Mortgage Refinancing - Refinancing Basics

Your house is an investment. But you needn't wait until you sell it to realize some gains. You can save money through your house by refinancing your mortgage.

The benchmark 30-year fixed mortgage rate has been at record low levels for quite some time now, with many experts expecting it to rise over the next few years. Still, rates remain much lower than historical averages, and if you haven't refinanced yet, it may not be too late for you. You owe it to yourself to consider whether refinancing makes sense to you now.

Refinancing is essentially paying off your existing mortgage and taking out a new one at a lower interest rate, typically decreasing the amount of your payments. You may also opt for a shorter-term mortgage, which may offer somewhat higher payments.

Remember that when you decide to refinance, you will have to pay all the closing costs and fees on the new loan, just like you did on your original loan. Think about the mortgage costs involved, such as the origination fee, discount points, the appraisal, the credit report, processing title insurance and the escrow fee. Consider what points, if any, you might have to pay. A point is equal to 1% of the value of your loan. Points are paid up front when you close the loan.

If you can get a new mortgage at a rate of 1 (or sometimes 1/2) percentage point lower, you may reap enormous interest savings over 15 to 30 years, depending on how much you borrow.

In some refinancing, you can actually increase the amount of your loan by taking out extra funds—perhaps to pay down high interest credit cards or make home improvements.

The most important part of refinancing successfully is finding the right lender to do it through. Here is where you will be presented with many options and might need some help with finding the best one. You might be able to get a better rate through the lender that gave you your first mortgage, but you also have the option of going to another lender if they can offer better rates. Your best bet is to shop around and see what various lenders have to offer. It would likely be in your best interest not to take the first deal you come across but rather, see how it compares to others.

It is also vital that you understand the difference between Cash-Out Refinancing (COR) and tapping into home equity. Unlike home equity, through refinancing you are using the value of the loan to get extra money as opposed to using the value of the property itself. COR allows you to get some extra cash without having to borrow from your home equity, and this can be a big advantage, especially to new homeowners.

This may seem like a lot to remember, but it can all be broken down into facts that are easy to remember. The key things to remember are:

Refinancing your mortgage means you apply for a new loan holping to secure a lower rate.
There are two forms of refinancing: Rate and Term Refinancing (RTR) and Cash-Out Refinancing (COR). Both of them have their advantages.
It is important to do research before you refinance so you can get the best deal and save the most money possible.
Cash-Out Refinancing differs from using home equity in that you are using your mortgage to secure a cash loan as opposed to using the value of your home.