Mortgage refinancing is a common way to extract value from your home, stabilize your finances, and take advantage of market opportunities. Before you start checking out refinancing lenders, though, you should understand these four things about the process and why folks often pursue it.
What Is a Refinanced Mortgage?
Mortgage refinancing means that you will take on a new loan. The mortgage refinancing services provider will close out the old loan, meaning it is considered paid in full. You will then enter into another loan with different terms. If you've paid on a 30-year mortgage for 10 years, for example, you might set up another 30-year mortgage.
Locking in Rates
One reason someone might talk with a refinancing broker is to lock in the interest rate on their home loan. If you are concerned about rising interest rates and have an adjustable-rate mortgage, for example, you might refinance so you can move into a fixed-rate mortgage. This locks in the interest rate, protecting you from future upward shifts that may occur while banks and the government try to tame inflation by raising interest rates.
Similarly, you might refinance with a fixed rate just to know what you'll be paying. A retired person on a fixed income might want to lock in their rate so they can confidently plan for the future, for example.
When interest rates are coming down, people often use mortgage refinancing services to pursue better rates. If numerous banks are offering lower rates than what you're seeing with your current loan, you might speak with a refinancing broker to learn what options are out there. When you find a rate that works well for you, you'll need to retire the old mortgage and enter into a new one to take advantage of the situation.
Notably, you might be able to pull this off with the current mortgage holder. However, you'd still be wise to contact refinancing lenders so you can compare rates. When you sit down with a loan officer from your bank, this will give you a better idea of how their offer compares to what's available on the market.
You may also want to pull some of the equity from your home after you've paid into it for years. This can be especially appealing if the value of your house has gone up significantly in recent years. You can collect the difference in the principals between the old loan and the new one, making cash available for retirement, renovations, buying a second home, paying your kid's college tuition, or just everyday use.