Refinancing a Mortgage Loan

How does refinancing work?

Refinancing replaces an existing loan with a new one. It requires going through the application process again, and incurring new loan fees. Despite this, there are three common reasons why people consider refinancing:

1. Macroeconomic changes. Market interest rates change with the state of the economy. You may lock in the best rate possible at the time of your closing, but it may decrease significantly five years later. With a mortgage refinance, you could replace the higher interest loan with a lower interest counterpart.

2. Changes in your financial situation. Mortgage loans aren't one-size-fits-all. Ideally, you and your lender should work together to find a loan program that suits your situation. If your circumstances change significantly, a refinance might be in order.

3. Increase in your home's value. If your home's value increases, you'll qualify for a larger loan (see LTV, Chapter 3). Refinancing to a larger mortgage allows you to access cash that could be used for home improvement, college tuition, or other expenses.

Ultimately, the partnership between you and your lender should be a long and mutually beneficial one. Even if circumstances change, your existing lender might be your best ally in a refinance. Just remember-it's your job to be wholeheartedly dedicated to that repayment promise.