To refinance is to simply pay off an old mortgage with the proceeds of a new mortgage. This is generally done with different, ideally better interest rates or terms. Refinancing should not be confused with getting a second mortgage, although there are some similarities. When an individual gets a first mortgage on his or her real estate, the homeowner has undergone a home refinancing. Think of home refinancing as trading in an old first mortgage for a new first mortgage. In this way, there is no second mortgage at all. To refinance a home, the homeowner must apply for a new mortgage. During the application process, the home in question will undergo a new appraisal to determine its value, and the homeowner’s credit report will be reviewed. The lender will also order a title report on the property to search for any other legal judgments that may appear.  If all these items meet with the lender’s approval, the loan will be approved. A good credit score also helps this process.

Once approved, the homeowner will meet at the office of the lender or title company to sign the new mortgage. The profit from the new loan will be used to pay off the old first mortgage and any additional mortgages and liens on the property. Accordingly, the only mortgage showing on the home after a refinance is completed will be the new loan.

Homeowners often refinance when interest rates fall below the rate purchased on their mortgage when they first bought their home.  If done at the right time, a mortgage refinance can save thousands of dollars over a lifetime. Accordingly, when determining if it is worthwhile to refinance a home, a homeowner should contrast the long-term savings with the costs involved in the refinance, and the period of time the homeowner intends to stay at the home. This insures that the refinance is worthwhile.

Costs typically involved in a refinance include:

  • Points
  • Document preparation fees
  • Tax service fees
  • Title expenses
  • Appraisal fees.

Of these, the “points” are typically the most expensive, where a point is 1% of the loan necessary, and multiple points may be on the loan.