Comparing Home Loans vs. Refinancing Loans
Whether you’re just beginning your mortgage search or have been a homeowner for many years, understanding the lending process is an essential component of being a responsible borrower. There are so many things to consider during the mortgage application process that you may not be thinking ahead to years in the future, when your financial circumstances change or the economy improves. What will you do then, when lower interest rates are available – or when you suddenly find yourself in need of money for an urgent repair project?
You may be aware of the fact that you can refinance your mortgage but might not know the particulars – but not to fear! Today, we’ll compare a home purchase and refinance loan, learn about the types of refinance loan, and consider how a mortgage broker can help you during the entire life of your mortgage.
Refinance loans are when you repackage a purchase loan to get a more favorable rate
When you originally bought your house, you took out a “purchase loan,” which is when a lender fronts the money for your home and you pay them back over a number of years. Of course, this loan comes with an interest rate, which can be as high as 7.5%. A single-digit interest rate might not seem like a big deal, especially when you consider that credit card interest rates can be as high as 24%, but this is a percentage of a hundred thousand dollars or more – which means that you’re paying thousands of dollars over the life of your loan. A rate change of even 0.01% can mean an enormous difference in how much you’re paying over time.
This is where refinance loans come in. A refinance loan is essentially a replacement of your old loan, usually taken out when you see that there are new, lower interest rates available. These refinances can be done for several reasons, which we’ll discuss now.
There are two types of refinance loans: a rate and term refinance, or a cash-out refinance
A rate and term refinance is when you change the interest rate or the term of your loan; this usually happens when you see that there are new, lower interest rates available. You can also use a rate and term refinance to change the term of your loan, from either 15 years to 30 years or vice versa. With a rate and term refinance, your old mortgage will be superseded by a new mortgage that has more favorable conditions for you, saving you thousands over time.
The other type of refinance is a cash-out refinance, which is when you essentially take out a larger mortgage on your home so that you can get a cash advance. For example, if your mortgage was for $120,000, but now you need $10,000 for repairs or other expenses, you will open a new loan for $130,000 on your existing property and get $10,000 in cash to spend now. This can be risky depending on your current financial circumstances, so this should be done with great consideration to ensure that you don’t find yourself in more debt.
A mortgage broker can assist you with the refinance application process – and find you the best deals
The refinance process isn’t quite the same as that for a purchase loan, as the lender will already have all the details about your house; instead, they’ll want to know the particulars of the current loan, as well as your current financial situation. There will be less paperwork involved as there is far less to consider regarding the house itself, which shaves quite a bit off the application process.
However, this doesn’t mean you should go it alone! Just as when you purchased a property, a mortgage broker is essential to helping you find the best interest rate for this new loan. If you’re getting a rate and term refinance, it’s critical that you find the lowest interest rate available, and a mortgage broker will be able to navigate through a variety of different mortgage products to get you a new loan that you’ll be happy to sign. For cash-out refinances, it’s also important that you get a good rate and term, especially as your mortgage will now be a bit larger every month.
Remember that you’re not beholden to use the same lender for your refinance loan as you did for your purchase loan; if you choose a different lender, they will pay off your old mortgage and take out a brand new one with new terms, which essentially closes out your previous mortgage and ends your relationship with the lender. Your mortgage broker can help you decide which lender to work with and explain the process to you every step of the way, making sure you completely understand what will be happening to your mortgage and what your new obligations are.
For both purchases and refinances, a mortgage broker is an essential ally in the process. Regardless of where you are in the life of your mortgage, be sure to reach out to a qualified broker to get the best conditions and the finest support.