Refinancing is the process of obtaining a new mortgage in an effort to reduce monthly payments, lower your interest rates, take cash out of your home for large purchases, or change mortgage companies.
Homeowners who own their home free and clear are still able to refinance their home. Any loan that isn’t considered a purchase is classified as a refinance, even if there isn’t a loan to pay off. The mortgage industry has not created specific terminology distinguishing a nonpurchase loan for a home that is free and clear.
A homeowner who is getting a mortgage on a home that is paid off is doing so for only one reason, and that is to pull equity – that is, money – out of the transaction. In recent years, reverse mortgages (with no monthly payment required) have become popular among homeowners over the age of 62, but other homeowners can qualify for a traditional cash-out refinance.
Cash-out refinance pays off your existing first mortgage. This results in a new mortgage loan which may have different terms than your original loan (meaning you may have a different type of loan and/or a different interest rate as well as a longer or shorter time period for paying off your loan).
Once your old loan is paid off, your existing lender will send you a refund. having to accept an elevated rate on your mortgage, you may want to refinance first and then add a home equity line of.
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When you have paid off your home, your loan to value ratio is actually 0 percent. home mortgage, Refinance, and Home Equity Loans.
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In a traditional cash-out refinance, an existing mortgage is paid off with a larger mortgage, resulting in a lump sum of cash to the owner. If there is no mortgage on the property at present, the same basic loan structure and regulations would apply.
Some lenders will charge prepayment penalties if you pay off your loan in the first three to five years of the repayment plan. Whether you’re selling your home, refinancing, or just want to pay off debt early, a prepayment penalty could be an unexpected charge. Make sure you check with your lender before you decide to pay off your loan early.