A mortgage is a loan provided from a mortgage lender to purchase a property.
Interest rate is the contractual rate that you agree to pay for your mortgage loan. This rate is used to calculate the interest portion of your monthly mortgage payment. Annual percentage rate (APR) includes your interest rate and factors in the prepaid finance charges to give you an average yearly rate. APR can be a good tool to use when you’re comparison shopping for rates.
A mortgage refinance is a new loan that pays off and replaces an old mortgage loan. Since mortgage loans are not typically amended, a refinance mortgage is the easiest means of restructuring mortgage debt. There are several reasons why you might do this: to lower the interest rate or payments, to shorten or lengthen the loan maturity, or to increase or reduce the loan amount.
If you have home equity, you may have the option of refinancing for more than what you owe on your old mortgage. This is a cash-out refinance, in which the amount leftover after the pay-off is transferred to you, and can be used as you wish. Your payment will reflect a higher loan balance, but you could possibly offset some (or all) of the increase with a lower interest rate or extended maturity date.
You can reduce your payment with a mortgage refinance by lowering the interest rate and/or by extending the maturity date.
Many homeowners start thinking about refinancing when there’s some part of the existing mortgage loan that’s no longer appealing. Examples include:
- Your payment is too high
- Your interest rate is higher than what’s available on the market
- Your adjustable interest rate is too volatile
- You want to pay off your mortgage in 15 years instead of 30
- You want to cash out your home equity
A refinance calculator can help you run the numbers, but the decision usually depends on how market mortgage refinance rates compare to what you’re currently paying. If you can find a refinance mortgage that will save you money and help you achieve your financial goals, then the time is right.