What does it mean to refinance a home?

[Norman Lai]

Hello everyone! I was just wondering if anyone can give me an example/definition of refinancing and how it works. I know it's pulling out a second loan after paying off the first loan? Does this mean it only applies if you borrow money from banks? Please help! I am reading and trying to learn more about everything and just want to make sure I'm understanding how it works :) Thank you!! Norman

[Jeff Dulla]

@Norman Lai

You can basically break a refinance into two major categories - rate/term refinance and cash out refinance:

Rate/Term Refinance - this is when you are paying off your existing mortgage with a brand new one. Typically dollar for dollar. If you have a $100,000 mortgage at a rate of 5%, you refinance to a new loan of $100,000 at 4%. If you own the home free and clear and you just bought it - you can also do a similar refinance getting money out but it is considered a rate/term refinance. It is called Delayed Financing. Within the first six months of buying the home in cash, you can take out up to that amount on a brand new first mortgage. So you bought a home for $100,000 cash. The home is now worth $150,000. You can pull up to the original $100,000 out and still have it be considered a rate/term refinance. The reason all of this matters is typically a rate/term refinance has lower rates.

Cash Out Refinance - this is when you pay off our existing mortgage and take out a new loan for more than the existing mortgage. Or you currently have no mortgage on the home but you are beyond six months since buying it in cash. You can simply take out whatever loan size you are looking for, up to 85% of the value on a primary residence (75% on investment and 70% on an investment multi unit home). Example - you own a home worth $150,000. You currently owe $75,000. You refinance and get a brand new loan for $100,000, pay off the original $75,000 and get $25,000 back after closing (you will have closing costs so you won't get that back exactly).