A mortgage refinance is when a homeowner takes out a second loan with the intention of paying off the original loan used to buy the property. This is usually done with the intention of lowering the APR on the loan-often with an increase in the length of payment (maturity)-or to liquidate some of the equity that has accrued on the property.
In essence, a property that has been owned for an extended period of time may have increased in value as compare to the loan that was originally taken out. This excess of money is known as the equity. With a mortgage refinance it is possible to take out a new loan, pay off the original loan, and still have money left over-equivalent to the equity.
Now let us take a look at an example. John Gonzales bought his first home with his wife over five years ago. Since purchasing the property he has made several notable improvements, including adding a backyard pool, repainting the exterior, and adding an addition in the form of a sunroom.
But John has not been the only busy one in his neighborhood. His neighbors have pooled together their resources to plant more trees along the road, and to put all the telephone and cable wires underground, greatly improving the look of the street. And because John and his wife had a baby two years ago, they got involved with a project that eventually refurbished a local park that had once been a rather unsightly location. Now it is a draw for local families as well as families from neighborhoods that don't have parks.
John took a long look at his situation with a financial consultant and realized that it was time for him to refinance his mortgage. With his greater job stability and assets, John could now get much better terms on a loan, including waived fees and a lower percentage rate. Also, with the added value to his property, John would be left with a large amount of liquidated funds after paying off his original mortgage.
A mortgage refinance could be the right move for you. If you have owned your home for more that a few years, and especially if the property has increased in value, refinancing your mortgage could be a good way to not only give yourself lower monthly payments, but also to get some extra cash into your budget.
One word of warning though, make sure that your original loan does not contain any sort of early buyout penalty that could cancel out any potential gains from a mortgage refinance.