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How does mortgage refinancing Work?

A mortgage refinance is when a homeowner or property owner refinances their mortgage to a new loan (typically at a lower interest rate). If your current mortgage interest rate is higher than today’s rate, you could benefit from refinancing.
However, if current mortgage rates are higher than the rate you have now, it’s best not to refinance because you wouldn’t want to lose a great low rate.
Home loan refinancing is generally a good idea if you can get a lower interest rate.
Homeowners who need some extra cash for home renovations or to pay-off debt may be eligible for a cash-out refinance that provides a lump-sum of money at closing.
You can start the mortgage refinance process by speaking to different lenders about their mortgage loan programs, interest rates, and loan term options.
At Credit Union of Southern California (CU SoCal) our home financing specialists can compare your existing mortgage interest rate and term with today’s rate and term options to help you decide if it is good to refinance your home.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
Read on to learn more about home loan refinancing and the best way to refinance a mortgage.

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What happens when you refinance your home?  

Home loan refinancing, also known as refinancing a mortgage, is when a homeowner or property owner takes out a new mortgage to pay off their existing mortgage. The new mortgage may be provided by the current lender or a new lender.
Many homeowners refinance their mortgage to either get a lower interest rate or shorten the length (term) of the loan, making it easier to pay off the mortgage sooner. If you can do both, then you’ll save more money in the long run.

How to refinance a mortgage

Home loan refinancing is an easy process, especially if you refinance with your current lender. However, it always makes sense to shop for the best (lowest) interest rate and the loan terms that will help you save money.
Here are the basic steps for refinancing a mortgage:
Check your credit score. Your credit score tells lenders how you have managed your debt. If you’ve paid bills and loans on time, then you’ll likely have a good or excellent credit score. Lenders look at a borrower’s credit score to determine the level of risk that borrower will be. On, you are entitled to a free annual credit report from each of the three credit reporting agencies. These agencies include Equifax, Experian, and TransUnion.
Know your DTI ratio. Lenders look at debt and income to create a borrower’s DTI ratio. Your DTI tells lenders if you have enough income to repay your current and future debt (e.g., a mortgage). To calculate your DTI ratio, add up all your monthly debt payments and divide them by your gross monthly income (before taxes). Most lenders look for a DTI ratio of 43% or less, although some will accept up to 50%. To lower your DTI you can increase your earnings and/or pay off debt.
Calculate your equity. Lenders generally require 15-20% equity in the home that will be used to secure the loan. Equity is the amount of the home you own. To calculate equity, subtract the mortgage amount from the appraised or market value amount. For example: An appraised value of $600,000 subtracted by the $250,000 owed on mortgage would equal $350,000 equity. Divide the equity ($350,000) by the home value ($600,000), which is 58% equity. (A homeowner who doesn’t have a mortgage loan has 100% equity in their home.)
Set a goal. Is your goal to get a lower interest rate? Get cash out at closing to pay down high-interest debt or make home improvements? Or, pay off your mortgage early? When it comes to your finances, it’s smart to set goals and share this with your lender so he or she can help you reach your goals. If your goal is to pay off your mortgage sooner, refinancing to a lower rate is a great place to start.
Gather necessary documents. These include paystubs, W-2s, tax returns, bank statements, investment account statements, current mortgage statements, debt/loan statements, and alimony that is paid or received. Self-employed individuals will need to provide 1099s and profit-and-loss statements, as well as other documents that show income, debt, and assets.
Shop different lenders. Start by talking to a loan representative at your current mortgage lender. This could save you time and money because your current lender will have much of your personal information still on file, and they may be able to provide you with a better rate due to your existing relationship. Still, it’s smart to shop a couple of different lenders to ensure you’re getting the best rate and terms.
Schedule an appraisal. All lenders will require an appraisal of your home, also called the subject property. An appraisal compares various aspects of the subject property (such as location, square footage, etc.) to other similar homes in the area, to determine the home’s market value. Knowing how much the home is worth is one of the factors a lender uses to determine how much of a mortgage loan they will give.
Lock in your interest rate. Most lenders will allow their customers to lock in a mortgage rate for up to 90 days. Extended rate locks past their period may come with added fees.
Close. When your loan refinance is approved, you are “clear to close.” Refinancing a mortgage is typically a quicker process than getting a first mortgage, and averages 20 – 45 days.

What are the benefits of refinancing?

The benefits of refinancing a mortgage include:
Lower interest rate. Although mortgage interest rates are rising, you may still be able to get a lower interest rate than you have now.
Shorter loan term. When refinancing, many homeowners choose a shorter loan term (length of loan). For example, if you get a lower interest rate, you may choose a 15- or 20-year mortgage, rather than a 30-year, which means you can pay off your mortgage sooner.
Pay off debts. Using a cash out refinance to pay off high-interest credit card debt or student loans is a financially smart reason to refinance.
Make home improvements and renovations. One of the best uses of a cash out refinance is reinvesting in your home by adding value. Renovations including a new roof or windows, and updating the kitchen and bathrooms all add value.
Switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Homeowners with an ARM should consider refinancing to a fixed-rate mortgage before the ARM adjusts to the higher rate.
Remove mortgage insurance. If you purchased your home using a mortgage loan and made a down payment of less than 20%, you are likely paying private mortgage insurance (PMI) as part of your monthly mortgage payment. PMI is charged by lenders to cover their expenses if a borrower defaults on the loan. If it’s been a couple of years since you bought your home, you can ask your lender to run the numbers to see if you now have 20% equity in the home, and thus can eliminate PMI. Refinancing just to get rid of PMI may cost you more in closing costs than it’s worth. You can build equity in your home by making extra payments toward the principal loan balance, and eventually eliminate PMI that way.
Save for retirement. Refinancing to a lower interest rate means you’ll save money over the course of the loan term. The money you save each month can be put in a savings account, invested, or placed in a retirement account.

How much does it cost to refinance?

In most cases, expect to pay 2% to 6% of your loan balance in closing for a mortgage refinance. This amount will include various fees, such as lender fees, an application fee, an appraisal fee, a title search fee, etc.

Do you lose equity when you refinance?

It’s possible to lose equity when you refinance if you use part of your loan amount to pay for closing costs. These days, with home values at record highs, most homes are appraising higher and homeowners are benefitting from increased equity. However, if you refinance to get cash out and thus increase your mortgage amount, this could reduce the amount of equity you have in your home. Because the real estate market fluctuates, it’s difficult to predict whether equity will go up or down.

How often can I refinance?

There are no limits regarding how many times a property owner with a mortgage can refinance their loan. However, refinancing too frequently can end up costing you a lot in closing costs and fees associated with refinancing.

Is refinancing your mortgage worth it?

A CU SoCal Mortgage Loan Originator can help you run the numbers and determine if refinancing will save you money. Ultimately, you are the only one who can truly know if refinancing is worth it. If you need cash for a large home project or other financial obligations, you may decide it is worth it to refinance even if the interest rate is slightly higher than your current rate.
If cash is what you need and you prefer to keep your current low interest rate, you may want to consider getting a Home Equity Line of Credit (HELOC) or a Home Equity Loan.
Learn more about whether you should refinance your mortgage.

When is the best time to refinance?

The best time to refinance is when you:

1) Can get a lower rate that will save you a couple of hundred dollars each month.
2) Are planning on living in the home for at least 5-10 years more.
3) You can afford the closing costs. Paying for closing costs with cash will save you money in interest. For example, if your closing costs are around $5,000 and you have the money saved up, you’ll save more money by paying out of pocket rather than rolling the amount into the mortgage and paying 4%-5% interest.
Click here to learn more about mortgage refinancing online.

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For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

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