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One of the more confusing aspects of homeownership is the notion of mortgage financing vs. refinancing. The processes may be similar, but there are some differences. A mortgage refers to the loan you’ll take out to purchase the property, while a mortgage refinance is a chance to pay off your original loan with a new loan. This allows you to negotiate new terms that work better for your current lifestyle and hopefully lower your payments.
Types of Mortgage Terms
You have many mortgage options available to you when purchasing a home, and one of the most important decisions you’ll have to make is the loan term. Do you want to finance for 15 or 30 years? Do you prefer a fixed or adjustable rate mortgage? A majority of these terms are also available for refinancing. For example, you can sign up for mortgages with fixed rates, adjustable rates, or interest-only payments.
One of the biggest differences between mortgage terms and refinancing terms is the ability to obtain an FHA loan. An FHA loan is designated for first-time homebuyers and is only available as an initial mortgage; they are not available for refinance home loans. However, a homeowner who currently has an FHA loan may refinance their home to get out of the FHA loan agreement. One of the main reasons to refinance an FHA loan is to eliminate the mortgage insurance fees that come with these agreements.
| Mortgage | Refinance | |
|---|---|---|
| FHA Loan | Yes | No |
| Appraisal Fees | No | Yes |
| Cash Out Refinance | No | Yes |
| Second Mortgages | No | Yes |
Mortgage & Refinancing Costs
The fees and closing costs for financing and refinancing are similar. For example, both include the concept of “points.” When you consider refinancing your home, a lender may offer you point options on the loan. Paying these point fees upfront will help you to get lower interest rates on the loan. The points that were available for your initial mortgage may not be the same as your current home loan. Knowing these terms can make a difference in the amount that you pay each month. A mortgage point typically represents 1% of the total home value, for example if a home is valued at $200,000, a single point would equal $2,000. This prepaid amount would go toward the mortgage and help you secure a lower interest rate.
When you refinance, you may also be subject to appraisal fees that you didn’t encounter with your initial mortgage. An appraisal is needed to ascertain the true value of your home for refinancing. When you sign up for an initial mortgage, the appraisal may have already been completed or simply included as a part of the mortgage. The appraisal fees are often paid upfront before the home is refinanced.
Cash-Out Refinancing
There is a special type of refinancing that can afford you a cash loan payout. Known as cash-out refinancing, this type of loan is a lot different from a standard mortgage and is similar to a home equity loan. Along with setting up a new mortgage and payment term, you can receive a cash payment based on the paid value of your home. For example, if your home is valued at $125,000 and you have already paid $50,000 of the mortgage, the refinancing term will have a balance of $75,000 plus any amount of the $50,000 that you decide to take as cash. A standard home mortgage does not offer this option, as the mortgage will typically just cover the full price of the home minus any down payments that are made.
Second Mortgages
As you consider refinancing, one of the options that you may come across is a second mortgage. A second mortgage does not eliminate your currently monthly payment; it’s a way to get extra cash based on the amount that you have already paid for the home. When taking out a second mortgage, you can have 2 monthly payments, one for the original mortgage and one for the new mortgage. Or, if you choose to refinance through your second mortgage, the lending company will pay off your original mortgage so that you only have one payment. This is ideal if you’re seeking lower payments each month and do not want the burden of a high mortgage.
So, Which Mortgage is Right for You?
Now that you know the differences and benefits of refinanced mortgages, be sure to check out rates and reviews from top lenders. Each lender offers various choices, so whether you are looking to purchase your first home, refinance for lower monthly payments, or get a cash loan using your home equity, there’s likely a mortgage out there that will suit your needs and budget.