Refinance? What Does That Mean??
We hear the term refinance a lot in real estate—but what does it really mean?
When someone says they’re refinancing their home, what they actually mean is they’re refinancing the mortgage on their home. In other words, they’re taking out a new loan to pay off the existing loan.
Why Would Someone Refinance?
Here are a few common reasons to refinance (or “re-fi”):
- To obtain a lower mortgage rate
- To extend the loan term and reduce monthly payments
- To pull out cash by increasing the loan amount (a “cash-out re-fi”)
- To remove a name from the mortgage and deed—often necessary in divorce situations
What Happens During a Refinance?
Refinancing means applying for a brand-new mortgage, which involves:
- A full application process
- Credit check
- Review of income and taxes
- Property appraisal
Each of these factors must meet your lender’s criteria to qualify for the new loan.
Are You Eligible to Refinance?
To assess your eligibility, consider:
- Your credit score
- Your income
- Your debt
- Your home’s current value
Understanding Loan-to-Value (LTV)
When your lender appraises the property, they use a third-party valuation to calculate your loan-to-value ratio.
For example:
-
If your home is worth $500,000 and your lender allows up to 80% LTV, the maximum loan amount would be:
$500,000 × 80% = $400,000
-
If your home is worth $400,000, then:
$400,000 × 80% = $320,000
This is the maximum amount you could borrow in a refinance.
Things to Consider Before Refinancing
- If you have significant equity, refinancing might be quick and easy.
- If you’re underwater (owe more than your home is worth), the new loan may not cover the old one, and you’d need to pay the difference out of pocket.
Choosing a Lender
Your current lender can be a good starting point, but you’re free to shop around and choose any lender that fits your needs.
Final Tip: Always consult with trusted professionals to ensure your refinance is done correctly and aligns with your financial goals.
