How to Refinance: What is Refinancing?

By Karen Lawson
Local Lender Columnist

Are you a good candidate for a refinance loan? Maybe your adjustable rate mortgage payment is about go up. Perhaps you're carrying balances on high-interest credit cards, or have a second mortgage at a high rate. Your kitchen might need remodeling. Fortunately, refinancing your mortgage may help you lower your payment, secure a good interest rate, or provide cash for necessities. Here's how refinancing works.

Home Equity is Key to a Cash-Out Refinance

Refinancing your mortgage means taking a new mortgage loan in an amount sufficient to pay off your old mortgage loans. Depending on your goals, refinancing will take one of two forms: If you need extra cash for debt consolidation or home improvement, your refinance transaction is called a "cash out" refinance. If you are only paying off existing mortgages, the refinance is called a "rate and term" refinance.

The amount of equity in your home determines the maximum amount you can refinance. Home equity is the difference between the present value of your home and what you owe against it in mortgages and equity lines of credit. In other words, it's the amount you've already paid off. If your home is worth $300,000 and you still owe $200,000 on your present mortgage, you have $100,000 in equity. With enough equity, you can often build the costs of refinancing into your new loan and not have to bring cash into the transaction.

Your Financial Picture is Important

The first step in learning how to refinance is assessing your financial situation. Figure out your monthly income, your total debt and monthly payments, and the interest rates and terms of your present mortgage and consumer debt (credit cards, car payments, etc.). This helps you determine when a refinance is a better deal than your current situation.

Generally, you'll want to refinance your mortgage to a lower and/or fixed interest rate, to eliminate rising payments. You may also be able to take enough extra cash from refinancing to pay other expenses, or to consolidate debt and lower your overall payments. Refinancing is similar to getting your original mortgage. You apply for a new mortgage, and open an escrow. Your lender will qualify you for a new mortgage and order an appraisal. When your refinance closes, debt secured by your home is paid off with the proceeds of your new mortgage.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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