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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When you refinance a mortgage, you’re just paying off the previous mortgage and getting a new one. Sort of like if you sold your house and paid back the mortgage, and bought a new house with a new mortgage, but you’re not moving. The new mortgage lender pays the old lender your balance, and then your balance is with the new lender.
So Bank A gave you a mortgage for $300k at 5% interest when you bought your house 5 years ago, paying $360k for the house (and putting 20% down). Now, you see rates are 3% which would save you a ton in interest. Your current balance on that first loan is now down to $270k, so your new lender pays the old lender $270k to pay off that loan, and now you start a new $270k loan at 3% with the new lender.
Now let’s say your home has jumped in value to $600k. So your $270k loan would be less than half the home’s value. But you can easily borrow up to 80% of the home’s value on the new mortgage, which in your case would be $480k. Since only $270k needed to go to the old lender, you could pull out up to $210k and use that as a down payment on a rental property, home remodeling, etc. So maybe you decide to take out $100k, increase your mortgage balance to $370k and use half to remodel your kitchen and half as down payment on a $200k rental home.
With the lower rate, even the higher mortgage is still about the same monthly payment as before, and the rent on the other house covers the mortgage there.
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