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What’s is a refinance?

The term refinance normally refers to when you’re taking out a new mortgage on your home replacing existing debt. That doesn’t mean you can’t refinance if you don’t have a mortgage.
Refinancing exists as more than a method of redoing an existing loan, but also as a way to unlock equity in a property without having to sell it.

Just like when you’re purchasing a home, an appraisal is done to determine value. Our variety of loan products offer differing level of loan-to-value to best fit your needs.

What does this all mean?

Let’s use an example:
John buys a house 2 years ago for $400,000

  • John buys a house 2 years ago for $400,000.
  • John also took out a mortgage in the amount of $300,000 to help purchase the property.
  • Today, John sees that rates have gone down and thinks he can save some money by refinancing into a lower interest rate.
  • Additionally, John could use a little extra cash to help start on some home repairs.
  • After making an application for a refinance, the value comes back at $500,000.
  • John sees there’s a balance of $290,000 on his current mortgage and wants to pull out about $100,000 for home repairs.
  • John moves forward and refinances his property at a new loan-to-value ratio of 80% and his new mortgage is for $400,000.
  • After closing costs he’ll have a little under $100,000 going to his pocket when the new loan is consummated.

Home equity line of credit

A home equity line of credit is a great way to pull cash out against your property while still maintaining your existing loan. It differs from a traditional mortgage because it works as a line of credit. Just like any other line of credit, you’ll have an available amount and outstanding balance that you use and pay off at your will.

  • The advantage to doing this, over other line of credit options, is its secured by real property so the interest rate is significantly lower.
  • The downside is that it’s not as low as a conventional single mortgage you’d have on a property. For shorter term scenarios like home improvements, this could be a great way to secure financing. The process is very similar to any other mortgage but allows flexibility.

Let’s use an example:

  • Angela, buys a home for $400,000 1 year ago.
    To help cover the cost, she took out a mortgage for $300,000.
  • Angela locked in a 2% fixed rate mortgage.
    After living in her home she also found that she could increase the value with minor improvements.
  • She initially wanted to refinance the first loan to cover said improvements, but now only qualifies for a 4% rate.
  • Additionally, she plans on paying off the improvements over 2 years instead of the 30 given on a conventional mortgage.
  • This is the perfect scenario for a home equity line of credit.
  • The first mortgage stays in place and Angela gets a home equity like of credit in addition to it.
  • The process is very similar to refinancing in that an appraisal and formal closing are required, but the first loan will remain untouched.
  • Her appraised value comes back at $500,000 and her credit line is approved for $100,000.
  • Just like a credit card, Angela will not be charged interest on the full amount, unless she’s using it.

Reverse Mortgage

A reverse mortgage is a way for someone 62 or older to pull out cash against their home while still maintaining possession. This is different than refinancing or getting a home equity line of credit because it’s designed for individuals with little or no income.

Other products would require to verify the borrowers ability to repay. The borrower in this situation can either receive monthly payments, a lump sum or a line of credit. Additionally, this doesn’t inhibit the sale of the property. Just like any other mortgage, when a sale takes places the only thing that’s required is paying off the existing debt under the terms provided.

Let’s use an example:

  • Cathy is 70 years old.
  • Her current mortgage is 90% paid off and she is tired of making monthly mortgage payments.
  • Since she is over 62 years old and has significant equity in her property a reverse mortgage is an excellent option.
  • Reverse mortgage are typically for 50%-65% of the homes value and Cathy is ends up using 60%.
  • With the reverse mortgage she will be able to pull cash out of her property to help with day-to-day expenses and entertainment.
  • Cathy will no longer have to make mortgage payments.
  • Cathy will still be responsible for paying property taxes and homeowners insurance.
  • The loan will last for the rest of Cathy’s life.