Ask a Mortgage Banker: What Is a Refinance?
Ask a Mortgage Banker: What Is a Refinance?
A refinance replaces your current loan with a new loan; that new loan pays off the debt of the old loan. So, you are trading your loan in for one with better terms. For example, if there is something that you don’t like about your current loan, you may qualify for a loan with different terms and by refinancing eliminate the terms you dislike. Refinancing, as with anything, has benefits and detriments.
One benefit to refinancing is it could save you money by refinancing into a loan with a lower interest rate that your current interest rate. This is especially true if you have a long-term loan at a large dollar amount. Another benefit to refinancing is it could lead to lower monthly payments. After all, your new loan amount will likely be less than when you first purchased the home and because you are getting a whole new loan you could repay over a longer time frame, thus lowering your monthly payment.
Refinancing has many great benefits but there are a couple things to be mindful of. When refinancing, a new loan is being processed so just like your first one, there are transaction costs—appraisal fees, closing costs, etc.; talk with your mortgage banker so you can be fully prepared when it comes time to close on the refinance. Also, make yourself aware of interest rates, refinancing may reduce your monthly payment but increase the amount paid over time because the interest rate is higher than your current one. Based on your circumstances, it may make sense to refinance at a higher interest rate to reduce the monthly bill but be sure you understand fully, how that will affect the life of the loan.