Homeownership 101: What Does it Mean to Refinance?
Smart Money

Homeownership 101: What Does it Mean to Refinance?

Posted: 06/13/2018

By Amanda Abella

As a homeowner, you may hear the word “refinance" quite a bit, but what does it actually mean?

In this article, we're going to break down what it means to refinance your mortgage. We'll also discuss why people choose to do it and what the process looks like.

What does it mean to refinance a mortgage loan?

Refinancing a mortgage loan is the process of replacing an existing mortgage with a new mortgage with new terms that meet a borrower's needs or goals. For example, a borrower may choose to replace an existing mortgage with a shorter- or longer-term mortgage depending upon his or her financial circumstances and needs.

The new mortgage terms depend on the borrower's current financial circumstances and financial goals.

Why do people choose to refinance a mortgage loan?

There are several reasons why someone may choose to refinance their mortgage. One common reason is to pay off their home sooner than anticipated with a shorter term. Another common reason is to save money on interest payments by switching to a shorter-term mortgage, essentially paying off the loan faster. Other reasons include refinancing to lower monthly payment amounts or to access needed cash.

What are the different types of refinancing options?

The most common type of refinancing is a rate-and-term. This is when the original loan is replaced with another loan with a rate and terms that make way for lower interest payments.

There is also a cash-out refinance option which allows the borrower to gain access to cash equal to the value of the home minus the current loan amount. The loan amount increases, but you receive cash equal to some portion of the difference between the value of the home and the current loan amount, without having to sell your home.

What does the process look like?

In many ways, the process of refinancing a mortgage is the same as taking out a new mortgage.

When you choose to refinance a mortgage, you are basically taking out a new loan. This means you are usually subject to the same requirements that were present when you took out the original mortgage. This includes an evaluation of credit worthiness, employment history, assets and cash reserves.

Overall, a refinance is a good idea for many looking for new terms to achieve financial goals like getting access to cash or paying off a mortgage quicker. The process also isn't as tedious as one might assume. If you think it's the right time to refinance, ask your loan officer about which refinance option is right for you.

Amanda Abella is a writer and Amazon bestselling author of Make Money Your Honey. She specializes in millennials, personal finance, credit cards, debt, student loans, budgets, investing and business.

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