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 change the length of the loan or to take out cash to spend on other things. The amount of equity you have in your current mortgage is a big factor in determining the details of your refinance deal.
TL;DR (Too Long; Didn't Read)
Whether or not refinancing increases your mortgage amount depends on the new terms and if you are taking additional cash out.
Your home equity is defined as the amount of your original mortgage that you've paid off compared to your home's current value. For example, if your house is valued at $150,000 and you've paid your current loan down to $100,000, you can tap your home's equity 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. Financial experts recommend limiting cash out refinancing to important expenses like home remodeling, a child's college education or an uncovered medical expense.
Adjusting Mortgage Length
You can refinance to change the length of your mortgage, such as cutting 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. You can also shorten the length of your mortgage if you've decided you'd like to increase your monthly payments to pay off your mortgage more quickly.
Paying Loan Costs
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.
Additional Refinance Considerations
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.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.