A purchase loan is a traditional mortgage, in which a person borrows money from a mortgage lender or bank to finance the purchase of a home. A refinance offers mortgage owners the ability to update or change the terms of their loan by obtaining a new loan to replace the existing one. The bottom line is that both purchase and refinance mortgages are mortgage loans; however, they serve very different purposes. When you refinance, you're basically taking out a new loan for your property, often for the rest of what you owe (but not always).
Ideally, this new loan should have better conditions than the old one. This depends on several factors, such as current mortgage rates, the amount of equity you have in your home (that is, how much of the loan you have already paid off) and what your credit rating is when you apply. Refinancing allows you to modify an existing credit agreement and usually replace the original contract with a new one. Refinancing is beneficial for borrowers, as it results in more favorable loan conditions. For homeowners, refinancing is a great way to lower the cost of their mortgages when interest rates fall, allowing them to get a lower interest rate than they currently have.
Whenever rates go down, it's worth exploring refinancing. With a refinance, you replace your current mortgage with a new one loan. The refinance loan is used to pay off your old mortgage and then continue with the new one. So, if you can refinance a mortgage with a lower interest rate than the current one, for example, you could win.
In short, a refinance mortgage is the process of replacing an existing mortgage with a new one, usually with better terms. If you decide to go ahead with a refinancing lender, you'll go through the entire mortgage approval process, including details such as doing a home appraisal and verifying the title of the home. It's a good idea to use a mortgage refinance calculator to calculate your break-even point after accounting for refinancing expenses. The main difference between refinancing and modifying a loan is that refinancing gives you a new mortgage, while the modification changes your current conditions to add late payments to your balance to help you stay in your home.
Maybe you originally took out an adjustable rate mortgage (ARM) to save on interest, but you'd like to refinance your ARM and convert it to a fixed-rate mortgage while rates are low. Finally, even if only temporary, refinancing your mortgage could have a negative impact on your credit score, as the lender will conduct extensive research to evaluate your creditworthiness. Refinancing can help you save money on your monthly mortgage payments, lower the interest rate or change the term of your loan. A refinance mortgage helps current homeowners change the rate and terms of the mortgage to lower the interest rate, the monthly payment, or withdraw some of the principal from their property.
If you think you could benefit from refinancing your mortgage, start by calculating some numbers to find out how much you could save. Refinancing will hurt your credit score, as a credit check is done when you refinance your mortgage; however, this is temporary and your score will be adjusted over time. Consumer loans that are generally considered for refinancing include mortgage loans, auto loans, and student loans.
