When it comes to handling your mortgage, two very important words come into play: refinancing and mortgage renewal vs.. While both pertain to adjustments of your mortgage, they are used for completely different purposes and follow different processes.
For an enlightened homeowner, the difference between mortgage refinancing and mortgage renewal can be very instrumental to making smart financial decisions best suited according to long-term goals.
Refinancing Mortgages Refinancing Mortgages Simply put, mortgage refinancing is the replacement of an existing loan with a new loan, where you generally get better terms, such as a lower interest rate or a more favorable pay-out schedule.
Renewal of Mortgage Refers to the extension of the term of your existing mortgage, usually at your current lender’s place, when the initial term expires. Both of them impact your financial situation in quite rudimentary ways, and so it’s essential to know what is what.
In this piece, we’re going to take you through exactly what are mortgage refinancing and renewal, the differences between them, and which one to choose between.
What is Mortgage Refinancing?
Definition
Mortgage refinancing is basically the process in which the current mortgage is replaced with a former mortgage rate or new loan usually having the terms which might include a new interest rate or repayment period.
Actually, it is taking a new mortgage for the old one and achieved in order to improve the financial conditions for the borrower.
Purpose
A good reason to renew or refinance often is getting a better interest rate, thereby reducing the monthly payment of the loan and eventually saving even more during the period.
Refinancing could also facilitate changes in loan terms; because of this, an individual may extend or shorten his or her loan repayment period.
Some people use refinancing to obtain the equity of their homes for other financial purposes, such as home improvement, consolidation of debts, or investment in something else.
Process
Generally, refinancing includes the following steps:
1. Application – The whole process begins with the application for a new loan, whether using your existing lender or a new lender.
2. Appraisal – Depending on the lender’s requirement, normally, an appraisal is required to determine the current market value of the equity in your home.
3. Approval – If your financial profile, including credit score and debt-to-income ratio, meets the lender’s requirements, the loan will be approved, and the new mortgage will replace the old one.
What is Mortgage Renewal?
Definition
The renewal of a mortgage occurs after the term of an existing mortgage has ended. It aims at renewing it with the same lender, whereas a refinancing is a whole new loan.
Renewal maintains the same loan, but its terms may be changed-for instance, by renegotiating an interest rate.
Purpose
A mortgage renewal involves essentially paying off the mortgage but with a new agreement that reflects current mortgage rates and market conditions.
The same would be useful if anything of importance related to your financial situation or interest rates has changed since the original loan was obtained.
Everything else about the mortgage remains unchanged, from the principal to the repayment timeline.
Process
Streamlined Renewal Procedure Compared to Refinancing:
1. Reviewing Offers: Most likely your lender will get in touch with you during the latter part of the current mortgage contract term and offer you to renew several months ahead.
2. Negotiation: You need to review the new terms of the contract. Occasionally you can secure better interest rates or other attractive conditions with your existing lender.
3. Signing – Once the parties agree on the terms, you just sign the new agreement and continue to make repayments.
Key Differences Between Refinancing and Renewal date
Scope of Change
Refinancing: In refinancing, there is more extensive change. The refinancing process entails obtaining a completely new mortgage. This may result in significant changes to the makeup of the loan, including interest rates, repayment terms, or other borrowing possibilities via the equity linked with the home.
Refinancing: Refinancing is literally the replacement of the existing mortgage with a new one, hopefully carrying a low interest rate and better terms but essentially the same fundamental loan type. Generally, there are usually fewer modifications than in refinancing.
Costs
Refinancing: The cost to refinance your mortgage is an appraisement fee, a legal fee, and in some cases, a prepayment penalty because the old mortgage is technically being paid off prematurely.
Re-new: the costs of renewing a mortgage are generally not too costly, but sometimes their actuaries may request them to pay processing fees. It is usually very economic in comparison to refinancing.
Timing
Refinancing: one can refinance at any point in the term. For example, if there is a good market time after some years then one can benefit and enjoy good deals for his or her next mortgage payment.
Renewal: This occurs at the end of the mortgage term, usually, one to five years depending on the agreement made.
Flexibility
Refinancing: This gives one more flexibility as regards changing the structure of the loan, interest rates, home equity access, and even to change lenders.
Renewal: You will here have a little leeway with negotiation on new terms, renewal is more related to continuation on existing agreements, which may be with the existing lender.
When to Consider Refinancing means
Interest Rate
You should refinance your home when today’s interest rates are significantly lower than the rate on your existing mortgage. You can save more money, every month, or you will be able to pay off the loan sooner, depending on the amount of savings by locking in a lower rate.
Financial Needs
You may also refinance your home mortgage to get at the equity in your residence for important financial need, such as home improvements, debt consolidation, or other big expense items. Typically, a cash-out refinance is used by borrowing more than you owe on the home and taking out the difference as cash.
Loan Term Changes
If you want to alter the term of your mortgage loan—is it to extend the term of the mortgage so that your monthly payments thereafter are smaller, or to shorten the term to pay the mortgage off much sooner—refinancing can be the ticket. For instance, converting a 30-year to a 15-year could save you tens of thousands of dollars in interest over the life of the loan.
When to Consider Renewal
Expiration Date
One easy renewal option if your mortgage payments current term is at the end now and you don’t want a change in lender, then simply renew your mortgage with the lender as normally done. This keeps the continuity without much hassle in paying off your mortgage.
Stick with Your Current Lender
If you have enjoyed a good relationship with your lender and are satisfied with the renewal offer they give you, then this renewal can be the easiest step for you. Under this option, you do not need to go through the whole process of switching the lender and it avoids a complicated refinancing scheme.
Ease
Renewal is a good alternative for those who want to have an effortless and simple way of applying. With fewer costs and paper works, mortgage renewal date lets you to continue your mortgage without too much change and to the most possible minimum monetary burden.
Pros and Cons
Refinancing
Pros: There is the ability of receiving a lower rate of interest, access to the equity of the home and this can also be able to change the term in the loan as according to your needs. Refinancing can make it flexible and receive better terms, particularly when circumstances are good.
Cons: You might be charged with some initial costs especially the legal legal and appraisal fees and appraisal fees and you may even have to pay the prepayment penalties. The process is more complex in addition to consuming more paper works and the cycle might take more time than is in renewal.
Renewal
Pros: Renewal is less technical and inexpensive. It keeps the homeowners with the same mortgage, thus saving a lot of hassle for satisfied ones with their already existing mortgage contract with lenders.
Cons: Renewal does not necessarily ensure to come with the best offers. In this way, it has lesser flexibility in terms of adjusting or accessing equity in the loan structure.
Making a Decision
Know Your Goals
Contemplate your financial goals and current mortgage terms before settling for refinancing or renewal. Decide whether you have to decrease the interest rate you pay, tap into home equity, or adjust the loan term.
If simplicity and continuity is your objective, renewing your mortgage might suit you. However, if you aim to save your hard-earned money or to make drastic changes, refinancing would better serve you.
Consult Experts
Also, you could consult with a mortgage advisor or financial advisor before coming to a decision. According to your financial and credit scores plus the prevailing market conditions, the professional will weigh out the options for you.
Professional assistance may also guide you through the process of refinancing, renewal, and help you make the best choice for the needs at hand.
Conclusion
In a nutshell, mortgage refinancing and renewal are two different options that are open to homeowners in terms of managing mortgages.
Refinancing represents an opportunity to replace a current mortgage with a new one, securing better terms and more flexibility. Renewal is the extension of an existing mortgage, offering fewer changes and a simpler process.
When the two are compared, financial goals, the market conditions at the time of consideration, and the degree of satisfaction or dissatisfaction with the lender must be taken into account.
For whatever course of action the consumer chooses to pursue refinancing versus renewal further research and consultations with specialists are necessary in making the proper choice for their long-term financial benefits.
