What Does It Mean to Refinance a Mortgage?

When you took out your mortgage loan, its interest rate and terms were almost certainly the best available to you at the time.

Fellowship Home Loans is here to help. We can evaluate and explain your unique financial situation to help determine whether a refinance might be the right solution for you.

Let’s start at the beginning. Anyone visiting this page presumably knows what a mortgage loan is, but not all borrowers are familiar with loan refinancing. In its simplest terms, refinancing is the process of paying off one loan, in this case, a mortgage, and replacing it with another one. Ideally, the new loan will offer lower interest rates, better terms, or both.

Reasons to Refinance

Fellowship Home Loans may offer the same types of refinancing options as other lenders, but don’t assume that means we treat our borrowers the same way. We look at each of you as a unique individual. Before we make a recommendation, we want to understand your needs, your current lifestyle, and your plans for the future. At that point, we’ll usually recommend one of the following options:

Refinancing to Consolidate Debt

It’s not uncommon for homeowners to refinance to consolidate debt from higher-interest sources. However, we certainly don’t recommend this approach to everyone. If you’ve found yourself in debt and are having trouble paying your bills, the first thing you need to do is evaluate how and why.

Refinancing to consolidate debt can help in the short term, but it will only bring long-term relief if you learn how to exercise financial prudence. We only recommend refinancing your home loan to consolidate debt if you are confident that you’ll be able to resist the temptation to go back to your old spending habits.

Paying for Home Improvements

One of the most common reasons for homeowners to apply for mortgage refinancing is to fund home improvement projects. It only makes sense. Regardless of what your motivation is for making home improvements, they will almost certainly increase your home’s value. Why not pay for them by using mortgage refinancing to access some of the home equity you already have?

Refinancing to Increase Equity

In some cases, refinancing can be a good way to increase the equity in your home. Here’s how it works: you own only a percentage of your home while you’re still making mortgage payments. The greater the percentage of the principal balance you’ve paid off, the more of it you own, and the more equity it represents.

If you want to increase equity, either for the purposes of improving your credit score so that you can open new lines of credit or of increasing your net worth for other reasons, refinancing to a shorter loan term can be a good solution. If you initially took out an FHA loan, you could also increase home equity by refinancing to a conventional loan that does not require a mortgage insurance premium. That way, more of your payments will be going toward the principal instead.