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What Is the Difference Between a Mortgage and a Refinance?

Mortgage = your original home loan.

Refinance = replacing that original loan with a new one under hopefully better terms.

When You Refinance a Loan, Do You Get Money?

You only get money if you do a cash-out refinance. The funds from the loan are first used to pay off your current mortgage, covering closing costs and any prepaid expenses (like mortgage points or fees); any leftover amount is then given to you. If it’s a rate-and-term refinance, no extra cash is given—you’re just adjusting the loan terms.

Is It Good to Refinance a Loan?

Steps to Evaluate:

1. Compare Current and New Loan Terms: Understand the current loan balance, interest rate, monthly payment, and compare them to the new loan’s interest rate, term, fees, and any cash-out amount.
2. Calculate New Loan Amount: Include any fees, points, and cash-out money into the new loan principal.
3. Calculate New Monthly Payment: Use the new loan amount, interest rate, and loan term to estimate the new monthly payment.
4. Analyze Payment Difference and Loan Term: Compare the new monthly payment to the current one and note how much the loan term changes.
5. Decide Based on Your Financial Situation:

Refinancing is good if you can afford higher payments and want to pay off the loan faster with interest savings.

It is not advisable if the higher payments cause financial strain.

Example:

• Current loan balance: $200,000
• Current rate: 8%
• Current monthly payment: $4,000
• New loan rate: 6%
• Loan term: 3 years
• Fees: 2% points + $1,500 closing costs
• Cash-out: $1,000

Result:

• New loan amount: about $201,000 (only includes cash-out)
• New monthly payment: around $6,115
• Monthly payment increases by $2,115, but loan payoff is much faster.

This straightforward approach helps you understand if refinancing fits your budget and goals.

How Many Times Can I Refinance My House?

There’s no strict limit on how many times you can refinance your house. However, lenders and loan programs often have their own requirements and guidelines, such as:

• Waiting periods: Many lenders require you to wait a certain amount of time (e.g., 6 to 12 months) after your last refinance before you can refinance again.
• Loan seasoning: Some loan types, like FHA or VA loans, have minimum time requirements before refinancing.
• Costs and benefits: Frequent refinancing may not be cost-effective because of closing costs and fees.
• Credit and income: Lenders need to see your ability to repay each time you apply.

It’s best to check with your lender about their specific rules and consider whether refinancing again makes financial sense for you.

What Is the 2% Rule for Refinancing?

The 2% rule for refinancing is a quick guideline some borrowers use to evaluate whether refinancing a loan is financially beneficial. It suggests that it makes sense to refinance if you can reduce your interest rate by at least 2 percentage points.

How Do I Qualify for Loan Refinancing?

To qualify for loan refinancing, lenders typically evaluate several key factors, including:

• Credit Score: A good credit score (usually 620 or higher) improves your chances of approval and securing a lower interest rate.
• Income and Employment: Stable and sufficient income demonstrated through pay stubs, tax returns, or bank statements is essential.
• Debt-to-Income Ratio (DTI): Lenders prefer a DTI below 43%, meaning your monthly debts (including the new mortgage payment) should not exceed 43% of your gross monthly income.
• Home Equity: You generally need some equity in your home (the difference between your home’s value and what you owe). Depending on the refinance type, lenders may require at least 20% equity.
• Property Appraisal: Lenders may require an appraisal to verify the current value of your home.
• Loan Type and Purpose: Certain loan programs have specific requirements for refinancing.

Meeting these criteria doesn’t guarantee approval, but it improves your likelihood. It’s a good idea to check with your lender for their specific requirements and documentation needed.

When Should You Not Refinance?

You should not refinance if the costs are too high, you plan to sell soon, interest rates are higher than your current loan, or your credit is poor.

How to Cut 10 Years off a 30-year Mortgage?

Paying an extra $467.52 a month on a $400,000 fixed-rate loan with a 30-year term at an interest rate of 6% could save you $175,578.94 in interest over the full term of the loan and you could pay off your loan in 240 months vs. 360 months.

References

Official Government Information

• Consumer Financial Protection Bureau (CFPB): Understanding Mortgage Refinancing
• Federal Housing Administration (FHA): FHA Loan Information
• Federal Trade Commission (FTC): Refinancing Your Mortgage: What You Need to Know
• U.S. Department of Veterans Affairs: VA Interest Rate Reduction Refinance Loan (IRRRL)
• Fannie Mae: Conventional Loan Products
• Freddie Mac: Primary Mortgage Market Survey (Historical Rates)

Rate Information Sources

• Federal Reserve Economic Data: 30-Year Fixed Rate Mortgage Average
• U.S. Bureau of Labor Statistics: Economic Indicators and Inflation Data

Consumer Protection Resources

• CFPB Complaint Database: Submit Mortgage-Related Complaints
• HUD Housing Counseling: Find a HUD-Approved Housing Counselor