Home > Mortgages > 4 Big Refinancing Questions Answered

Comments 0 Comments

You may have heard about it on the news, your neighbors may be bragging about it or you could have even received eligibility notice in the mail — but what is the real deal behind refinancing? Before you crunch your personal numbers and weigh the costs and benefits of refinancing your mortgage, you need to be sure you understand what exactly we’re talking about.

How Does It Work?

Basically, refinancing a mortgage means getting a new loan with new terms on your home. When you went through the homebuying process, you likely thought — or hoped — that you were done with picking mortgages, but if you can secure a lower interest rate, need lower monthly payments or want to build equity in your home sooner through a shorter-term mortgage, it may be time to revisit your situation. Refinancing also gives you the option to switch between an adjustable-rate mortgage and a fixed-rate mortgage.

Should I Do It?

When making the decision, it’s important to consider your current mortgage size, details of the new mortgage you would be taking out, the current home value, the interest rate of your loan options and the closing costs. A refinance calculator can help determine if refinancing is right for you. You enter specific information about your personal finances and the calculator determines what makes the most sense for you. If you plan to stay in the house longer than it will take for the monthly savings on your new mortgage to recoup the upfront costs of refinancing, you may want to move forward.

What Will It Cost?

When you bought your home, you probably paid closing costs to complete the sale. When you refinance, you have to pay these again to replace your original mortgage with the new one. You can expect to fork over 3% to 6% of your principal in refinancing fees along with any prepayment penalties you could incur. Beware that if you are offered a “no-fee” refinance, the lender may be charging you extra interest to make up for the fees you are avoiding upfront.

When Is It a Bad Idea?

Refinancing may sound great, but it isn’t for everyone. You need to be eligible for the new loan, which means you usually need to have a certain amount of equity in your home and decent credit score. (If you’re not sure where you stand, you can check a free credit report summary at Credit.com.) If you don’t qualify, it obviously isn’t an option for you. You also should probably not refinance if you plan to move from your home soon, since this doesn’t give you time to recoup the closing costs for the new loan. Being able to afford closing costs upfront is also important. Though lenders may offer the option to roll them into your new mortgage, this isn’t always the best decision and can cancel out the savings you would make from the switch. Also, if the prepayment penalty on your original mortgage is too high, this can also negate the potential savings of a refinance.

More on Mortgages & Homebuying:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team