The 5 Most Common Refinancing Questions, Answered

Lower mortgage payments? Shorter loan term? Lower interest rates? You may have thought you were done thinking and talking about home loans when you first bought your house, but as with most big financial decisions, it may be a good idea to revisit and re-evaluate. Refinancing offers some great potential benefits, but it’s important to consider your personal circumstances to see if it is truly the right decision for you. It’s also a good idea to be sure you understand what getting a new mortgage loan with new terms really involves. Check out some of the top refinance questions (and their answers) below to help you be sure you are acting in your best interest.

Should I Refinance?

The biggest question is, of course, whether this option applies to you. A refinance may be a good option for you if you cannot afford your monthly payments, if you can obtain a big drop in your interest rate, if you want to change the terms of your mortgage from adjustable rate to fixed rate, or if your financial situation or credit score has improved drastically since you got your mortgage (you can get your credit scores for free on Credit.com to see where you now stand).

How Much Will Refinancing Cost Me?

If it seems like a refinance is the right move for you, you are probably wondering how much you will save and what exactly it will cost. Though you may save money in the long run, refinancing requires some cash upfront. Your interest rate difference, lender, credit score, title and home value will all affect your refinancing closing costs. If you don’t have the money upfront you may lose out on some of the benefits by spreading out the cost over the length of the loan.

How Do I Take Cash Out?

Besides changing the terms of your loan, you may want to refinance to take equity out of your house (if you have enough). By increasing your mortgage balance and paying more monthly, you can take cash out to use elsewhere. This is not always advisable, as it takes away from the equity you have built up.

What Are Points?

Points are a form of prepaid interest. In exchange for increasing your upfront payment, a lender will reduce your loan’s interest rate and thus, the monthly payment you make for the term of the loan.

Why Do I Have to Pay Mortgage Taxes?

Mortgage tax is charged on all new mortgages by local or state governments. Since a refinance is basically obtaining a new mortgage, you will likely have to pay the tax just as you did when you first acquired your home loan. If you are using the original lender, you may be able to avoid paying the tax if they treat your refinance as a modification of your existing mortgage — but that could mean you will have to pay a modification fee.

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Refinancing can be confusing, but by getting educated and crunching some numbers, you could clear up all your concerns and save some serious cash along the way.