Refinance Explained

Refinancing is the process of replacing your existing mortgage with a new loan. Homeowners may seek a loan that lowers their interest rate, lowers their monthly payments, or grants them access to necessary cash, which are all benefits that can make the process well worth it. While whether you should or shouldn’t refinance right now depends on your individual situation, knowing the refinance basics should make getting started easier when the time does come.

Compare the Best Refinance Options

Why Refinance?

If you’re on the fence about refinancing, know that doing so has many potential benefits. Most homeowners end up saving money, lowering their monthly payments, or accomplishing another helpful financial goal, making the process well worth it. Here are some of the most common reasons for refinancing:

Lower Interest Rates: When market rates are lower than the interest rate you’re currently paying on your mortgage, refinancing can allow you to lock in these lower rates and pay less in interest for the duration of your new loan.
Lower Monthly Payments: Choosing a loan with a longer term, lower interest rate, or both can lead to lower monthly payments, which means less financial burden on a month-to-month basis.
Quick Cash: Homeowners that opt for a cash-out refinance will be able to borrow from their home equity. This cash can come in handy when it comes to larger expenses, such as home repairs or debt.
Shorter Loan Length: Homeowners that want to pay off their mortgage more quickly can refinance into a loan that has a shorter loan length. While this will mean higher payments each month, you’ll likely save money when it comes to interest paid over time.
More Stable Payments: Homeowners with an ARM may want to refinance into a fixed-rate loan in order to get an interest rate that won’t fluctuate, thus lowering their financial risk.

Whichever of these benefits most aligns with your goals, choosing to refinance at the right time can make a huge difference on your finances. Once you’ve settled on your desired results, looking into potential loan options is the next step.

Types of Refinance Loans

There are three types of refinance loans, each of which suits a different set of goals. Having a basic understanding of how each type works will make your loan decision easier:

Rate-and-Term: The most common type of refinance, in this case homeowners take out a new loan that allows them to change their interest rate, their term length, or both. This can result in money saved in the long run and lower monthly payments overall, depending on the loan you go with.
Cash-Out: With this type of loan, homeowners can access their home equity in order to borrow cash that they can then use on large life expenses, including paying off debt or paying for home renovations.
Cash-In: Though not as common as the other two types, homeowners with a cash-in refinance pay off a large sum of their mortgage at one time in order to improve their loan-to-value (LTV) ratio, which is essentially the amount you owe on your loan divided by the value of the home, expressed as a percentage -- most lenders require an LTV of 80 percent or lower to qualify for a refinance. After a successful cash-in refinance, homeowners can lower their LTV and then apply for a better refinance.

As you can tell, each of these loan types can benefit homeowners in distinct ways. The loan type that might be the most helpful to one homeowner could prove detrimental to another. As we’ve already stressed, knowing where you stand and which of these three options best suits your current needs is key to a smooth refinance.

Fixed vs. ARM

Besides the three types of loans we just described, you’ll also have to consider whether you want a fixed-rate or an adjustable-rate mortgage loan. As the name implies, a fixed-rate loan offers homeowners an interest rate that is fixed for the duration of their loan term, which is typically 15, 20, or 30 years in length. Conversely, an ARM offers an interest rate that is only fixed for the first few years of the loan -- typically five or seven years. After this point, the interest rate will move with the market on an annual basis, which means unpredictable costs that can either save or cost you money.

Streamline Loans

While many loans are conventional loans, which are backed by private lenders, there are also loans that are backed by government agencies, including the FHA, VA, and USDA. These loan options are typically easier to qualify for and involve less paperwork and faster processing times than conventional loans, though they may also include extra costs. Keep in mind that only those with a streamline mortgage can qualify for a streamline refinance.

What to Expect

Though getting a refinance has many similarities to getting your first mortgage, it is not quite as complicated or stressful. In order to apply, some of what you’ll need includes information about your current mortgage, previous tax forms, and recent pay stubs. Lenders will want to assess your credit status, how much equity you have in your home, and what your home is worth. In most cases, a home appraisal will be required at some point during the process.

A refinance typically takes 30 to 60 days to complete. You’ll need to pay closing costs at the end of this process, so make sure you keep track of what each lender might charge. Once the process is officially over, you’ll be able to reap the benefits of whichever loan and interest rate you’ve chosen.

Refinancing Your Way

While there is no right way or time to refinance, know that refinancing can make a big difference in your financial life and that it doesn’t have to be a long or complicated process. By being aware of how the process works, keeping track of market rates, and checking out multiple lenders, you’ll have a head start once you do decide to go for it. To see your refinancing possibilities, try checking potential costs by using our mortgage calculator and read our in-depth reviews on the top refinance lenders. Once you pick out the lenders you feel suit your needs the best, you can request loan estimates from your top choices and go from there.