How does refinancing work?

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My parents recently suggested I refinance my home to help with some of my debt, but how does that help/work?

I bought my house in 2020 for roughly 275,000 its current market value is close to 400,000. From my understanding I can use the difference in value to help pay for the loan, but how exactly does that work? And how do I go about it?

In: Economics

9 Answers

Anonymous 0 Comments

The traditional way of doing it is that you take out a new mortgage on the property for the amount you still owe and use that to pay off original, essentially restarting your term with a lower amount making for a lower monthly payment.

If you have high interest unsecured debts you could roll those in and probably end up paying less each month than servicing them all separately.

Anonymous 0 Comments

Unless this is credit card debt your parents are morons.

ELI5: Essentially you are redoing the mortgage in a very similar (slightly less complicated) fashion to when you bought the house but since the house is now worth more you could potentially borrow more. There are going to be thousands in fees, you will not get an interest rate anywhere close to your 2020 rate (ie owe 100k+ more over the life of the loan), have significantly higher monthly payments and tack on an additional four years to pay off if you’re making minimum payments.

Anonymous 0 Comments

Approach a bank.

Let’s say when you bought it for 275k with a mortgage of 200k and deposit of 75k

That’s a loan of 73% of the value.

You might now be able to get revalued and get a mortgage of 220k which 55% of the value. The bank is still happy, because they know that if you default they’ll be able to get their money back by selling.

Anonymous 0 Comments

What’s your interest rate!?!? What your parents recommended might have worked in 2020 on a home purchased in 2015 as rates fell, but now it’s probably not a good idea. Rates in 2020 were typically in the 3% range, and now they’re over 7%.

Re-financing is getting a new lender to pay off your current loan, and issuing a new mortgage you begin paying. This is typically done to lower your interest rate and lower your payments as a result.

And if you need more money (say you want to remodel the kitchen), you can do a “cash out” refinancing where you take out a mortgage larger than the current amount owed to pay off your old mortgage, so long as it’s under 80% of the current home value. Let’s say your original loan was for $247.5k (10% down) and still owe $200k on your mortgage. But you could borrow up to $320k, so you could pull out $120k in equity if you wanted, but you’d have a bigger mortgage payment on the $320k loan than on your previous, smaller mortgage.

But I suspect your interest rate you currently have is WAY lower than a new loan would be, and your payment would skyrocket if you refinanced. Like it could double between the larger amount and higher interest rate.

Anonymous 0 Comments

Would not refinance a 2020 mortgage interest rate into a 2024 interest. If you have crazy high debt, find another way to pay that down.

ELI5:

You bought a rock in 2020 for $275. The bank loans you $275 at 3% interest. It’s now 2024 and your rock is worth $400, but you still owe $225 on it. You need some money to paint your rock, and it’s going to cost $50. You go to the bank and get a loan for $50 to paint your rock. The bank gives you $50, but also charges you $2 extra to process. Also, the bank now wants 8% interest instead of 3.

Anonymous 0 Comments

Refinancing literally means to redo the financing. Usually on a house or a car.

Let’s say you got a 30yr mortgage at 8%, then 5yrs later you qualify for a better interest rate of 5% (either your credit score and/or the economy is better), you pay a refinancing fee (either upfront or rolled into the mortgage) and now your remaining payments are at 5% interest instead of 8% which means lower monthly payments and less interest paid.

Now, many times refinancing also recasts/reforecasts, so in the above scenario it restarts the 30yr clock so a total of 35yrs (you could maintain you previous monthly payments to pay off early).

The main thing to consider is what the refinancing fee will be and what interest rate will you get. Interest rates are higher than they were 2 years ago, when I bought, so it’d be foolish to refinance (I’d hope the bank would even stop me from doing so).

Anonymous 0 Comments

You bought your house for $275k.

You’re going to sign a new mortgage for $400k, while taking the difference (~125K) in cash.

Because you’re borrowing more money this time, your mortgage payment is going to go up. Also, the interest rate is likely much higher, so that’ll increase the payment.

Overall, doesn’t sound like a great idea unless you’ve dealt with the underlying issues that caused you to go into debt in the first place, AND can afford a massive increase in your house payment.

Anonymous 0 Comments

Refinancing is basically taking a new loan (mortgage) to pay off your old loan. There is nothing particularly special about it – go to a bank or credit union and talk to a loan officer. The process is pretty much identical to the original mortgage.

There are several (relatively good) reasons to do this.

a) Interest rates have fallen and you can refinance basically the same amount and pay less interest. Mortgage loans have pretty high up front fees so the interest rate savings would need to be substantial for this to really make sense. Be careful because lots of banks try to attract the borrower by “LOWER YOUR MONTHLY PAYMENT” but hide the fees in the new loan – meaning the borrower ends up paying A LOT MORE in the long run. Shop around and make sure you’re getting a good deal.

b) Changing terms of loan. You might have a variable rate loan and want to switch to a fixed rate loan (not available in all countries) or vice versa. You want to change the term of your loan say you have 20 more years on the current loan and want to reduce it to 15 years or vice versa.

c) The home price has appreciated and you want to take out a bigger loan and get some cash on hand. Say your loan outstanding is 150K and your house has appreciated enough so that the bank will be willing to lend you 200K, you take 150K to pay off the existing loan and keep 50K in cash. (of course your monthly payments might also go up). Not a great idea unless you are disciplined and use that cash wisely. (maybe medical expenses, kid’s education or investment etc. Blowing it on a holiday or new expensive car would be a bad idea generally)

d) Tax optimization. In the US, for example, mortgage interest is deductible from income for primary residence (up to 750K loan – married joint filing) This can be beneficial for people who have high salaries and are in a high marginal tax bracket. But see a tax specialist – this gets complicated.

e) A variant of (c). Debt consolidation. If you have existing other debt like car loans, credit card debt etc which tend to have higher interest rates and also not interest deductible, refinance to pay off all the other debt. Mortgages tend to have lower interest rates and result in reduced total monthly payments.

Anonymous 0 Comments

Don’t do it unless you have a ton of credit card or other high interest rate debt which is on you.

look at the interest rate you’re paying now and what your payment would be if you bought in 2020. you’re interest rate could easily be double what it is now.

using your home to fund over spending in life is a vicious cycle You need to live within your means and pay down your house. mortgage not increase it.