What we'll cover
What refinancing is and what it covers
Defining different types of financing
When you should reconsider refinancing
A mortgage refinance loan means that you replace your existing mortgage with a new one—a common reason homeowners refinance is to lower their interest rate. The new mortgage could but does not always include terms that are better than your old mortgage.
What is a mortgage refinance?
Let's dig into a deeper definition of how a mortgage refinance works.
The application process is similar to when you applied for your existing mortgage loan; your lender may ask you for information such as your income, assets, current debt, amount of your existing mortgage and estimated value of your home and credit score.
When should I refinance my mortgage?
You may want to consider reducing your interest rate, switching from an adjustable-rate mortgage to a fixed-rate mortgage or shortening your loan term. You may also want to refinance or access the equity in your existing home. Let's take a closer look at some of the reasons why you may want to refinance your mortgage.
If your credit score has improved since you last applied for a mortgage, this could also present an opportunity to qualify for a reduced rate.
Switch from an adjustable-rate mortgage to a fixed rate
An adjustable-rate Mortgage or ARM is a mortgage loan with an interest rate that has an initial fixed-rate period, but after the initial period ends, the interest rate can fluctuate over time with the market interest rates. Refinancing an ARM loan into a fixed- ate mortgage could reduce your interest rate, and because payments on fixed-rate loans remain the same for the term of the loan, you will have more certainty about your monthly payments.
How exactly does it work? A 5/1 ARM rate stays locked for the first five years, then resets periodically. If the ARM rate is higher at the reset period, your mortgage payment could go up. If it is lower, your payment may go down.
Shorten your mortgage term
You may also decide to pay off your existing mortgage faster by refinancing into a shorter term loan. For example, if your existing mortgage loan has a 30-year term, you could refinance into a 15- ear mortgage and pay the mortgage off faster. Refinancing into a shorter term mortgage could result in higher monthly payments, however. Punch some numbers into a calculator to determine the potential impact to your monthly payment. You may be better off adding an additional principal payment every month to pay off your loan faster.
Another great reason to refinance your mortgage: If you are currently paying private mortgage insurance (PMI) on your existing mortgage and your home's equity has increased, a refinance may eliminate the PMI requirement on your loan.
You replace your existing mortgage with a new one that often has better terms.
Types of mortgage loans
There are a few different types of mortgage refinance options available, including cash-out refinances, cash-in refinances, rate-and-term refinances and more.
Cash-out refinance: A cash-out refinance is a loan where you are able to borrow against the equity in your home. When you do a cash-out refinance, you borrow more than the amount you owe on your existing mortgage and the lender gives you cash in exchange or taking on a larger mortgage.
Cash-in refinance: A cash-in refinance means that when you refinance your existing mortgage, you make an additional cash payment to secure better loan terms.
Rate-and-term refinance: Rate and term refinances let you change the interest rates and loan terms of existing mortgages. A rate-and- erm refinance can be a great option because it allows you to pursue more favorable terms with your lender.
There are other types of refinancing available as well; ask your lender for details about all your options.
What are the costs to refinance a mortgage
In general, you can expect to pay at closing between 3% and 6% of the overall loan amount in the form of closing costs. For example, let's say you qualify for a mortgage loan amount of $250,000. In this case, you'd pay closing costs between $7,500 and $15,000.
Use Ally's refinance calculator to help you decide whether or not to refinance.
