Renewal vs. Refinance: Why They’re Not the Same
A lot of people use the terms renewal and refinance interchangeably, but they are actually two very different things. And understanding the difference matters — especially when it comes to the rate you’re offered.
What Is a Renewal?
A renewal happens at the end of your mortgage term.
At renewal, you are
- Keeping the same mortgage amount
- Keeping the same amortization or reducing it although there are situations where we can increase it
You can choose to renew with your current lender or move your mortgage to a new lender, but the structure of your mortgage generally stays the same. You’re simply agreeing to a new interest rate and term for the remaining balance. There are some situations where we can increase the amortization and we can always lower it.
What Is a Mortgage Refinance?
A refinance is when you make changes to your mortgage.
This can include:
- Increasing your amortization. This lowers your payment
- Increasing the amount you owe. You might want to do this to consolidate debt, give you some money for renovations or pay for a kid to go to school
You can refinance with your current lender or switch to a new one, but the key difference is that the mortgage itself is being restructured.
Why the Difference Matters
One of the most important reasons to understand this difference is because the rates for renewals and refinances are not the same.
A refinance is considered a new mortgage with changes, which often means different qualification rules and different pricing compared to a simple renewal.
This is why someone might be quoted one rate for a renewal and a very different rate for a refinance.
The Bottom Line
Renewals keep things mostly the same.
Refinances increases the amount you owe and/or your amortization.