If you’ve already got a mortgage, but now you want to modify your payment plan, then you need to understand what home refinance is. Asking for this refinance could help you lower your interest rates and extend or reduce the payment term. In this article you’ll dive into the world of mortgages to get to know the types of refinances available and the risks you may be taking when applying for one.
What does ‘refinance’ mean?
You probably hear this word a lot, since any loan can lead you to a refinance plan, but what is it exactly? A borrower who’s paying of a loan, any type of loan, can ask for a refinance to the same lender or a new one with better loan terms. This means that you replace the existing loan with a new one that provides a reduced monthly payment and saves money on interest costs. If you change from lender, the previous lender transfers the debt to the new one.
What about a home refinance?
A home refinance, also called mortgage refinance, is a refinance used for real estate loans. You can customize it to fit your needs, changing the term of payment according to your financial possibilities and goals. Plus, you can change your interest rate and choose between a fixed or adjustable rate.
Types of home refinancing
Now that you now what home refinance is, you need to figure out which type suits your current mortgage needs:
In this case, the only changes made to the loan are the loan term and the mortgage rate, though the modifications may be just for one of those. For instance, a homeowner can change from a 20-year term to a 10-year term, or from a 20-year-mortgage at 5 percent fixed rate to a 4 percent adjustable rate.
As the rate-and-term refinance, this refinance option allows you to change your payment term and mortgage rate. The difference lies on an extra amount of money borrowed that must surpass the original budget by at least 5 percent. Also, that additional money can be paid in two ways: as cash at closing or directed to creditors in the case of a debt consolidation refinance.
This is the exact opposite of a cash-out refinance. Instead of asking for an extra amount of money, you pay down the balance of your mortgage to reach a certain loan-to-value ratio in order to qualify for a mortgage refinance.
Home refinance risks
- You may forget to consider exit fees. These are charged when you exit your loan before the agreed term and the costs are steeper when you have a fixed interest rate.
- It can have a negative impact on your credit history. If you ask for loans and refinance too many times in a short term, you could find your loan applications rejected.
You may be required to pay a Lender’s Mortgage Insurance (LMI) which can be expensive if you only have a 20 percent or less equity in your property. LMI offsets the losses in case you’re not able to pay the mortgage.