Refinancing a mortgage works a lot like the process you went through getting your original home loan. You figure out how much money you need, apply to your lender or another mortgage company for a loan and calculate the best deal based on interest costs, monthly payments and other conditions. You can refinance to get a more favorable interest rate, to lower monthly payments by extending the loan or to take out cash to get money for other things. The options affect how much you owe compared to your original mortgage depending on why and how you refinance.
Taking out cash in refinancing increases the amount you owe. If your house is valued at $150,000 and you've paid your current loan down to $100,000, you can get some extra money by refinancing. Taking $20,000 in cash out, however, bumps your mortgage up to $120,000, and you'll pay interest on that extra $20,000 for the life of the mortgage.
Refinancing involves some closing costs, appraisal fees, document filing fees and so on. The amount varies, but you often can wrap those costs into the new loan. If you're keeping your loan at $100,000, for instance, but refinancing to get a lower interest rate, you can add the closing costs to the new loan. Say that raises your new loan to $103,000. You'll pay interest on that $3,000 for the life of the loan.
You can cut your monthly payments by refinancing to get a longer term. You can lower the monthly payments on a 15-year mortgage by extending it to 20 or even 30 years. That won't change your total loan; the amount can remain at $100,000. However, you'll pay that interest, even at the lower rate, for a longer time -- in effect, you are increasing your mortgage.
Time of Mortgage
Consider how long you've had your mortgage when you think about refinancing. Home loan interest is tipped toward the early years. A higher percentage of your monthly payment goes to interest the first few years. If you've had your loan for a while, more money is going to pay down principal. If you refinance, even at the same face amount, you start over again, initially paying more on interest. That, in effect, increases your mortgage.
- Bankrate: 7 Good Reasons for a Mortgage Refinance
- Federal Reserve Board: A Consumer's Guide to Refinancing
- Home Loan Center: Mortgage Refinance Questions
- TheTruthAboutMortgage.com: Cash-out Refinance
- The Mortgage Professor: Can Mortgage Refinance at a Higher Rate Make Sense?
- EZCreditMortgage.com: Mortgage Guide - Refinancing Your Home
- EZ Credit Mortgage: Mortgage Guide: Refinancing Your Home