Refinancing your mortgage is basically a trade in of your existing mortgage for a new one and perhaps a new balance.
Refinance your Mortgage: Your bank or lender will pay off your existing mortgage by refinancing.
Refinance is a popular choice for borrowers who want to lower their interest rate and pay less over the term. They also have the option to cash out some equity they have built up on their homes.
Two types of refinance are available: cash-out refinance or rate and term refinance.
Rates and Term Refinance
A rate and term refinance would usually result in a lower interest rate as well as a shorter term of payment (30-year term changed to 15-year term).
Refinancing a 30 year mortgage into an 15-year mortgage could result in similar monthly payments to your original loan.
This is due to the lower interest rate you will pay on your new mortgage. However, the 15-year mortgage payments are typically higher than those for 30 years.
Before refinancing your mortgage rate, it is important to determine your break-even point. This is when refinance costs are “recouped”, via a lower monthly mortgage payment.
Cash-Out Refinance
Cash-out refinance allows you to refinance up 80 percent of the current value of your house for cash. This is why it’s called cash-out refinance.
Let’s say that your home is worth $100,000 and that you owe $60,000 on the loan. As a qualified borrower, your bank or lender may offer $20,000 cash-out to make your new mortgage $80,000.
A cash-out refinance is not about saving money but rather getting a lower-interest loan for some cash.
A cash-out refinance may be necessary if you want to build a pool in your backyard or take a vacation.
You should be aware that a cash-out mortgage can result in an increase in your lien [2]. This could lead to higher and/or more frequent payments. This is not free money, and you will have to repay your lender.
Refinance of your mortgage is not something you should take lightly. The refinance cost should be weighed against the return.
If you have concerns about refinance and other options, talk to a financial advisor.