friends or family members have refinanced their home loans.

This guide to refinancing fills the gap between what you already know and what you want to learn (whether you should refinance).

What it means to “refinance”

There are many different types of home mortgage refinances. Before covering those, let’s begin with the basics.

To “refinance” your mortgage means obtaining an entirely new home loan with some terms that differ from your current mortgage’s terms. For example, you may be able to get a lower interest rate, or change your mortgage from a 30-year term to a 15-year term.

You would refinance with the same type of business where you obtained your initial mortgage: a private bank/lender, a federal loan program or possibly a credit union.

The type of refinance you choose will depend partly on your current mortgage. For instance, if you have an FHA or VA home loan, your options may slightly differ from someone with a traditional bank-approved mortgage.

• Rate and term: You change the interest rate or loan term of your existing mortgage, which allows you to reduce monthly payments or build equity faster – or sometimes both.
• Cash-out refinance: You take out a new mortgage for a larger amount of money than you owe on your current mortgage. You can use the extra cash for any purpose.
• FHA, USDA or VA Streamline refinance:You may have obtained a mortgage backed by one of these government programs. In that case, the FHA, USDA and VA each offer a specific refinance program you could consider.
• Reverse mortgage: This is similar to the cash-out refinance in that you receive money for your needs. Borrowers over 62 with enough home equity can receive monthly payments from the lender that receives its money back when the borrower leaves or sells the home.

When should your refinance?

“When” depends on why you want to refinance. You may want to refinance to:

• Eliminate private mortgage insurance (PMI): If you didn’t make a sufficient down payment (20%), your mortgage lender likely required you to purchase PMI. This makes your monthly payment more expensive. If your home’s value has risen, you may be able to refinance and eliminate PMI.
• Shorten the mortgage’s term: You may be able to turn your 30-year mortgage into a 15-year mortgage without significantly affecting the monthly payment. For example, changing a 9% rate to a 5% rate would allow you to pay more per month toward your principal rather than interest.
• Change the type of mortgage: Depending on the broader economy, you may want to change your mortgage from a fixed-rate mortgage (FRM) to an adjusted-rate mortgage (ARM). For instance, when interest rates are lower, an FRM may be preferable to an ARM.
• Access home equity: Sometimes, you need cash on hand, whether to pay for an emergency, contribute to a child’s college education, renovate your home, or consolidate high-interest debt.

How to refinance

The refinance process mimics the initial mortgage application. Because you’ll have to get a new mortgage, you’ll have to apply again for a new loan.

Depending on the lender, you’ll have to provide proof documents (e.g., income statements and debt payments you owe) and pay the same closing costs (origination, title, appraisal and credit report fees). This can cost anywhere from 2 to 6% of the total principal.

Because of these fees, it might not make sense to refinance if you plan to move in the near future. Calculate your break-even point, which is when the savings from the refinance pays for itself.

Alternatives to refinancing

If your primary goal with refinancing is to access home equity, you may want to consider the cash-out refinance in addition to other options.

• Home equity loan: A home equity loan works like a traditional personal loan. Your home secures this loan and provides a one-time lump-sum payment that you repay monthly with interest.
• Home equity line of credit (HELOC): Like a home equity loan, your home is collateral for a HELOC. Unlike the home equity loan, the HELOC works like a credit card you can use as needed. After the draw period (when the line is active), you repay the loan over a set period of years.

A third option is the home equity agreement (HEA). With an HEA, you receive a one-time lump-sum payment, in exchange for a portion of your home’s future value. There are no monthly debt payments. Instead, you settle your agreement when you sell your home, or anytime during the HEA term, usually 10 years. 

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If you want to access home equity, a home equity agreement from Unlock Technologies could be what you need. You may qualify to tap up to $500,000 in home equity and there are no income requirements. Explore your options today.