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.

Question

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?

In: 293

Answer 1

I buy a house for $500k, put $100k down and get a mortgage for $400k at 10% interest. 5 years later, I’ve paid off $50k of the $400k, so I now own $150k of the house and have $350k left on the mortgage. Rates drop to 1%. I take out a new mortgage for $350k at 1% interest. I use that $350k to pay the $350k left on the first mortgage. Now the first mortgage is paid off, and I’m left with a $350k loan charging 1% interest. At a very high level that’s the basics.