A refinance is a mortgage loan you take out to repay your current loan. You may be looking to reduce your interest rate, drop private mortgage insurance, or use some of the equity in your home to pay off other debts. When you refinance, you will use the proceeds from the refinance loan to pay off your existing debt. You’ll then make payments to the new lender. Refinancing usually makes the most sense when you can reduce your current interest rate but can have other financial benefits as well. In general, there are two different mortgage refinance types, the rate & term refinance and the cash out refinance.
RATE & TERM REFINANCE
This is a type of refinance loan is a loan in which you just refinance the amount you currently owe on your home. You will owe virtually the same amount before and after the refinance, but with more favorable terms to meet your financial objectives. You might be trying to reduce your interest rate, drop mortgage insurance or reduce your overall mortgage payment. Lender see a rate & term refinance as less risky than a cash out refinance and generally have more favorable terms such as lower interest rates and the potential ability to obtain an appraisal waiver thus saving you these fees when refinancing. You should consider your loan term carefully. Refinancing to a shorter loan term will save you the most on interest. But shorter repayment timelines lead to higher monthly payments. On the other hand, if you refinance to a loan that takes longer to repay, it’s possible you could end up with higher total costs even if you reduce your interest rate.
CASH OUT REFINANCE
A cash-out refinance is where you seek a loan amount that is more than you currently owe on your current mortgage. Depending on how much equity you currently have in your home, you may be able to borrow more than the current amount you owe on your loan. You may need cash to pay off bills, start a business, or finance other endeavors. Because you are receiving cash out, you may not receive as favorable terms on the loan as you would with a simple rate and term refinance.
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