Refinancing 101: A Beginner’s Guide

What does it mean to refinance?

Refinancing is the process by which an existing credit agreement (such as a mortgage) is replaced with a new one with different terms.

Why refinance?

When an individual or business refinances their existing credit agreement, they usually do so to take advantage of more beneficial terms. For example, a homeowner may refinance their mortgage to obtain a lower interest rate or to adjust their payment schedule. In that traditional refinancing scenario, the original mortgage is replaced by a new one for the same balance.

However, there is also something called cash-out refinancing in which the original mortgage is replaced with a new mortgage for more than what you owe on your home and the difference between what your new mortgage amount is and what you owe on your home is received by you in cash. This refinancing mechanism is most commonly used when homeowners want cash to make home improvements. For more on this, click here and here.

What is interest?

Interest is the amount that a lender charges you for borrowing the principal from the lender. The interest rate is applied to the principal (i.e., the amount being borrowed) to calculate the cost of borrowing the principal. For more on this, click here.

When is it a good time to refinance?

This determination will differ for each homeowner based on what the terms of their current mortgage are and what their financial circumstances and needs are. However, in general, it is a good time to refinance an existing mortgage if the currently available interest rates are lower than the current interest rate on your existing mortgage, if your financial situation and/or credit have improved since you first obtained your mortgage allowing you to secure better loan terms now, or if you desire to change your mortgage payment schedule (e.g., from 30-years to 15-years).

Why is there so much talk about refinancing these days?

Lenders are currently offering historically low interest rates on home mortgages, among other things, so it is a great time opportunity to lock in lower interest rates on your existing mortgage.

Is there any downside to refinancing?

When you refinance your mortgage, you replace your existing mortgage with a new mortgage with new terms and a new start date. Upon refinancing, the clock will usually start all over on your mortgage term, so if you started with a 30-year mortgage and then refinance for a lower interest rate on a new 30-year mortgage, you start your 30-year repayment clock all the way at day one again. This is not always the case though, as your new mortgage could be a 15-year mortgage, so where the clock starts depends on the specific terms of your new mortgage terms. Another potential downside to refinancing is that lenders will sometimes charge a fee for refinancing. This fee is often waived, but you should inquire about it when determining whether refinancing is the right choice for you.

If you decide that you want to refinance, how do you start the process?

Once you have determined that it is a good time to refinance your mortgage, the best place to start would be do research into different mortgage brokers/lenders to determine what refinancing terms you are able to obtain. Reach out to your real estate agent and inquire about whether they can recommend any mortgage brokers/lenders to you; they usually can. Next, you will need to gather and prepare your up-to-date financial information to be sent to the mortgage brokers/lenders that you contact, as they will need to review this information to determine what terms they will offer to you. Once you have done your due diligence and gathered competing refinancing term options, you can determine which one, if any, to proceed with.

While the process will require some time and effort on your part, the long-term savings of refinancing make the process worthwhile. I hope that this article has answered some of your refinancing questions and encourages you to investigate whether you can take advantage of today’s historically low interest rates by refinancing your home mortgage.

If you would like to learn more about refinancing or if you have other real estate topics that you would like covered, or if you are interested in exploring the San Diego real estate market, please contact Paris M. Torkamani at ptorkamani@esquirereb.com or 949-413-6699.