What is Involved in Refinancing a Home Mortgage?
© 2009, Brandon Cornett. All rights reserved.
Welcome to Mortgage Refinance Help, the brand new blog by Cornett Communications. We created this blog to help homeowners learn about the refinancing process. And with this being the very first blog post, I thought it would be good to start with the basics. In this lesson, I’ll explain what is involved with refinancing a home mortgage.
What is Involved With the Process?
When you refinance your home, you are basically replacing your original mortgage with a new one. You are using the new loan to pay off the old one. And when it’s done right, you gain something along the way — better terms, a lower interest rate, etc.
So what is involved in refinancing a home loan? Well, for starters, you should find out how much equity you have in the home. You’ll need a sufficient amount of equity in order to qualify for a refi loan. Once you clear that hurdle, you would begin gathering refinance offers from lenders. Then you would review those offers to make sure the new loan would help you achieve your goals. For example, if your goal is saving money, you would run the numbers to make sure the money you save on the new loan exceeds the amount you pay in closing. Finally, you would close on the new mortgage — a process that is very similar to the first closing you went through, when buying the home.
That’s what is involved in refinancing a home mortgage loan, in a general sense. So let’s summarize the steps mentioned above. Here is the basic process you will go through when you refinance your loan:
- Determine your equity. This is the first step in the process, because you need a certain level of equity (ownership) in the home to qualify for refinancing.
- In order to measure your equity, the lender will send a professional appraiser to appraise the home. This will determine the current market value of your house. By comparing the home’s value to the amount you still owe on your mortgage, you can find out how much equity you have. You’ll need at least 20% equity to refinance, in most cases.
- If you pass the equity “test,” the lender will offer you the terms and interest rate for the refinance loan.
- Next, you would run the numbers to make sure the new loan accomplishes your goals. Primarily, you want to ensure that the amount of money you save (in the form of lower interest rate) is greater than the amount you pay in closing costs. When I say “run the numbers,” I mean using a refinance calculator to measure your future savings.
- In many states (but not all of them), there are laws that prevent lenders from offering refinance loans that do not help the borrower. So if you live in a state with these laws, you will not be approved for refinancing unless it benefits you financially.
This article answers the question: What is involved in refinancing a home mortgage? We will continue to add new lessons to this blog on a regular basis. I hope this lesson gives you a better understanding of how refinance works, and I wish you well in your financial endeavors.
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