Refinancing is the process of paying off an existing mortgage loan with another on the same property.

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Reasons to consider it

  • To get a significantly lower interest rate (like dropping from 4.5% to 3.5%).
  • To change from an FHA loan to a conventional loan and ditch your mortgage insurance premium (MIP).
  • To alter the length of your mortgage (ie. from a 30-year to a 15 or vice versa).
  • To switch from a variable interest rate mortgage to a fixed rate.
  • To cash in on the equity you built up (known as “cash-out” refinancing).
  • To add a chunk of money toward your principal, which increases your equity and lowers your monthly payments (known as “cash-in” refinancing).
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Reasons to pause

  • Refinancing costs money for underwriting and closing the loan, just like your original mortgage. Refis can even have higher escrow requirements.
  • Closing costs and other fees can get rolled into the loan (called a “no-cost” refi), but they’ll add to the life of your mortgage and you’ll pay interest on them.
  • In some cases, at least 20% equity in your home may be required to refinance.
  • A low credit score could make refinancing a challenge.
  • You may not be able to refinance if you missed any mortgage payments in the last 12 months.
  • Any late payments in your mortgage history will show up on your credit report, making it more difficult to refinance.

What it looks like

  • To refinance, you’ll need to go through all the steps of your first mortgage, from checking your credit score to compiling financial documents, appraisal, underwriting, and closing the loan.
  • While you can just call up the lender for your current mortgage and ask what they have to offer, it’s a good idea to shop around for various options. One method is to start with your local bank and then expand to national lenders.
  • If you’re refinancing to a lower rate, try to lock it in so you don’t lose the rate before closing on the loan.
  • When you’re looking at the terms of your new loan, confirm that there are no prepayment penalties. You want the right to pay off your loan early. Tip: Penalties are often indicated with a tiny checkbox that’s easy to miss.
  • If something doesn’t sit right with you, keep in mind that federal law gives you three days after closing to cancel the deal.

Wondering if repayment is right for you? Here are some more resources to inform your decisions: