The Basics to Refinance Mortgage for Physicians

Many homeowners refinance mortgage loans to gain a lower interest rate, use home equity for home improvements, or settle debts.

Regardless of your situation or reason to get a refinance, it’s important to know how it works, what your options are, and when to refinance to save you money and protect your finances.

What Is Mortgage Refinancing?

A refinance, or refi, is a term used when you want to replace your existing mortgage with a new one.

The new home loan pays for your current mortgage, but you only pay your new mortgage moving forward.

Refinancing means you have a new interest rate, principal amount, and loan term.

You may gain a refinance through your current lender or a different provider.

Note that refinancing differs from mortgage modification in that refinancing means getting an entirely new loan.

On the other hand, mortgage modification lets you extend your term or reduce your interest rate if you can prove that you’re struggling to pay your monthly payments.

Types of Mortgage Refinancing

Your refinance options may mostly be an adjustable-rate mortgage.

However, some lenders offer a fixed-rate mortgage and other refinance loan types. Check the different types and see which loan program suits you best.

• Rate-and-Term Refinance: This type of mortgage refinance changes your interest rate, loan term, or both, without taking additional cash out.
• Cash-Out Refinance: This option lets you take a larger mortgage loan, pay off your current mortgage with the proceeds, and receive the remaining funds as a lump sum. You can use the funds to settle debt, make a major purchase, or save money. Consider a cash-out refinance if your home value has increased or you have built up your home equity.
• Cash-In Refinance: If you received a large amount of money, a cash-in refinance allows you to change your current mortgage while making a lump sum payment to get favorable loan terms. This option lets you lower your monthly payment, reduce your debt, and qualify for a lower interest rate.
• Short Refinance: If you struggle to pay your monthly mortgage or are at risk of foreclosure, your lender may get you a new loan lower than your original loan. The lender will then forgive the difference between what you owe and the new mortgage amount.
• No-Closing-Cost Refinance: This option allows you to get a new mortgage without paying closing costs. However, instead of paying the closing costs upfront, you pay them as part of the loan, resulting in a higher monthly payment and interest rate. 
• Reverse Mortgage: If you’re an eligible homeowner aged 62 and over, a reverse mortgage allows you to borrow money against your home’s equity and receive the proceeds as monthly payments, a line of credit, or a lump sum. This option is best for older people whose net worth is mostly tied to their property’s equity.
• Debt Consolidation Refinance: This option enables you to borrow a single, lower-interest loan and receive cash which you can use to repay non-mortgage debt, like student loans and credit card debts.
• Streamline Refinance: If you have an FHA, USDA, VA, Fannie Mae, or Freddie Mac loan, you can apply for a streamlined refinance, which lets you borrow with less credit documentation and paperwork. Some can bypass appraisal, income verification, and credit checks, making refinancing easy.

How to Refinance Your Mortgage

Applying for refinancing is similar to getting an initial loan. However, before pushing through with the application, be clear with your goals to ensure that refinancing is the best option for you. Here are the steps to refinancing your mortgage.

1. Check Your Credit History and Home Equity

Since the process is the same as applying for an initial home loan, start to check and gather your financial information, such as your credit history.

Note that a higher credit score means better refinance rates and a higher chance for approval.

Conventional refinance options usually require a score of at least 620.

Also, check your home equity, which is the difference between the value of your home and what you owe on your mortgage.

You may need to conduct an appraisal to estimate your home’s value.

If your home’s equity is at least 20%, you can get better rates and fewer fees from your lender.

You also won’t have to pay for private mortgage insurance.

2. Find Several Lenders

After checking your financial status and history, shop for at least three lenders. Ask for quotes and compare terms and interest rates.

Also, know what type of refinance loan suits your current financial situation.

After choosing a lender, don’t forget to ask them when’s the best time to lock in your rate since mortgage rates can increase quickly.

3. Accomplish Lender Requirements

After choosing a lender and refinance loan term, gather and submit all your lender’s requirements.

These documents may include your federal tax returns, bank statements, proof of income, net worth, and credit score.

Ideally, prepare your documents while checking your credit history to avoid delays and inconveniences.

4. Conduct a Home Appraisal

Lenders often require a home appraisal to determine your property’s market value.

You’ll need to pay a professional appraiser to assess your home based on certain criteria and similar homes in your neighborhood.

If you have had major repairs, additions, or improvements since purchasing the home, you must disclose it to your lender or appraiser.

These upgrades can increase your home’s assessed value.

5. Close the Loan

After submitting all lender requirements, attend the closing to finalize the loan and pay the closing costs.

If you can’t afford to pay the closing expenses upfront, consider negotiating with your lender.

However, this may result in a higher interest rate or loan amount. If you can afford the closing expenses, it’s better to pay it upfront.

After closing the deal, keep tabs on your loan and mortgage fees, ensuring you pay your monthly dues or receive any payment from the lender.

Should You Consider Refinancing Your Mortgage?

Refinancing your current loan with a new one depends on your financial goals.

Most people refinance their mortgages to lower their interest rates. You can also use it to reduce your monthly mortgage payment.

If you’re unsure why you need to refinance your mortgage, here are the common perks:

• Lock in a lower interest rate
• Extend your repayment term
• Reduce your loan term to pay it off sooner
• Get tax-free cash from your equity
• Change from an adjustable-rate to a fixed-rate mortgage and vice versa
• Cancel private mortgage insurance premiums when possible

However, there are also downsides to refinancing.

Consider the following cons carefully before pushing through:

• Pay closing costs again.
• Reduce your home’s equity if you take cash out.
• Temporarily affect your credit score.
• Undergo the process for 15 to 45 days or more.

When to Refinance

Refinancing isn’t for everyone. Knowing when to refinance will help you maximize your mortgage and save on costs.

Consider refinancing if you experience or plan the following:

• You will stay in your home in the long term.
• You want to use the equity for house improvements.
• You have cut a full percentage point from your rate.
• You want to remove your mortgage insurance for more savings.
• The interest rates have dropped.

Don’t hesitate to seek the help of a Financial Advisor to ensure that refinancing suits your financial needs and goals.

Questions to Ask Yourself Before Getting a Mortgage Refinance Loan

Here are three questions you can ask yourself before applying for a new loan, to ensure that it’s the best step for you.

Can you pay for the refinance expenses?

Remember that applying for a new loan costs money, especially since you must pay for closing expenses again.

Some costs include the origination fee, appraisal fee, and discount points.

What are your refinance loan options?

Most lenders offer an adjustable-rate mortgage, but some also provide a fixed-rate mortgage.

Choose the right type of refinance loan for your goals to maximize your term.

Will the equity in your home be used for a cash-out refinance?

Many homeowners tap into their equity to pay for home improvements and other debts.

However, remember that this move will also reduce your equity and increase your payments over the life of the loan.

Frequently Asked Questions

Ask an Expert to Make Well-Informed Financial Decisions

Refinancing can lower your monthly payment and save you money in the long run, especially if you’ve been paying your home for a while.

However, if you’re unsure if this is the best financial decision for you, don’t hesitate to seek the help of an expert.

Consult a Financial Advisor to help you assess your mortgage and financial condition and provide guidance on your best next move.

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