Mortgage Loan vs. Mortgage Refinancing
What's the Deal?
A mortgage is the initial loan you take out to purchase a property. A mortgage refinance involves replacing the existing mortgage with a new one. Refinancing is often used to secure lower interest rates, change the loan term, or to tap into home equity. It can lead to lower monthly payments, reduce the total interest paid, or provide quick access to cash for major expenses.
When to Consider Refinancing
You should consider refinancing your mortgage when you can secure a significantly lower interest rate than your current one, potentially reducing your monthly payments by hundreds of dollars. There are several ways you might secure a lower rate, including low-trending market rates, a significant improvement in your credit score, a reduction in your overall debts, or some other sort of change in your finances.
Refinancing is also a great way to to switch from an adjustable-rate mortgage to a fixed-rate mortgage to gain stability in your payments. Or, if you want to change the loan term to either pay off the loan faster or extend it for lower monthly payments. It's also worth considering refinancing if you have built substantial home equity and need access to cash for major expenses like home improvements, education, or debt consolidation.
Mortgage Terms
When discussing mortgages and mortgage refinancing, it's important to understand mortgage terms. A mortgage term is the duration over which you commit to paying off your home loan, typically 15, 20, or 30 years.
15-Year Mortgage
A 15-year mortgage term typically offers lower interest rates compared to longer terms. The shorter time frame results in higher monthly payments, but it also means you'll own your home in half the time. This is a popular choice for those who can comfortably manage the higher monthly payments and want to build equity fast.
30-Year Mortgage
The 30-year mortgage term provides lower monthly payments, making it more affordable for many homebuyers. However, it also means paying more interest over the life of the loan. This extended term is suitable for those seeking lower monthly financial commitments and are willing to accumulate more interest.
20-Year Mortgage
The 20-year mortgage term strikes a balance between the 15-year and 30-year options. It offers moderate monthly payments and a shorter time frame than the 30-year term. This is an attractive choice for those who want to build equity at a faster pace while keeping monthly payments manageable.
Mortgage and Refinancing Costs
Mortgage Costs
When you secure a mortgage, you'll owe costs beyond just the loan amount such as the down payment, closing costs, and ongoing expenses like property taxes and homeowners insurance. The down payment is a percentage of the home's purchase price that you pay upfront, typically ranging from 3% to 20% of the home's price. Mortgage closing costs typically range from 2% to 6% of the total loan amount and include fees for services like appraisals, title searches, and attorney fees.
Refinancing Costs
Refinancing, or replacing your existing mortgage with a new one, also involves costs. These may include application fees, appraisal fees, title insurance, and lender fees. Similar to mortgage loan, refinancing closing costs average between 2% to 6% of the loan amount. To determine whether refinancing is financially beneficial, you'll want to compare these costs with the potential savings of refinancing.
Second Mortgages
A second mortgage is often confused with refinancing because both involve borrowing against the equity in your home, but while a second mortgage adds a new loan to your existing mortgage, refinancing replaces your current mortgage with a new one.
Home Equity Loan
A home equity loan is a second mortgage that allows you to borrow against the equity in your home. Equity is the difference between the current value of your home and the remaining balance on your first mortgage. Home equity loans provide a lump sum of money, often with a fixed interest rate. They are commonly used for large expenses like home improvements, debt consolidation, emergency funds, or major life events.
Home Equity Line of Credit (HELOC)
A HELOC is another type of second mortgage that allows you to access a line of credit based on your home's equity. Unlike a home equity loan, a HELOC provides a flexible source of funds that you can draw on as needed. You only pay interest on the amount you've borrowed. HELOCs are commonly used for ongoing expenses like education costs or home renovation projects.
Considering Refinancing
Understanding the differences between mortgages and mortgage refinancing could save you tens of thousands over the life of your loan. When it comes time for you to consider refinancing, be sure to carefully evaluate the difference in costs to determine whether a mortgage refinance will benefit your overall finances.
