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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ELI5: you buy a house and the value of the property increases over time. That means that you own the difference between what you still owe on the current mortgage and the value of the property. So if your current mortgage is 100 thousand and the house is now worth 200 thousand you have 100 thousand that is yours. Another way to say it is that you have 100 thousand in equity. You can use a portion of that 100 thousand equity as a down payment on another house. You access the down payment money by taking out a loan on the house you currently own. (There are different kinds of loans you can take out, depending on the situation) You then apply for a loan on the new property. The question then becomes how do you pay for the loan on your new property. This depends on your income and whether the new property is a vacation home or rental property.
ELI5: you buy a house and the value of the property increases over time. That means that you own the difference between what you still owe on the current mortgage and the value of the property. So if your current mortgage is 100 thousand and the house is now worth 200 thousand you have 100 thousand that is yours. Another way to say it is that you have 100 thousand in equity. You can use a portion of that 100 thousand equity as a down payment on another house. You access the down payment money by taking out a loan on the house you currently own. (There are different kinds of loans you can take out, depending on the situation) You then apply for a loan on the new property. The question then becomes how do you pay for the loan on your new property. This depends on your income and whether the new property is a vacation home or rental property.
ELI5: you buy a house and the value of the property increases over time. That means that you own the difference between what you still owe on the current mortgage and the value of the property. So if your current mortgage is 100 thousand and the house is now worth 200 thousand you have 100 thousand that is yours. Another way to say it is that you have 100 thousand in equity. You can use a portion of that 100 thousand equity as a down payment on another house. You access the down payment money by taking out a loan on the house you currently own. (There are different kinds of loans you can take out, depending on the situation) You then apply for a loan on the new property. The question then becomes how do you pay for the loan on your new property. This depends on your income and whether the new property is a vacation home or rental property.
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Mortgage refinancing is when you replace your current home loan with a new loan from another provider.
You do this to get better loan terms, like a lower interest rate or a shorter loan period. When you refinance, you pay off your old loan with the new one.
Then, you make payments on the new loan until it’s paid off or you refinance again.
Mortgage refinancing is when you replace your current home loan with a new loan from another provider.
You do this to get better loan terms, like a lower interest rate or a shorter loan period. When you refinance, you pay off your old loan with the new one.
Then, you make payments on the new loan until it’s paid off or you refinance again.
Mortgage refinancing is when you replace your current home loan with a new loan from another provider.
You do this to get better loan terms, like a lower interest rate or a shorter loan period. When you refinance, you pay off your old loan with the new one.
Then, you make payments on the new loan until it’s paid off or you refinance again.
Mortgage Refinancing, as you already understand, is nothing more than taking out a new loan on a home, while it still has a current loan on it, and using the new loan to pay off the current loan.
So on the surface, you would think “What even is the point? Wouldnt I still have a loan I have to pay off? How is this advantageous in any way?”. All valid questions, but there are actually multiple advantages / reasons not readily apparent which ill share a couple.
But before I share those reasons, there is one additional thing to remember: Equity. Equity is essentially the difference between how much your home is worth vs how much you owe on your mortgage. And this equity is also a factor when deciding to refinance.
**Advantage #1: Reducing your interest rate**
When you buy a home, MOST of the time, your interest rate is locked in at time of purchase (*unless one stupidly went with one of those “variable” rate loans*), and its stuck at that rate for the life of the loan, which is anywhere between 15 – 30 years. Interest rates fluctuate constantly (*for example: in early 2021, interest rates had dropped to <3%. Currently today, interest rates are around 7.5%*), so if your got your mortgage at time when interest rates were high, choosing to refinance with a new loan at a much lower rate is advantageous.
For example: when my wife and I purchased our home in Jan of 2019, we purchased it for $280k at 4.3% interest, with only a 10% down. During the early days of Covid in mid-2020, interest rates had dropped to <3%. Refinancing so soon after purchasing the home the year before was advantageous for us to get a better interest rate (*as well as remove PMI*), since we can get a brand new loan at the lower interest rate of our current 3.35%.
**Advantage #2: Access to huge amounts of cash**
When you refinance a mortgage, you are borrowing against what you still owe on your current loan, not for the full value of the home.
But, this is where Equity comes in. If you were so inclined, you could increase the amount you want to borrow on the new loan up to the current value of the home, by borrowing against your Equity, in which case, you would use the new loan to pay off the old one and then you can pocket / keep whatever is left over.
For example: My home is currently valued at $489k. Wife and I have a principal of $236k. If the wife and I wanted to, we could refinance our mortgage for, say, $450k (*at whatever the current interest rate is right now*). We would then take that $450k, first be required to pay off the $236k of the old loan, and then we get to keep the $214k left over… to spend it however we want to.
This is “cashing in on your Equity”. Granted, were now stuck on a brand new loan of $450k that we now have to pay off, but we have over $200k cash, right now, that we can use to: purchase more property and rent it out as additional income, or invest it in some risky high-yield bonds, or even head over to Las Vegas and gamble it all away, hoping to score a huge jackpot!
So its advantageous to refinance if you need large amounts of cash.
Mortgage Refinancing, as you already understand, is nothing more than taking out a new loan on a home, while it still has a current loan on it, and using the new loan to pay off the current loan.
So on the surface, you would think “What even is the point? Wouldnt I still have a loan I have to pay off? How is this advantageous in any way?”. All valid questions, but there are actually multiple advantages / reasons not readily apparent which ill share a couple.
But before I share those reasons, there is one additional thing to remember: Equity. Equity is essentially the difference between how much your home is worth vs how much you owe on your mortgage. And this equity is also a factor when deciding to refinance.
**Advantage #1: Reducing your interest rate**
When you buy a home, MOST of the time, your interest rate is locked in at time of purchase (*unless one stupidly went with one of those “variable” rate loans*), and its stuck at that rate for the life of the loan, which is anywhere between 15 – 30 years. Interest rates fluctuate constantly (*for example: in early 2021, interest rates had dropped to <3%. Currently today, interest rates are around 7.5%*), so if your got your mortgage at time when interest rates were high, choosing to refinance with a new loan at a much lower rate is advantageous.
For example: when my wife and I purchased our home in Jan of 2019, we purchased it for $280k at 4.3% interest, with only a 10% down. During the early days of Covid in mid-2020, interest rates had dropped to <3%. Refinancing so soon after purchasing the home the year before was advantageous for us to get a better interest rate (*as well as remove PMI*), since we can get a brand new loan at the lower interest rate of our current 3.35%.
**Advantage #2: Access to huge amounts of cash**
When you refinance a mortgage, you are borrowing against what you still owe on your current loan, not for the full value of the home.
But, this is where Equity comes in. If you were so inclined, you could increase the amount you want to borrow on the new loan up to the current value of the home, by borrowing against your Equity, in which case, you would use the new loan to pay off the old one and then you can pocket / keep whatever is left over.
For example: My home is currently valued at $489k. Wife and I have a principal of $236k. If the wife and I wanted to, we could refinance our mortgage for, say, $450k (*at whatever the current interest rate is right now*). We would then take that $450k, first be required to pay off the $236k of the old loan, and then we get to keep the $214k left over… to spend it however we want to.
This is “cashing in on your Equity”. Granted, were now stuck on a brand new loan of $450k that we now have to pay off, but we have over $200k cash, right now, that we can use to: purchase more property and rent it out as additional income, or invest it in some risky high-yield bonds, or even head over to Las Vegas and gamble it all away, hoping to score a huge jackpot!
So its advantageous to refinance if you need large amounts of cash.
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