Refinancing: what changes, what doesn't

The short version

A refinance is a new loan that pays off the one you have. Almost everything about the loan is chosen again, while the home, and most of what comes with owning it, stays the same.

What changes

Because it's a new loan, a refinance generally brings:

• a new application, with documents, a credit check and generally a new appraisal
• a new Loan Estimate after you apply, and a Closing Disclosure before closing
• closing costs again, paid in cash or, on many loans, added to the new balance
• a term chosen at the time; a shorter term, or one matching the time left on the current loan, is often possible
• a higher balance if closing costs, cash out or other debts are added, and any debts rolled in become secured by the home
• often, a new servicer, the company the monthly payment goes to

What doesn't

Some things stay as they are:

• the home itself
• the property-tax assessment, since a refinance on its own doesn't reset it the way a sale can
• the need for homeowners insurance; the policy can stay if it meets the new lender's requirements, and the insurer updates it to name the new lender

Kinds of refinance I place

I place these in Georgia and Florida. Each has its own rules, set by the program and the lender:

• a refinance that replaces the current loan without taking cash out
• a cash-out refinance into a new conventional, FHA or VA loan, which borrows more than the current balance and pays the owner the difference, after the old loan and the costs are paid, once the loan funds
• an FHA Streamline, which refinances an existing FHA loan into a new FHA loan under HUD's streamline rules
• a VA IRRRL, VA's streamline refinance, which refinances an existing VA loan into a new VA loan under VA's streamline rules
• Fannie Mae's RefiNow and Freddie Mac's Refi Possible, for homeowners whose current loan on the home they live in is owned by Fannie Mae or Freddie Mac, and whose income is at or below a limit for their area, among other requirements

The loan starts over

A common belief is that a refinance picks up where the old loan left off. It doesn't. The new loan runs on its own term, chosen when you refinance.

Restarting can lower the monthly amount but raise total interest, which is why it's worth comparing both.

Skipped payments and double escrow

A refinance doesn't skip a payment. Interest is paid in arrears, so a month without a bill isn't a month without interest. That interest is in the payoff of the old loan and in the prepaid interest on the new one.

It can look like you're paying for escrow twice. It's timing. The new escrow account is funded at closing, and the old servicer generally refunds the old escrow balance after the payoff.

Moving from FHA

Some owners refinance from FHA to conventional, where mortgage insurance, when there is any, can come off once enough equity is built. Whether that works depends on equity and credit.

Before the money moves

On a refinance of the home you live in, there's generally a short window after signing in which you can cancel, before the loan funds. The notice you sign at closing explains it.

From the source

These are Fannie Mae's, Freddie Mac's and the CFPB's own pages. Freddie Mac's Loan Look-Up shows whether Freddie Mac owns a particular loan. None of these pages recommends any lender or broker, including me.

• Fannie Mae: refinance options, including RefiNow
• Freddie Mac: refinancing
• Freddie Mac: Loan Look-Up
• CFPB: Closing Disclosure explainer

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