How Does Refinancing Work?

Refinancing involves getting a new loan from the bank and then paying off your old loan with it. This can be important to help you save money, lower your interest rate or make your mortgage more affordable.

Knowing how efinancing works involves knowing the steps involved in the process. Generally, if you want to refinance your house, you need to:

1. Shop around for lenders
2. Apply for a refinance loan- providing all financial and credit information
3. Provide information about your existing loan- such as how much you owe and who the lender is
4. Have your home appraised and/or inspected
5. Get approved for a loan
6. Pay for a title search
7. Pay closing costs and fees
8. Pay off your old loan
9. Begin making payments on your new loan

Requirements to Refinance

Generally, in order to refinance, your home must be worth at least as much- if not more- than what you currently owe. For example, if your home is worth $100,000 but you owe $150,000, a lender is not generally going to allow you to refinance their loan with them. They won't allow the refinance because mortgage loans are supposed to be secured loans, which means the home is supposed to guarantee the loan. If the home is worth less than what you want to borrow, the bank won't have a sufficient guarantee.

If your home is worth less than you owe and you want to refinance, you'll have to come up with the cash. Alternatively, after the financial crisis of 2008 and 2009, the government has made programs available to help you renegotiate the terms of your existing loan. This is different from a refinance- you aren't simply taking a new loan if you renegotiate, you are changing the terms (such as the interest rate or amount you owe) on the loan you already have.

In order to make sure your home is worth enough money to refinance, the bank will usually require a professional appraisal. You will find out the value of the home, and then the bank will use that information to determine how much to lend you.

The bank will also look at your credit and income situation. A good credit score (usually 700 or above) and a steady income history may also be essential for getting approved for a refinance loan.

Once the loan is approved, the bank will require a title search to make sure there are no liens on the property. They won't refinance your loan unless the title comes back clean. Application fees and loan closing costs may also have to be paid at the time of refinance.

Why Refinance?

Now that you know how does refinancing work, you may wonder why you would want to refinance. There are several reasons why you would want to refinance:

• To lower your interest rate. If mortgage rates have dropped and/or your credit has improved since you bought the house, you may be able to get a lower interest rate. This can make your mortgage cost less over the life of the loan.
• To get into a safer mortgage. If you have an adjustable rate mortgage or a balloon mortgage, you may need to refinance in order to be able to afford to keep your house and avoid foreclosure.
• To get cash out. If you have equity in your home and you need the cash, you can refinance and take a larger loan than the amount you currently owe (as long as the house is worth enough to guarantee the loan). This will allow you to take the money out of your home that you have paid in.
• To lower payments. If you have seven years left on your mortgage and you refinance into a 15 year mortgage, your payments will be lower since you'll be paying off the same amount of money but in a longer period of time (remember, though, the longer it takes you to pay, the more you pay in interest.)

Regardless of your reason, you need to make sure refinancing is worth it for you. If you don't plan to stay in the home long enough to recoup the costs of refinance, then you usually shouldn't do it. You alone will have to decide what is right for you and your home.