Finances

The complete guide on how to refinance a mortgage

7 steps to getting a good mortgage refinance. Understand how this maneuver can reduce your total debt and mortgage time and even allow access to loans!

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Learn how to refinance a mortgage and save money

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Here’s your guide to getting the most out of a mortgage. Source: Pixabay

It is possible to have better mortgage conditions without incurring breach of contract fines. Access lower interest rates, shorten your loan time, and much more. Indeed, this is possible for anyone who knows how to refinance a mortgage.

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In this article, we are going to present a complete, step-by-step guide on how to benefit from mortgage refinancing.

As well as explaining the effects of this maneuver on your credit score. Check out the article below and learn how to refinance a mortgage.

Why you should refinance your mortgage: is it worth it?

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Get to know the main types of mortgage financing and choose the one that is most useful for you. Source: Pixabay

A mortgage refinance and the chance to “reset” the initial contract you made to buy your home. Through this feature, you can seek better payment terms and even reduce your debt.

Thus, it is similar to normal financing and can be done at any company that offers this type of loan. In fact, there are six main ways of refinancing mortgages. Each of them offers a distinct benefit. Below is a list with the description of each of them:

Rate-and-term refinance

These features allow the mortgage applicant to have lower interest rates for their mortgage. In addition, it is possible to reduce (or increase) the term of your mortgage.

It is typically sought after by anyone looking to reduce monthly payments or reduce overall debt.

Cash-out refinance

In this modality, you can withdraw an amount referring to the market price of the property you are buying. This is only available when there is a difference between the market value of the property and the amount paid.

The cashout goes to your account and you can use it however you want. However, the amount received will be added to the value of your mortgage. So you can make it longer or increase the monthly fee.

Cash-in refinance

This happens when a customer makes a one-time payment to reduce their debt and monthly payments. It can be interesting for those who want to shorten the payment as long as the amount paid does not compromise their budget.

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No-closing-cost refinance

This is an inverse refinancing modality to the previous one. In this one, you get new conditions for your loan without paying an entire installment at once.

Instead, the lender agrees to distribute the amount payable over the current mortgage installments. Thus, your monthly fees tend to become higher.

Short refinance

Typically, this is a style of financing best suited when you have trouble paying your monthly payments on time. In this case, there is an agreement between the parties and a new total amount is defined for the debt.

In effect, this new value is lower than the previous one and the difference from the previous value is forgiven. This way, refinancing avoids a foreclosure. However, this maneuver does considerable damage to your credit score

Debt consolidation refinance

In fact, this type of refinancing is very similar to Cash-in refinance. However, the difference is that the money related to the value of the property is used to pay off debts. Plus, the effect is the same: increasing the value of your mortgage.

Each of the modalities has a specific benefit and should be chosen after careful consideration.

Does refinancing affect your credit score?

Yes, your credit score will be affected when you decide to refinance your mortgage. Once your refinance is accepted, your credit score will automatically drop. This movement is known and programmed.

So there is nothing you can do to get rid of it. In fact, this is a “defense mechanism”. Its objective is to prevent the same person from accumulating several loans in a short period of time.

As it is easy to imagine, this can be a risk factor for indebtedness, which is avoided by banks. Also, a refinance is the closing of one loan and the beginning of another. In this way, an older loan was finalized for the start of a new one.

In effect, this move lowers your “credit age”. This is an indicator that measures the time you use the same credit service. The longer the better. When you decide to make this change, your credit age goes down and your score goes down as well.

In addition, a simple query for the new loan can reduce your score by approximately 5 points. However, all these reduction effects are temporary. Normally, your credit will quickly return to the previous level. So just pay the monthly mortgage on time.

How to get the best deal on refinancing your mortgage: follow these 7 steps

Blurred middle class house in the background with brush stroke written "approved" (how to refinance a mortgage).
7 steps to getting your mortgage refinance approved. Source: Pixabay

We come to the “heart” of this article. In this topic, we will explain how to refinance a mortgage. So, take a look at this step by step and put them into practice to have great results:

Step 1: Set a goal

You should think carefully because you want to rely on this resource to choose the best refinancing modality. Therefore, it is important that you clearly understand what your objective is.

Looking for lower interest rates? Decrease loan time? Use the value of the property to invest? Think carefully.

Step 2: Check your credit score

Indeed, this score is very important for anyone who wants to apply for refinancing. In fact, people with better scores will have access to better opportunities. So, check your credit score before applying for your new loan.

Also, consider growing it for a few months before using this feature.

Step 3: Analyze your home equity

This tip is especially important for those who want to use the market value of the mortgaged house to pay bills or cash out. For this, you should consult the current value of your financed home with the help of a broker.

Subtract that amount from the debt today. The result is your net worth that can be traded on your new financing.

Step 4: Look for options in the market

You are not required to refinance with the company that gave you the first loan. So, you are free to search for good options in the market. Therefore, it is essential that you research well until you choose your new borrower.

Step 5: Organize your documents

Receipts, paychecks, engineering reports, renovation vouchers, house documents… It’s important to keep these papers organized. In effect, they will be requested when you finally enter the refinancing process.

Step 6: Evaluation

Your new creditors will review the property to come up with a final proposal. Typically, this assessment is paid and costs a few hundred dollars.

Step 7: Closure

In most cases, a down payment is required to start a new loan. So be aware of that. In most cases, your mortgage takes 15 to 45 days to validate.

As you’ve seen in this “how to refinance a mortgage” article, having a good credit score is important. So, click on the link below and understand how you can increase yours in simple steps!

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About the author  /  José Gonçalo

I started reading about finance only to find better options than savings. Since then, I have never stopped studying finance, and I believe that writing about it is the best way to help individuals feel fulfilled and have a healthy financial life. Today, I balance finance and medical school studies.

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