The Basics of Refinancing Your Mortgage
The terms of an existing mortgage can become unmanageable for borrowers for a number of reasons. When this occurs, they may want to seriously consider other options, such as refinancing. This can be a very convenient option to help borrowers change their financial situation.
Refinancing refers to taking out a new mortgage loan to take the place of a current mortgage loan. Refinancing is categorized as either “rate and term” or “cash-out.”
Rate and Term Refinancing
Rate and term refinancing refers to paying off a previous loan and adopting a new one that will have a lower interest rate or a shorter term.
Cash-out Refinancing
Cash-out refinancing provides borrowers with a cash payment once all costs associated with the new mortgage loan are paid. There are no restrictions as to how the funds can be used.
Reasons to Refinance
There are many reasons to refinance a mortgage loan, such as:
- Obtaining a lower interest rate - this can help to reduce the monthly payment amount and save on interest paid over the term of the loan
- Shortening the term of the loan - this allows borrowers to pay the loan off more quickly, i.e. refinancing a mortgage with a 30-year term to a loan with a 15 or 20 year term
- Taking cash out - this can be a great way to access a low cost of funds that can be used for major purchases, home improvement projects or pay off debt
The Bottom Line
