I can’t quite wrap my head around this so anything will be appreciated.
So if a company ‘buys’ a property for me with the expectation of me paying it back, when I switch mortgage companies, does the new company pay off the debt to the old company? How does it transfer over?
In: 13
The payoff to the old lender usually comes from the new lender, and becomes part of the money you owe them. Say you wanted to get $50,000 from your mortgage, and owed $150,000 on the property. You would need to take a $200,000 loan, then use $150,000 to pay off the old loan and keep $50,000, and owe the new lender $200,000.
Mortgage is transferred by means of a payoff of the principal. So whatever you still owe, the new lender assumes and then you pay the new lender the principal and interest.
Rates are HIGH right now, are you refinancing?
Yes, the new company pays off the debt to the old company. A couple of things happen at the same time. The old company releases their lien (their ability to take your house if you don’t pay the loan) and the new company gets a lien established. The new company would usually want assurances that the house will still *exist* for them to take it in case you stop making payments – for example they’d do an inspection/appraisal and they’d need proof that you have insurance, and they would often make arrangements to handle the insurance so you can’t stop paying *that*. Basically all the same details you had to work out when you bought the home in the first place.
For this reason it is typically expensive and requires sitting down with a lawyer and representative from the bank(s), just like purchasing a new house, rather than being a quick process like applying for a credit card online.
Yes, a new mortgage lender pays off the balance of the loan with the previous mortgage lender. And you now owe the balance to the new lender.
As far as the old lender is concerned, having a mortgage paid off because of refinancing is no different from a mortgage being paid off due to a house being sold. Mortgages very commonly get paid off before the loan matures (typically 15 or 30 years) for a variety of factors like a house being sold, owner death, refinancing.
A mortgage is you saying “hey bank, can you give me money to buy a house so I can pay you back over time?”
A refinance is “hey other bank, I see your rates are cheaper, can you give me money to pay off this mortgage and I will pay you back at the lower rate? “
The first bank didn’t buy the house. You did. They just lent you the money, with a clause that if you seen the house you have to pay them back the balance immediately.
Then another bank offers you a better deal, lower interest rates or whatever.
You take a loan from the second bank. But they want the condition about you not seeing the house without paying them off. So the lawyers do a dance where you have to use the new loan money to pay off the first bank, and the rule about having to pay off the loan if you sell moves to the new bank.
The company does not “Buy” the property for you, they grant you a loan which you use to buy the property. However you are using the value of the property as collateral against the loan if you were to stop paying.
When you get to the end of the fixed rate you can repay the loan in full with no penalties. If you get a new fixed rate mortgage this is what is done, whether with a new company or not. lets say you have a mortgage with company A for $500K and after the fixed rate you have paid it down to $480K. You get Company B to give you a mortgage for $480K and they will pay off your first mortgage, and take the place of Company A.
Latest Answers