What Exactly is a Refinance?

We constantly talk about how refinance can benefit borrowers, but the term refinance seems to be a little confusing to many people.  Refinancing a mortgage loan replaces the existing mortgage loan with a new mortgage loan.  You may have the same lender or a new lender, but your previous mortgage loan is paid off by the funds from the new mortgage loan and closed. The monthly payments you make must be sent to the new mortgage company to pay the new mortgage account. 

People usually refinance to either get a new mortgage loan with more beneficial terms than their existing mortgage, or to take more cash out of their home’s value in order to use the money to either improve the home or for other purposes, such as paying their child’s college tuition.  Refinancing for better terms is referred to as a rate and term refinance.  A limited cash-out rate and term refinance, allows you to take out a limited amount of money, just enough to pay for the loan’s closing costs, if any.  Mortgage Loans refinanced to liquidate some or all of the home’s available equity are referred to as a cash-out home improvement mortgage, a cash-out debt consolidation mortgage, or a cash-out “other”.

Each time a mortgage is refinanced, the new mortgage payment statements will show a different breakdown of how much of your monthly payment goes to the principal balance, how much is applied to interest due, and how much covers escrows.  Escrow is the account holding your monthly incremental payments for funds which will pay your property taxes and/or insurance bill.  If you are in a fixed rate mortgage, the mortgage portion of your payment will remain the same, but the escrow portion usually will increase over time.  You can monitor this, and if your property insurance jumps, you can call your agent to revisit coverage or you can look for new insurance that fits in your budget.  The amount of your monthly payment that goes to interest is higher in the beginning of the loan than later in the mortgage term.

There is a cost to refinance, either in closing costs, or buried in the loan amount or interest rate.  If you recently refinanced, and you are considering a rate and term refinance, think carefully before you jump at new rates.  It usually takes a couple of years before the savings offsets the costs.  CalcXML recommends only refinancing if the interest rate drops 2% or more, but as a general rule of thumb, if the interest rate will drop 1% or more, and you are still in the early years of the mortgage, refinancing is worth it and will save you significant money over the term of the loan.

At homerefinetwork.com we match you to loan professionals who are adept at handling financial situations like yours, and who can advise you on when it makes sense for you to refinance.  Come see us today at www.homerefinetwork.com to find out how much you can save.

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