Am I the only one who doesn’t understand how mortgage refinancing works? I’m having trouble understanding how a loan instrument can be used to purchase more properties or even negotiate better rates.

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How are these advantages possible AFTER a mortgage has been signed? Help needed as I’m trying to wrap my head around financial mechanisms – why is this a thing and under what circumstances/ conditions does a refinancing make the most sense to use?

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Anonymous 0 Comments

Refinancing is basically using a new loan to repay an old loan. Let’s say I take out a 30 year $200,000 mortgage on a $220,000 house with a 5% rate and make monthly payments for 10 years. After 10 years, the house’s value has increased to $300,000 and the mortgage balance is $140,000. Also, interest rates (for me and this house) are now closer to 3.5%.

So now I have a house with $160K in equity (what I would be left with if I sold it today after using sales proceeds to pay off the existing loan), and a $140,000 mortgage balance with a 5% interest rate. I could just leave things as they are and continue to make mortgage payments for 20 years. Or I could get a new loan at a lower rate for at least what’s needed to repay the existing loan. I likely can get a new loan for a lot more than the amount of the old mortgage – probably $100,00 more – and use that additional money for just about anything I want. And because the interest rate is significantly lower, it may not cost me more on a monthly cash flow basis to carry the new mortgage than it did to carry the old one (but I have a lot more cash on hand).

Anonymous 0 Comments

You take out a new loan with a better rate. You use the new loan to pay off the old loan. That’s it.

It’s like taking out a proper loan from a bank to pay off a high-interest credit card.

You can pay off loans early. People often don’t because they don’t have the money (that’s why they took out the loan). A “second mortgage” is the same idea but you get extra cash on top of it if the house has appreciated in value.

Anonymous 0 Comments

You take out a new loan with a better rate. You use the new loan to pay off the old loan. That’s it.

It’s like taking out a proper loan from a bank to pay off a high-interest credit card.

You can pay off loans early. People often don’t because they don’t have the money (that’s why they took out the loan). A “second mortgage” is the same idea but you get extra cash on top of it if the house has appreciated in value.

Anonymous 0 Comments

You take out a new loan with a better rate. You use the new loan to pay off the old loan. That’s it.

It’s like taking out a proper loan from a bank to pay off a high-interest credit card.

You can pay off loans early. People often don’t because they don’t have the money (that’s why they took out the loan). A “second mortgage” is the same idea but you get extra cash on top of it if the house has appreciated in value.

Anonymous 0 Comments

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Anonymous 0 Comments

Okay.

You buy a house for £100,000. You get a 10% mortgage – you pay a £10,000 deposit, and mortgage the remaining £90,000. You decide to pay your mortgage back over 10 years, at £750 per month (Ignoring mortgage interest for the sake of simplicity. Note also that these figures are wildly out of step with reality for most house purchases).

A mortgage is simply a loan secured against a piece of property – almost always used to purchase the property in question.

Cut to 5 years later. You have paid 5*12=60 payments of £750 towards your mortgage, for a total of £45,000 repaid. Your remaining outstanding mortgaged amount is £45,000 (£90,000-£45,000=£45,000).

By paying a 10% deposit, then repaying 50% of the mortgaged amount, you now own 60% of the property completely free of finance. The remaining 40% is still mortgaged. This isn’t *literally* true, but it can be helpful to think of it that way.

Five years have passed since you bought the house. You get your house re-valued, because you’ve made some improvements to the house in that time, and the housing market has also changed.

Congrats, your house has increased in value! It’s now worth £130,000, £30,000 more than you bought it for!

You decide you want to re-mortgage (e.g., move your mortgage to a new financial provider) to try and get a cheaper interest rate.

You reach out a new mortgage supplier. You tell them (simplified):

**”I own 60% of this £130,000 house. I am looking to re-mortgage the remaining 40%, valued at £52,000.”**

You find a mortgage company who is willing to do business with you. They offer you a mortgage of £52,000 at a competitive interest rate. You accept it.

Remember, though… under the terms of your *original* mortgage, you only had £45,000 left to pay off. You’ve *gained* £7,000, because your house is more valuable than it was when you bought it.

Anonymous 0 Comments

Okay.

You buy a house for £100,000. You get a 10% mortgage – you pay a £10,000 deposit, and mortgage the remaining £90,000. You decide to pay your mortgage back over 10 years, at £750 per month (Ignoring mortgage interest for the sake of simplicity. Note also that these figures are wildly out of step with reality for most house purchases).

A mortgage is simply a loan secured against a piece of property – almost always used to purchase the property in question.

Cut to 5 years later. You have paid 5*12=60 payments of £750 towards your mortgage, for a total of £45,000 repaid. Your remaining outstanding mortgaged amount is £45,000 (£90,000-£45,000=£45,000).

By paying a 10% deposit, then repaying 50% of the mortgaged amount, you now own 60% of the property completely free of finance. The remaining 40% is still mortgaged. This isn’t *literally* true, but it can be helpful to think of it that way.

Five years have passed since you bought the house. You get your house re-valued, because you’ve made some improvements to the house in that time, and the housing market has also changed.

Congrats, your house has increased in value! It’s now worth £130,000, £30,000 more than you bought it for!

You decide you want to re-mortgage (e.g., move your mortgage to a new financial provider) to try and get a cheaper interest rate.

You reach out a new mortgage supplier. You tell them (simplified):

**”I own 60% of this £130,000 house. I am looking to re-mortgage the remaining 40%, valued at £52,000.”**

You find a mortgage company who is willing to do business with you. They offer you a mortgage of £52,000 at a competitive interest rate. You accept it.

Remember, though… under the terms of your *original* mortgage, you only had £45,000 left to pay off. You’ve *gained* £7,000, because your house is more valuable than it was when you bought it.

Anonymous 0 Comments

Okay.

You buy a house for £100,000. You get a 10% mortgage – you pay a £10,000 deposit, and mortgage the remaining £90,000. You decide to pay your mortgage back over 10 years, at £750 per month (Ignoring mortgage interest for the sake of simplicity. Note also that these figures are wildly out of step with reality for most house purchases).

A mortgage is simply a loan secured against a piece of property – almost always used to purchase the property in question.

Cut to 5 years later. You have paid 5*12=60 payments of £750 towards your mortgage, for a total of £45,000 repaid. Your remaining outstanding mortgaged amount is £45,000 (£90,000-£45,000=£45,000).

By paying a 10% deposit, then repaying 50% of the mortgaged amount, you now own 60% of the property completely free of finance. The remaining 40% is still mortgaged. This isn’t *literally* true, but it can be helpful to think of it that way.

Five years have passed since you bought the house. You get your house re-valued, because you’ve made some improvements to the house in that time, and the housing market has also changed.

Congrats, your house has increased in value! It’s now worth £130,000, £30,000 more than you bought it for!

You decide you want to re-mortgage (e.g., move your mortgage to a new financial provider) to try and get a cheaper interest rate.

You reach out a new mortgage supplier. You tell them (simplified):

**”I own 60% of this £130,000 house. I am looking to re-mortgage the remaining 40%, valued at £52,000.”**

You find a mortgage company who is willing to do business with you. They offer you a mortgage of £52,000 at a competitive interest rate. You accept it.

Remember, though… under the terms of your *original* mortgage, you only had £45,000 left to pay off. You’ve *gained* £7,000, because your house is more valuable than it was when you bought it.

Anonymous 0 Comments

Refinancing is basically using a new loan to repay an old loan. Let’s say I take out a 30 year $200,000 mortgage on a $220,000 house with a 5% rate and make monthly payments for 10 years. After 10 years, the house’s value has increased to $300,000 and the mortgage balance is $140,000. Also, interest rates (for me and this house) are now closer to 3.5%.

So now I have a house with $160K in equity (what I would be left with if I sold it today after using sales proceeds to pay off the existing loan), and a $140,000 mortgage balance with a 5% interest rate. I could just leave things as they are and continue to make mortgage payments for 20 years. Or I could get a new loan at a lower rate for at least what’s needed to repay the existing loan. I likely can get a new loan for a lot more than the amount of the old mortgage – probably $100,00 more – and use that additional money for just about anything I want. And because the interest rate is significantly lower, it may not cost me more on a monthly cash flow basis to carry the new mortgage than it did to carry the old one (but I have a lot more cash on hand).

Anonymous 0 Comments

Refinancing is basically using a new loan to repay an old loan. Let’s say I take out a 30 year $200,000 mortgage on a $220,000 house with a 5% rate and make monthly payments for 10 years. After 10 years, the house’s value has increased to $300,000 and the mortgage balance is $140,000. Also, interest rates (for me and this house) are now closer to 3.5%.

So now I have a house with $160K in equity (what I would be left with if I sold it today after using sales proceeds to pay off the existing loan), and a $140,000 mortgage balance with a 5% interest rate. I could just leave things as they are and continue to make mortgage payments for 20 years. Or I could get a new loan at a lower rate for at least what’s needed to repay the existing loan. I likely can get a new loan for a lot more than the amount of the old mortgage – probably $100,00 more – and use that additional money for just about anything I want. And because the interest rate is significantly lower, it may not cost me more on a monthly cash flow basis to carry the new mortgage than it did to carry the old one (but I have a lot more cash on hand).

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