Refinancing your mortgage replaces your old mortgage with a new one; one with a different principal amount and interest rate. The lender cancels the old mortgage with the new one, and then there's only one mortgage left, usually one with more favorable terms (lower interest rate) than the old one. Refinancing occurs when a homeowner obtains a new mortgage loan to replace their current loan. The new loan should help them save money or meet another financial goal.
When you refinance, it means that you're basically taking out a new loan for your property, often for the rest you owe (but not always). Ideally, this new loan should have better terms than the previous loan. This depends on several factors, such as current mortgage rates, the amount of equity you have in your home (that is, how much of the loan you have already paid off) and what your credit rating is when you apply. Refinancing a mortgage involves taking out a new loan to pay off your original mortgage loan. However, before starting the process, it's important to know how the process works and what are the advantages and disadvantages of mortgage refinancing.
Refinancing a mortgage loan involves replacing your current mortgage with a new one, usually for more favorable terms or to meet your financial objectives. If you have a HELOC or a home equity loan, you can choose to keep it and refinance only your first mortgage. For example, most people refinance to lower their interest rates and reduce their mortgage payments, often saving thousands of dollars in mortgage interest. Finally, even if only temporary, refinancing your mortgage could have a negative impact on your credit rating, as the lender will conduct extensive research to assess your creditworthiness.
However, if your score has dropped since taking out your original mortgage and you've gone from a conventional loan to an FHA loan with expensive mortgage insurance, it may not be worth refinancing. With simplified refinancing, mortgage lenders forgo much of the “typical” approval process for a mortgage to refinance a mortgage. The truth about mortgages states that it's important to make sure you break even before deciding to refinance your current mortgage rate. It's a good idea to use a mortgage refinance calculator to calculate your break-even point after accounting for refinancing expenses.
If you're trying to lower your mortgage payment, the value could influence whether you have enough mortgage capital to get rid of private mortgage insurance (PMI) or whether you're eligible for a certain loan option. Refinancing a mortgage loan involves replacing your current loan with a new one, usually through another lender. When you refinance your mortgage, your bank or lender cancels your old mortgage with the new one; this is the reason for the term refinancing. Basically, this occurs when refinancing costs are “recovered” through the lowest monthly mortgage payment.
Victoria Araj is a section editor at Rocket Mortgage and has held positions in mortgage banking, public relations and more during her more than 15 years with the company. The main difference between refinancing and modifying a loan is that refinancing gives you a new mortgage, while the modification modifies your current conditions to add late payments to your balance in order to help you stay in your home. Maybe you originally took out an adjustable rate mortgage (ARM) to save on interest, but you'd like to refinance your ARM to convert it to a fixed-rate mortgage while rates are low.
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