Asking yourself this question? You’re not alone. Many people have basic mortgage questions like, “What does it actually mean to refinance?”
Well, remember back when you first purchased your home and got a loan? If you refinance, you are effectively getting an entirely new loan to pay off your existing mortgage and replacing it.
Just like a purchase loan, a refinance loan is actually a note and the mortgage or deed of trust that serves as collateral for the note.
The mortgage note basically says that the borrower will pay this money back, otherwise the Lender can take control of the house, sell it, and collect their money.
A mortgage note and the accompanying mortgage can be bought and sold, similar to other types of debt. Since the debt is backed by a physical asset, it’s deemed more stable than some other investments.
Here’s who is involved in a refinance (it may sound familiar):
- Borrowers – That’s you, and, if you have someone else on the loan, your co-borrower.
- Mortgage Broker – You could use a broker to find a lender. This is a person/company that will provide you lender options. They are more or less a middleman in the process that could save you from doing the legwork yourself. Typically you’ll pay them a fee or lenders will pay them directly to be included in their options.
- Lenders – That’s us. These are the people or companies that lend you money. These companies usually follow a highly technical and highly regulated process. They can be big banks (like Chase or Wells Fargo), mortgage companies, or in some cases, even individual people (like a wealthy family member).
- Third Parties – There aren’t any real estate agents or sellers with a refinance, but there are still many third-parties involved. Here are a few you may interact with:
Appraisers/Inspectors – The appraiser determines the value of your home. Inspectors determine the condition of the home and any needs for repair.
Escrow Officer – A neutral third party individual who holds all funds associated with the refinance and distributes them at closing.
Notary – A professional specially trained to handle and notarize loan documents.
Title Company – Even if the title was researched for the initial mortgage, the lender will initiate another title search to see if any changes have occurred in the title since that time.
- Servicers – They collect the monthly payments for a mortgage. Because the process can be complex, lenders often work with companies called “mortgage servicers.” These companies collect payments and route them to whoever owns the mortgage debt.
Who will refinance my loan?
Just because a lender was right for your original mortgage doesn’t mean they’re your best option to refinance now. We recommend shopping around among different lenders before making your choice.
To really compare lenders apples-to-apples, you’ll need to get an official Loan Estimate; this is a document that the Consumer Finance Protection Bureau (CFPB) requires a lender to provide to a potential borrower who has submitted an application to the lender. With the Loan Estimate, it’s easy to see the total cost of borrowing – including your mortgage interest rate and Annual Percentage Rate – in a way that is clear and transparent. The APR is a broader measure of the cost of your loan because it reflects your interest rate and other costs such as discount points, broker fees, and settlement fees.