A mortgage refinance often saves a borrower money by reducing home loan interest. If a borrower has an existing loan and takes out a new loan to pay off the old loan balance, she’s refinancing the debt.
When to Refinance Your Mortgage
Refinancing is used in many loan types, such as automobile and personal, but home loan refinances are very common because of the longer loan term.
The goal of most mortgage refinances is to reduce the overall interest the borrower will pay over the course of the loan.
For example, if a borrower currently has a mortgage with a balance of £100,000 and an interest rate of 3.29%, she will pay £3,290 in interest when the loan is paid off.
If she gets a new loan for £100,000 that has an interest rate of 2.20 percent and use the money to pay the old loan in full, she’ll only pay £2,200 in interest.
She can also refinance with a shorter loan term to pay off her debt faster.
If the borrower has equity in her home, she might do a mortgage refinance to access the money.
Equity is the percentage of the property’s value she owns free of any debts or liens. If she borrows more money on the new loan than she owes on the existing loan, she keeps the difference.
Mortgage refinancing still involves an application process and credit approval.
The borrower must meet the lender’s credit standards, and the home must have the property value needed to secure the debt. In some cases, a borrower may find she’s been offered a higher interest rate than she currently has, making the refinance pointless.
Economic conditions determine the offered range of mortgage interest rates, so if a borrower is unable to refinance with the terms she wants, she might try again down the road when the rates are lower.