Simple Real Estate Definitions : Refinance
A mortgage is a contract between a bank and borrower, defining the terms by which a home loan must be repaid.
The paperwork, signed by both parties, includes provisions for things like:
- The interest rate
- The length of the loan
- The amount of money to be borrowed
But, like all loans, a mortgage loan can be paid off at any time. So, when market interest rates fall, homeowners will often exercise their right to an “early payoff” by securing a new loan that pays off the old one.
This process is most commonly known as a refinance.
A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment. When the refinance process is complete, the original lender’s loan is paid in full using the money from the new lender’s loan and the former’s relationship is officially terminated.
There’s no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense. In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision.
However, there are other reasons to refinance, too, including:
- To convert from an ARM into a fixed rate mortgage (or vice versa)
- To extract equity for paying off third-party debts or for cash
- To extend a loan from 15 years to 30 year for payment relief
Because there are fewer third-parties involved with a refinance, it’s often simpler and less expensive than a comparable purchase transaction. The paperwork stack is often smaller, too.