Does your mortgage start over when you refinance?
Because refinancing involves taking out a new loan with new terms, you're essentially starting over from the beginning. However, you don't have to choose a term based on your original loan's term or the remaining repayment period.
That means you effectively start the loan over. But it is still possible to refinance without restarting your loan term at 30 years. With a little bit of savvy, you may be able to refinance and shorten the number of years remaining on your loan.
In the early years of your mortgage term, your payments primarily go toward paying off interest. In the later years, you begin to pay off more principal than interest, meaning you start to build up equity — the amount of your home that you actually own. Once you refinance, it's like you're starting over.
A refinance occurs when the terms of an existing loan, such as interest rates, payment schedules, or other terms, are revised. Borrowers tend to refinance when interest rates fall. Refinancing involves the re-evaluation of a person or business's credit and repayment status.
If you lock in a lower interest rate, your monthly payments will be reduced. If you change the term of your loan (say, from 30 years to 15 years) your monthly payment amount will likely increase, but you'll make fewer interest payments throughout the life of your loan.
Refinancing to lower your monthly payment is great unless it puts a big dent in your pocketbook as time goes on. If it costs more to refinance, it probably doesn't make sense. For instance, if you're several years into a 30-year mortgage, you've paid a lot of interest without reducing your principal balance very much.
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
- Closing costs. To begin with, refinancing loans have closing costs just like a regular mortgage. ...
- You may end up in more debt. You also need to have a clear idea of how you'll use the money you free up when you refinance. ...
- A slight dip in your credit score.
It is possible to sell your house immediately after refinancing – unless your new mortgage contract includes an owner-occupancy clause. It is common for owner-occupancy clauses to require you to stay in your house for six to twelve months before selling or renting it out.
You can sell your house right after refinancing — unless you have an owner-occupancy clause in your new mortgage contract. An owner-occupancy clause can require you to live in your house for 6-12 months before you sell it or rent it out.
Why do you get money when you refinance?
With a cash-out refinance, you get a new home loan for more than you currently owe on your house. The difference between that new mortgage amount and the balance on your previous mortgage goes to you at closing in cash, which you can spend on home improvements, debt consolidation or other financial needs.
You pay closing costs and fees when you close on a refinance – just like when you signed on your original loan. You might see appraisal fees, attorney fees and title insurance fees all rolled up into closing costs. Generally, you'll pay about 3% – 6% of your refinance loan's value in closing costs.
A lender will consider the value of your home, what the funds are to be used for and determine how much more you're eligible to borrow (if any). Once a loan is approved, upon settlement your old loan is refinanced and the additional amount borrowed is provided to you in the form of cash.
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
The part of your fixed-rate mortgage payment that changes annually is your escrow. Each year, the financial institution that holds your mortgage estimates how much you'll pay in property taxes and home insurance. If your home value has risen since the prior year, the cost of your taxes and insurance will also increase.
Today, mortgage interest rates have eased back down but remain significantly higher than they have been over the past few years. Refinancing may not be the right choice for many homeowners, especially those who took advantage of historically low rates in 2020 and 2021 and whose current loan has a sub-4% rate.
After its December 2023 meeting, the Federal Open Market Committee (FOMC) predicted making three quarter-point cuts by the end of 2024 to lower the federal funds rate to 4.6%. Inflation has started to recede, but the committee has signaled it wants to see more positive data before pulling the trigger.
In today's market, a good mortgage interest rate can fall in the high-6% range, depending on several factors, such as the type of mortgage, loan term, and individual financial circ*mstances. To understand what a favorable mortgage rate looks like for you, get quotes from a few different lenders and compare them.
The most common reason why refinance loan applications are denied is because the borrower has too much debt. Because lenders have to make a good-faith effort to ensure you can repay your loan, they typically have limits on what's called your debt-to-income (DTI) ratio.
Refinance closing costs commonly run between 2% and 6% of the loan principal. For example, if you're refinancing a $225,000 mortgage balance, you can expect to pay between $4,500 and $13,500. Like purchase loans, mortgage refinancing carries standard fees, such as origination fees and multiple third-party charges.
Does refinancing lower what you owe?
Pros and cons of mortgage refinance
You could lower your mortgage payment and create more space in your monthly budget. You could decrease your loan's term and pay it off sooner. You could tap into your home's equity and take cash out at closing.
For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2022, the average FICO® Score☉ in the U.S. reached 714.
| Product | Interest rate | APR |
|---|---|---|
| 20-year fixed-rate | 6.347% | 6.448% |
| 15-year fixed-rate | 5.761% | 5.895% |
| 10-year fixed-rate | 5.622% | 5.805% |
| 7-year ARM | 6.681% | 7.447% |
For example, you might refinance to secure a lower interest rate, adjust the term length on your original mortgage or switch the type of loan that you have. One of the primary benefits of refinancing is the ability to reduce your interest rate.
Yes, you can sell your home after refinancing, but you may end up losing money on the refinance if you sell before you reach the breakeven point or you're subject to a prepayment penalty. You may have to wait if your mortgage contains an owner-occupancy requirement.
