Your home is likely your most valuable asset. The decision to refinance deserves serious consideration. First, it’s important to understand exactly what refinances are and why people choose to do it.
It is simply the replacement of one loan with a new loan. The fresh loan pays off the old loan entirely. You can often get better terms in the new mortgage, and if you have equity in your home, you can walk away with a decent chunk of change. For example, if your original loan is for $100,000 and you have paid off 40,000 of that amount, you can refinance for $100,000 and receive the $40,000 you had in equity.
Lenders often choose to insure mortgages in case of default. However, the government will not back a refinanced mortgage. When an individual refinances, pulling equity out of the home, it becomes a higher-risk loan for the lender. This makes it “uninsurable.”
When you refinance, your previous loan is completely paid off and the terms no longer apply. The new loans have entirely new terms. They may be similar to your old terms, but likely there will be some significant differences. This is a good thing. You can seek a loan with much better terms than your previous mortgage. It is essential that you thoroughly understand the terms of your new mortgage.
Refinancing your home can be very beneficial. However, it is not a venture to be taken lightly. Do your homework, make sure it is the right decision for you, and find the best possible mortgage.