The Mortgage Refinancing Process and Its Benefits

Whether you’re looking to reduce your monthly expenses or finance home improvements, the mortgage refinancing process offers a range of benefits that can improve your financial flexibility. At Fifth Third, we understand that navigating the refinancing process can seem overwhelming, which is why we’re here to provide clear, reliable guidance every step of the way. Here’s how refinancing could work for your current financial needs and make the most of your home’s potential.

What is Mortgage Refinancing?

Mortgage refinancing is the process of replacing your existing mortgage loan with a new one, typically to secure better terms. Consumer Finance explains that when you refinance, you’re essentially paying off your current mortgage with the proceeds from the new loan, which may have a lower interest rate, different loan term, or different loan conditions.

The Benefits of Refinancing

Refinancing your mortgage can be a smart financial strategy for homeowners seeking to improve their financial situation. Whether you're aiming to lower your monthly payments, secure a better interest rate, or access your home’s equity, refinancing offers several key benefits:

1. Take Advantage of Better Interest Rates
   Have mortgage rates decreased since taking out your original loan? You may be eligible to refinance and lock in a new, lower rate. For example, if you currently have an adjustable-rate mortgage (ARM), refinancing to a fixed-rate mortgage can provide a stable interest rate, protecting you from potential rate increases down the road.
   
2. Lower Monthly Mortgage Payments
   If your refinancing goal is to lower your monthly payments, there are a few ways you can achieve this. If interest rates have dropped since you took out your original mortgage, refinancing to a lower rate can reduce your monthly payment. Another option is to refinance your home for an extended period of time. For example, refinancing your 15-year mortgage to a 30-year mortgage can lower your monthly payments. While this may increase the total interest paid over the life of the loan, it can help with immediate cash flow since your monthly mortgage payments would be less.
   
3. Shorten Your Loan Term Refinancing to a shorter loan term (say from 30 years to 15 years) allows you to pay off your mortgage faster and save on interest over time, even though your monthly payments will likely increase. Before making this change, it’s important to take a close look at monthly expenses, budgets, and extra income before taking on your higher mortgage payments.
   
4. Access Your Home’s Equity
   A cash-out mortgage refinance allows you to refinance your home for more than you currently owe, tapping into your home’s equity, ----which can provide you with extra funds for various purposes. Plus, you may even be able to save money by refinancing at a lower interest rate.
   
   What is my home’s equity, you ask? Home equity is the difference between what your home is worth and what you owe on your mortgage. As property values rise or you pay down your mortgage, you build equity, which can become a valuable financial resource.
   
   Some homeowners opt for this type of refinance to have extra cash on hand to complete home improvement projects, pay down high-interest debt, like credit cards or personal loans, pay for education expenses, cover unexpected medical expenses, and so on. Before tapping into your home’s equity with a cash-out refinance, it’s important to carefully evaluate your financial situation and long-term plans.
   
5. Improve Credit Score
   By refinancing and consolidating debt, or simply lowering your monthly mortgage payment, you can reduce your debt-to-income ratio, which can improve your credit score over time. To keep your score in a good place after refinancing, Bankrate recommends making on-time mortgage payments, avoiding additional credit applications, and practicing money management within your means.

Should I Refinance?

If you’re on the fence with refinancing, start with the basics. Lay out your financial goals, debts, current circumstances, how long you plan to stay in your home, and the terms available to you. You’ll want to spend time educating yourself on the current interest rate environment, the type of loan that best fits your needs (such as a fixed-rate vs. adjustable-rate mortgage), and your credit score, as these elements can impact the terms you're offered.

Unsure which refinancing loan option is best for you? No problem! Take this short quiz to narrow your options and apply online.

How to Refinance a Mortgage

• Step 1: Identify Your Goals. Why do you want to refinance? (lower rate, shorter term, cash-out, etc.).
• Step 2: Assess Current Finances. Organize existing debts, incomes, anticipated large expenses.
• Step 3: Compare Lenders. Research multiple lenders and compare mortgage refinancing rates, fees, and loan terms.
• Step 4: Apply for a New Loan. Gather necessary documents (proof of income, tax returns, mortgage statement, etc.)
• Step 5: Underwriting and Appraisal. The lender will perform an appraisal to determine the current value of your home and conduct underwriting to assess your ability to repay the loan.
• Step 6: Lock Your New Rate. It's crucial to compare the Loan Estimate with your financial goals to ensure everything aligns. Mention the option to "lock in" a mortgage rate to protect against rate fluctuations during the processing period.
• Step 7: Review the Loan Estimate. Sign the final loan documents.
• Step 8: Close on Your New Loan. Pay any closing costs. The new mortgage is used to pay off the original loan, and the refinancing process is complete.

Connect with a Mortgage Loan Originator

Fifth Third’s mortgage advisors are here to help you navigate the mortgage refinancing process, answer questions, and help you find the right solution to meet your financial goals.

Apply online today or get in touch with us to get started.