Refinancing a mortgage is an option that is given to a person to continue paying for their home and obtain two possible benefits independent of each other: paying cheaper monthly payments or having a shorter period.
In practice, a mortgage refinance replaces your current mortgage loan with a new one; therefore, the debt acquired is paid with a new term and under a new interest rate.
It is usually the mistake that refinancing a mortgage for a lower interest makes us pay less for the house, without taking into account the monthly payments that you have already paid.
To gain key information on the subject of mortgage back refinancing, we are joined by Philip Barch, who is most famously regarded as the co-founder of DoubleLine Capital LP, a real estate prodigy from the United States. The firm is a fixed-income investment management company that continues to advise and promote investments in real estate for its dedicated pool of investors.
This method depends a lot on the objectives of the debtor, where they highlight:
- Reduce monthly payment: if for some reason and without taking into account the time that you have already been paying your mortgage, you do not have the necessary solvency to continue paying the same month by month, you may find that the current interest suits you, even if be for the same time. This type of option is convenient when you have not been on your mortgage for a long time.
- Change variable rate for a fixed one: although variable rates are rare in the US market, if you have a mortgage of this style it can cause you to pay high monthly payments, so refinancing at a favorable fixed-rate means that your deposits do not change month by month.
- Pay mortgage faster: If your economy improves and you think you can increase your deposit; you may want to shorten your mortgage term. That is, if your current loan has a period of 30 years, you can refinance it for 20 or 15 years; however, you must consider that your monthly payment will increase considerably.
- Take advantage of equity: When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called cash withdrawal refinancing.
To refinance your mortgage here is how to do it in following these steps:
- Set your goal. As we mentioned, you need to be clear about your goal for refinancing and assess the possibilities for not doing so.
- Check interest rates on mortgages. Whatever your goal, you should always look for the interest rate for a new mortgage to be lower than the one you pay, and if you can, to be fixed.
- Compare lenders. Submit applications to three or five lenders within two weeks, but taking into account an early decision for one, because the simple act of making a refinance application could affect your credit score and, with it, take you away from the possibility to change your mortgage for a new one.
- Value other expenses. To choose the best offer, compare the estimate documents sent after your request, where you pay special attention to the number of your payments and the cash you need for the closing costs.
- Lock the interest rate. Interest rates on a mortgage constantly fluctuate, so an interest rate lock allows you to set it during the application process for your new mortgage until the closing of the loan, to ensure that you refinance for the interest rate that you wanted.
- Loan closing. At which point you will have to pay the closing costs listed in your new loan estimate and start your new mortgage process from scratch (and already with money accumulated from before).