Refinance (Refi)

Definition

Refinancing, commonly referred to as ‘refi,’ involves obtaining a new loan to pay off an existing loan. This process is typically pursued to achieve one or more financial goals: lower the interest rate, change the loan term duration, switch between a fixed-rate and an adjustable-rate mortgage, or access home equity for cash. Homeowners refinance to take advantage of better market conditions, personal financial changes, or to streamline expenses.

Examples

1. Lower Interest Rate Refinance: John has a mortgage with a 5% interest rate. Current market rates have come down to 3%. By refinancing his mortgage, John aims to secure the 3% rate, thereby reducing his monthly payments and the overall cost of the loan.

2. Term Adjustment Refinance: Lisa has 20 years left on her 30-year mortgage. She decides to refinance into a 15-year mortgage with a slightly higher monthly payment but reduced total interest paid due to a shorter loan term.

3. Cash-out Refinance: Mark’s home has significantly increased in value. He decides to do a cash-out refinance, replacing his current mortgage with a higher-value loan and taking the difference in cash to fund his child’s education.

Frequently Asked Questions

What are the costs associated with refinancing?

Refinancing involves various fees like application fees, origination fees, appraisal fees, attorney fees, and closing costs. It’s essential to consider these expenses when deciding to refinance to ensure the benefits outweigh the costs.

How do I know if refinancing is right for me?

Refinancing may be right for you if the new loan can save you money on interest, lower your monthly payments, or adjust your loan’s terms to better match your financial goals. Consulting with a mortgage advisor can help you decide.

Can I refinance with bad credit?

It is more challenging but possible. Some lenders offer refinance options for those with less than perfect credit, often at higher interest rates. Improving your credit before refinancing can increase your chances of securing better terms.

Is there a limit to how many times I can refinance?

There is no set limit on the number of times you can refinance your mortgage. However, each refinance must meet the necessary financial considerations, such as the cost-benefit balance and meeting lender requirements.

How long does the refinancing process take?

Typically, refinancing can take 30 to 45 days from application to closing, but this can vary based on lender efficiency, the complexity of the refinance, and the borrower’s preparedness.

Related Terms

• Fixed-rate Mortgage: A mortgage with an interest rate that remains the same for the entire term of the loan.
• Adjustable-rate Mortgage (ARM): A mortgage with an interest rate that can change periodically based on the performance of a specific benchmark.
• Cash-out Refinance: A refinancing option whereby a new mortgage is taken out for more than the current loan balance, and the difference is received in cash.
• Interest Rate: The percentage of the principal charged by the lender for the use of its money.
• Loan Term: The predetermined period over which the loan must be repaid.

Online Resources

1. Bankrate Refinance Guide
2. NerdWallet Refinance Calculator
3. Federal Reserve Mortgage Consumer Guide

References

1. Federal Reserve. “Consumer’s Guide to Mortgage Refinancing.” Available online.
2. Bankrate. “The Complete Guide to Refinancing Your Mortgage.” Available online.
3. Investopedia. “Refinance.” Available online.

Suggested Books for Further Studies

1. “Mortgage Management For Dummies” by Eric Tyson and Robert S. Griswold
2. “The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls, Second Edition” by Jack Guttentag
3. “Your Guide to Government Mortgage Programs” by Nicholas Leonard

Real Estate Basics: Refinance (Refi) Fundamentals Quiz