A lot goes into buying a home. You have your list of needs and wants, and even a few things you ultimately decide you can live without. It’s not an exact science for sure, but you do the best you can with what’s available on the market in your price range. The same goes for your home loan. You try to dictate as many loan terms as you can, but sometimes outside factors, including current mortgage rates, prevent you from getting everything you want out of your home loan. If you’ve been wanting to change the terms of your mortgage, a refinance may be right for you.
What is a home refinance?
Refinancing a home loan is the process of replacing your existing mortgage with a new one. Your new loan completely pays off your old obligation, and you’re left with a new mortgage and a new monthly payment. The new loan can be from a new lender entirely. It can have a different interest rate, payoff term, and even payoff amount. Here’s a look at a few common types of refinance loans.
Rate-And-Term Refinance – The most common type of refinance, a rate-and-term refinance, is exactly how it sounds. The interest rate and/or loan term changes, but everything else usually remains the same.
Cash-Out Refinance – This type of refinance involves borrowing more money than what’s owed on the original mortgage. The extra amount is paid to the borrower at closing and can go toward debt consolidation, home repairs, etc.
Cash-In Refinance – The opposite of cash-out, this type of refinance allows the borrower to pay extra cash at closing to pay down the loan balance, which may result in a lower rate and/or term.
Are there other reasons to refinance?
Aside from getting a different rate, term, amount, and lender, a refinance can help you convert a variable interest rate, which is subject to fluctuation depending on market conditions, to a fixed interest rate, which won’t change over time. You can also refinance to get rid of mortgage insurance premiums if you’ve paid down enough of your current mortgage loan or you qualify in some other way.
What are the advantages to a home refinance?
Again, a refinance is all about changing the terms of your existing loan to your advantage. If you can get a better interest rate or change some other term that will save you money on your monthly payments, a refinance is definitely something to consider. Also, if you’d rather have your loan serviced by a trusted local credit union, refinancing to switch to a preferred lender is also perfectly reasonable.
Refinancing a mortgage is usually a fairly simple process. But it can involve costs associated with closing the loan, so make sure that the benefits outweigh the costs. Otherwise, if you didn’t get everything you wanted out of your first mortgage, a refinance may be right for you.
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