There are two main types of mortgage refinances. There is the standard “rate and term refinance”, which allows a borrower to obtain a lower mortgage rate and/or shorten their term, while keeping their existing balance the same. And then there is the “cash-out refinance,” which allows a borrower to tap into the equity in their home.
The simplest type of mortgage refinance is called a “rate and term refinance” because the borrower is simply changing the interest rate and/or term of the loan, and perhaps the loan program, but not the loan amount. A borrower might consider a rate and term refinance if mortgage rates have dropped significantly since they originally took out their loan and they want to take advantage of the new lower rate. Another reason could be if they want to reduce the amount of time it will take to pay off the loan in its entirety. Lastly, if their current mortgage is an adjustable-rate mortgage and the fixed period is due to expire, then they could benefit from refinancing into new terms before their payment spikes.
A “cash-out refinance” allows a borrower to pull cash out from the existing equity in their home. Their are many reasons why someone might consider this type of refinance.
- Home improvements
- Other investments (stocks, bonds, real estate, etc.)
- Vacations and other luxuries
- College tuition
- Purchase another property
- Pay-off other higher-interest-rate debt, such as credit cards or auto loans
- For an emergency
- Because they want cash for any number of reasons
For example, say a borrower is considering a cash-out refinance to consolidate other debt. To avoid paying high-interest rate credit cards, homeowners may use cash-out to pay off those existing balances. Instead of paying a 20% interest rate or higher on a credit card each month, you can pay off that balance using your mortgage and pay a much lower rate of 3-8% instead. Other homeowners may cash-out to make improvements to their home that would increase the value, thus further increasing the equity in their home. A final example, others may cash-out if they feel they can invest their money into other avenues such as stocks, bonds or even additional real estate.
- FHA Streamline
- VA IRRRL
- Conventional Rate and Term
- Conventional Cash Out
- Conventional Limited Cash Out
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