Demystifying Real Estate: What is Refinancing?

Posted on: October 4, 2019

What is refinancing a home mortgage?

This is one of the more simpler real estate terms to demystify. Everybody has an idea of what it means to refinance a mortgage. However, there are some people that have never had a mortgage who are thinking about refinancing for the first time, and they just don’t understand what it all means.

Refinancing is the process of replacing an existing home mortgage with a new loan.

The home loan you have with a lending institution is essentially the debt you have against your house. The act of refinancing is paying off that mortgage entirely with a new loan that usually has better terms for you.

For example, if you are paying 5% interest on a loan that you obtained when you first bought your home three years ago, but current interest rates are over 1% lower than when you obtained your original loan, refinancing and getting a new loan can lower your monthly payments.

When refinancing, most people reset the number of years that they need to pay off their house.

So, if you initially obtained a 30-year fixed-rate mortgage three years ago, you have 27 years left to pay off your loan. When you refinance, you get another 30-year loan.

Why would you want to sign up for another 30 years of paying for your home?

Because you can lower your monthly payment. You are not required to sign up for a 30-year loan, but keep in mind that the fewer years you sign up for, the higher your monthly payment will be.

Cash-Out Refinancing

In some scenarios, such as if you have equity built up in your home, you can pull cash out. This is called a cash-out refinance, where you pull a certain amount of equity out of your home. This increases the amount of debt that you owe (and causes your payment to fluctuate accordingly), but it is one way in the refinancing process where you can get cash on hand.

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