Refinancing your mortgage is a great way to save money. When you refinance your mortgage you get a new mortgage loan to refinance the home loan you already have. I know, it seems confusing. But refinancing your mortgage is actually really easy, and the fact that you could save thousands of dollars is a great incentive to learn as much as possible about how to refinance your home loan.
How do You Refinance Your Home Loan? When you refinance your current home loan, you take out a new home loan that ends up replacing your current home loan (Dorsey 121). Many people may wonder what is the point of getting a new mortgage when you already have one. Which is a very valid question. It doesn't seem to make sense that people get a new mortgage loan to refinance a home loan they already have. However, getting a new mortgage can be a smart idea.
Getting a new mortgage loan to refinance a home loan you already have can save you money. When you get a new mortgage, the money you receive from the mortgage is used to repay the home loan you currently have. Because you completely repay your current home loan you no longer need to pay monthly payments. Instead you will have to pay the monthly payments on your new mortgage loan. Normally the new mortgage loan will either have a lower interest rate, a shorter term length or both, which means the total amount you owe on your new mortgage would be less than the amount you would have had to pay for your old one.
Why do People Get a New Mortgage Loan to Refinance a Home Loan They Already Have? There are many ways that getting a new mortgage loan to refinance a home loan you currently have can save you money. Here are some of the reasons why people choose to refinance.
Lower interest rates. If your new mortgage has a lower interest rate than your old mortgage, you will pay less interest over the life of the loan. The money you save can really add up.
A shorter term length. The shorter the term length of your mortgage loan, the less interest you will have to pay. Therefore, some people who experience an increase in their income may switch out of a mortgage that still have 25 years left for a new 15-year mortgage.
A different type of interest rate. People who have a fixed-rate mortgage may want to switch to an adjustable-rate mortgage because they think interest rates will stay low. While people with an adjustable-rate mortgage might want a fixed-rate mortgage for more stability (Reed 146).
Consolidate debt or get extra cash. When you go to refinance your home, you have a choice to either get a new home loan for only the amount you still owe on your current mortgage or to get a new home loan for the total value of your home (Fabozzi 292). If you choose to get a new home loan for the total value of your home, the first part of the money you receive will go towards paying off your current mortgage and everything that is leftover can be used for whatever you want. Some people use that extra money to consolidate their debt and other people use that money for home repairs or other things.
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