A Guide to Refinancing Your Mortgage: When and How to Do It

For most people, purchasing a home is by far the largest investment they’ll ever make. And, for most people, a mortgage is necessary to buy a property. But what if you want to refinance your mortgage? 

How a Mortgage Works

A mortgage is a type of loan made by a bank or other financial institution to one or more parties looking to purchase a home. The purchased property itself is collateral for the loan. This means if the buyer defaults on their mortgage payments, the financial institution can foreclose on the property and take possession of it.

What Affects Mortgages?

When a financial institution issues a mortgage, they charge interest on it, as is common for loans. The interest rate is key because it determines how much you will pay back in addition to the value of the original loan. Factors that can affect the value of the mortgage include:

• Mortgage term: Mortgages have different terms of length, such as 20 or 30 years. 
• Interest rate: The Federal Open Market Committee sets the interest rate in the U.S. When the rate is high, mortgages will cost more because they will accrue more interest.
• Down payment: A buyer who pays 20% down will owe a lot more on a mortgage than a buyer who pays 80% down.
• Credit score: Financial institutions use your credit score to determine how much they’re willing to lend you.
  

How Mortgage Refinancing Works

When you refinance, you basically trade your old mortgage for a new one. A refinancing could be a renegotiation of your mortgage with your current lender, or paying off that mortgage by getting a new loan from another institution. There are different refinancing options, including:

• Rate and term refinance: This option enables you to change your current mortgage's interest rate and loan terms. 
• Cash-out refinance: You can also apply for a new loan for a larger amount and use this to pay off the first mortgage. This can work if your property has increased in value and hire an appraiser to attest to that.
• Cash-in refinance: You can pay a lump sum toward your mortgage to increase equity and decrease the amount owed. This can lower your monthly payment and interest rate. Paying a big lump sum may incur a financial penalty. However, many lenders offer periods when you can repay a large amount without penalty. These are often periods where the lender may adjust the rate based on the Federal interest rate.

When to Refinance Your Mortgage

If you want a cash-in refinance, it’s best to wait for that three- or five-year mark when you can pay back a large sum without penalty. A cash-out refinance works best if your property has increased in value significantly. If you’re under financial pressure, remember that your bank doesn’t want to foreclose on you. That’s a last-case scenario, and you have options. Contact a Vectra Bank professional today and find out how we can help you make the best decision for your mortgage*.

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