You typically roll the leftover amount of your mortgage into a new mortgage through a process called refinancing. When you refinance your existing mortgage, you acquire a new home loan that pays off the balance of your current one and becomes your new home loan. So if you're looking to lower your interest rate, or pay off the credit card debt you built up buying a few necessities like an ATV, refinancing may be just what the credit doctor ordered.
A refinance is a common financial process used by homeowners to get a lower interest rate, reduce monthly loan payments or minimize total interest obligations over time. You can refinance through your current lender or get a loan from a new one. When you refinance, you take on a new mortgage at current interest rates. You can often decide whether to keep your remaining repayment period intact, stretch the loan to 30 years or reduce it to 15 years.
How It Works
Acquiring a new mortgage is very similar to getting your first one. You typically apply for the loan, lock in your rate and await approval from the lender. Some lenders offer streamlined refinancing to expedite the process and save you money, but more often, you must pay closing costs for lender fees, appraisals and titling. When approved, you close on the new loan. You may need to bring cash to the close to cover your costs, though they are often absorbed into the new mortgage, along with your remaining balance.
The balance of your loan generally means the remaining principal amount. This is the amount you still owe from your original loan balance. When paying off your current mortgage through a refinance, you actually pay more than your remaining principal balance. You typically have accrued interest between your last payment and your closing date. This is added to your principal to get your payoff. Banks can usually tell you ahead of time what your payoff will be for a certain date in the future.
Because of your interest obligations, closing costs and adjustments to your home insurance and taxes, your new loan balance regularly exceeds the remainder of your current loan. If your goal with the new loan is to reduce your monthly payments, you would usually elect to spread the loan over a new 30-year term. You can often leave your current repayment period intact if you just want a better rate. By going to a 15-year term, you greatly reduce your repayment time frame and save on interest over the loan period. This normally means a higher monthly payment, but more goes to principal.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.