What is a Mortgage “Refinance” and How Does It Affect Me?
Refinancing a home is one of those things where people understand what it is but have trouble explaining how it works. To put it simply, refinancing your home allows you to access the equity you have built up, by changing the mortgage amount.
Let’s say you bought a $300,000 condo and you paid 20% ($60,000) as your down payment and had a mortgage of $240,000. Over the next 4 years, you owed and now that amount is only $230,000. Your mortgage is up for renewal in one year however, you want to do some renovations and you need to access the equity in your home – this is where a refinance could come into play.
What this means is your will get an appraisal, or in simpler terms an evaluation, of your current home and submit that information to a lender. Let’s say your $300,000 condo is now worth $350,000 and you owe $230,000. You have built up an additional $60,000 in equity ($350,000 - $230,000 owning - $60,000 initial down payment = $60,000). You have a mortgage of $230,00 on a home worth $350,000, therefore your equity in the home is $120,000.
To access that $120,000, you can refinance your mortgage. So, let’s say you want to go back and take $50,000 from the $120,000 you have built up. Your new mortgage would go from $230,000 to $280,000 and that $50,000 will be transferred from the lender to you. You are essentially borrowing money from the lender while also adding money back on top of your mortgage.
This is just one-way people can use their home to access cash. Other ways people can do this, especially if they are looking to complete renovations, is through home equity, lines of credit, collateral charges and purchase plus mortgages.
Knowing this information before you buy can be extremely beneficial. That is why it is important to work with a qualified home mortgage specialist.
Information Provided By Chloe Colella