What does "Refinance" mean?

Definition

To refinance is to replace your existing mortgage with a new one. People refinance to get a lower interest rate, change their loan term, or convert their home equity into cash.

Understanding Mortgage Refinancing

Refinancing typically comes into play when homeowners want to adjust their mortgage terms. It involves replacing an existing loan with a new one, often to get a different interest rate or loan term. For instance, if a homeowner has a $200,000 mortgage at a 5% interest rate, refinancing to a 4% rate can change monthly payments. It's not an automatic approval or guaranteed savings, and it doesn't erase the original mortgage obligations. Understanding the reasons and outcomes is key before proceeding, as it's a strategic financial decision rather than a quick fix.

People Want To Know

Is it a good idea to refinance a mortgage?

Refinancing a mortgage can be beneficial if you secure a lower interest rate, reduce your loan term, or access home equity as cash. A good rule of thumb is to refinance if you can lower your interest rate by at least 0.5% to 1%. Evaluate your current loan terms, associated fees, and your long-term financial goals to determine if refinancing is advantageous.

How much does it cost to refinance a 300k mortgage?

Refinancing a $300,000 mortgage typically costs between $3,000 and $6,000. This includes fees such as application, appraisal, title search, and closing costs, which usually amount to 1% to 2% of the loan amount.

How does a refinance work?

Refinancing replaces your existing mortgage with a new one. You apply for a new loan, which pays off the old mortgage. The new loan can offer a lower interest rate, change the loan term, or allow you to access your home equity as cash. Closing costs typically range from 2% to 5% of the loan amount.

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More From The Mortgage Glossary

Repayment period

The repayment period is the length of time you have to repay a loan. For a mortgage, it's the full loan term. For a HELOC, it's the period after the draw period ends, when you can no longer borrow money.

Reverse mortgage

A reverse mortgage is a loan for older homeowners that allows them to borrow against their home’s equity. The lender pays the homeowner, increasing the loan balance, and the loan is repaid when the homeowner sells the home or passes away.

Right of first refusal (ROFR)

The right of first refusal is a legal right that gives a person the chance to purchase a property before it is offered to anyone else. It is often found in rental agreements.