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The Basics of Refinancing A Mortgage

Jenna Taubel

Jenna Taubel About The Author

Jul 5, 2017 7:09:00 AM

Refinancing a mortgage can be an excellent option if you are looking to change your financial situation. Borrowers look to refinance their mortgage for a number of reasons. This article will answer your mortgage questions, explain the basics of how refinancing works, and the ways it can help save you money.Thousands of people refinance their mortgages every year, this is largely due to people looking to lower their monthly payments due to their current financial circumstances. The term refinancing is essentially the attainment of a new loan to take the place of an older one. Refinancing is often categorized one of two ways, “rate and term” or “cash-out.” 

Rate and Term Refinancing
Rate and term refinancing refers to paying off your previous mortgage and adopting a new one with a new interest rate and repayment terms. This is most beneficial when the interest rates are lower than those of your current mortgage and/or if the period for repayment can be reduced.

Cash-Out Refinancing
Cash-out refinancing is similar to a Home Equity Loan, where you borrow additional funds based on the equity built up in your home.  You are essentially refinancing a mortgage for more than you currently owe and receiving the difference back in cash. 

refinancing a mortgage to save money

Top Reasons to Refinance a Mortgage:

A Lower Interest Rate
This is one of the main reasons people tend to refinance. A reduced interest rate often allow a person to save a significant amount of money over the life of the loan, along with lower monthly payments. But keep in mind that 
refinancing a mortgage comes with closing cost, because it is a new loan a person takes out to replace an older one. When looking at the long term savings of refinancing, make sure you take these costs into consideration. 

A Shorter Time Frame
Some people find that they are able to payoff their mortgage loan in a shorter time frame than they previously anticipated. Refinancing provides an option to do so conveniently when interest rates drop, and/or there is an improvement in your financial situations, such as an increase in income. 

Shortening your mortgage repayment term usually increases your monthly payments, but for many refinancing to a shorter period still proves to be beneficial in the long run. If you think you can afford a higher monthly payment, then refinancing to a shorter term maybe an excellent option to consider. 

Fixed Rate Verses Adjustable Rate Mortgages
Trading in a fixed rate mortgage for an adjustable rate mortgage, or vice versa, can provide a way out of repayment situation that is no longer working for you. If you need to have a fixed monthly payment, then it is better to shift away from the Adjustable-Rate Mortgage (ARM) to a fixed-rate mortgage. Fixed-rate mortgages can provide peace of mind by allowing you to avoid unexpected shifts in interest rates, which then change your monthly payment.

On the other hand, if you are determined to pay off your debt quickly while interest rates are low, then a switch from a fixed-rate mortgage to an ARM can be a worthwhile decision. A change in the interest rate is a suitable opportunity for switching between fixed and adjustable mortgages. 

A Cash-Out
A cash-out refinancing is preferred in a few situations, for instance, if you 
need to access the equity in your home to make large purchases or investments. For a Cash-Out refinance to be useful however, you need to have sufficient equity available to get the cash out of your mortgage. 

The Bottom Line

The purpose of refinancing a mortgage is usually to ease the burden of debts. Mortgage calculators are an excellent option to estimate of the amount you might save when refinancing. Mortgage refinancing can accelerate the process of eliminating your debt and can provide financial peace of mind. 


We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.