Refinance
Definition and meaning of Refinance in real estate.
Refinance is the replacement of an existing mortgage with a new loan that has different terms, interest rates, or structures. Homeowners typically refinance to lower their monthly payments, shorten their loan term, or cash out built-up home equity.
In more detail
When a homeowner refinances, the new loan pays off the balance of the original mortgage in full. The borrower then begins making payments on the new loan, which requires going through an application and approval process similar to the initial purchase. Homeowners must pay closing costs for the new mortgage, which can include appraisal and origination fees.
Refinancing is common when interest rates drop or when a homeowner's credit score improves significantly, making them eligible for better loan terms.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Common goals | Lower the interest rate, change the loan term, or extract cash equity |
| Typical cost | Two percent to five percent of the new loan amount in closing costs |
| Required documentation | Income verification, tax returns, asset statements, and a new property appraisal |
A homeowner replaces their thirty-year mortgage at a six percent interest rate with a new fifteen-year mortgage at a four percent interest rate to pay off their home faster.
Frequently asked questions
What is the difference between a rate-and-term refinance and a cash-out refinance?
A rate-and-term refinance changes the interest rate or the length of the loan, while a cash-out refinance allows the homeowner to borrow more than they owe and receive the difference in cash.
Does refinancing require a home appraisal?
Yes, most refinances require a new appraisal to verify the home's current market value, though some government loans offer appraisal waivers.