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
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).
Latest Answers