Mortgage vs. Mortgage Refinance - What's the Difference?
Being a homeowner often requires a little extra knowledge and research in the area of high finance. The more you understand about your home and the mortgage you pay, the easier it will be to sort through your finances and have realistic expectations for your current situation. One of the more confusing aspects of home ownership is the notion of mortgage financing vs. refinancing. The processes may be similar, but there are some important fundamental differences that every homeowner should understand.
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. A homeowner cannot refinance their home and sign up for an FHA loan. These loans have special interest rates and terms. 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 & Refinancing Costs
The fees and closing costs for financing and refinancing are often very similar, but there are some slight differences. One of the bigger differences that you will encounter is 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 obtain lower interest rates on the loan. The points that were available for your initial mortgage may not be the same as your current mortgage. Knowing these differences can make a huge 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.
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. 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.
As you consider home refinancing, one of the alternative 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 will have two monthly payments, one for the original mortgage and one for the new mortgage. If you choose to refinance, the lending company will completely 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.
The more you learn about your mortgage and refinancing, the more you will understand your options and have the ability to make the best financial decisions for your home.
Now that you know the differences and benefits of refinanced mortgages, be sure to check out rates and reviews from top lenders.