Types of Refinancing
September 13, 2023 by Brent Rasmussen, CMC, CRMS, CDLP, CVLS, CMA

Types of Refinancing

Refinancing is a financial tool that can help people achieve a range of financial goals. Whether you’re looking to save money, reduce your monthly payments, or access cash for various expenses, there’s likely a type of refinancing that can fit your needs. Let’s discuss the three main types of refinancing that we handle at Mortgage Specialists and the situations in which they can be beneficial.

Rate and Term Refinance

A Rate and Term Refinance is the most common type of refinancing. This is where an existing mortgage is replaced with a new one that has a lower interest rate and/or a different loan term. This type of refinance is typically used to reduce monthly mortgage payments or to pay off the home loan faster. Keep in mind that Rate and Term Refinances may come with closing costs and fees, so borrowers should carefully weigh the potential savings against these costs. Three main reasons why people choose a Rate and Term Refinance include:

  • To obtain a lower interest rate. One of the primary reasons people pursue this type of refinance is to secure a lower interest rate on their mortgage. Lower interest rates can significantly reduce monthly payments, saving homeowners money over the life of the loan.
  • To reduce monthly payments. By obtaining a lower interest rate or extending the loan term, borrowers can achieve a lower monthly mortgage payment. This can improve the monthly cash flow for a homeowner and make their lifestyle more affordable.
  • To secure a shorter loan term. Some homeowners may want to shorten the term of their mortgage, such as switching from a 30-year to a 15-year loan. This allows them to pay off their home and build equity faster. Additionally, shorter-term loans often come with lower interest rates.

Cash-Out Refinance

In a cash-out refinance, you borrow more than what you owe on your existing mortgage and receive the difference in cash. This is often done to access home equity for various reasons, such as home improvements, debt consolidation, or other financial needs. Generally speaking, homeowners will only be able to borrow about 80-85% of their home’s total value. Here are some common reasons why someone might opt for cash-out refinancing:

  • Home improvements. One of the most common reasons for cash-out refinancing is to fund home renovations. Borrowers can use the cash to remodel their home, add an extension, upgrade appliances, or make repairs. These improvements can increase the property’s value while enhancing its livability.
  • Debt consolidation. Cash-out refinancing can be used to consolidate high-interest debt, such as credit card debt or personal loans, into a lower-interest mortgage loan. This can make debt repayment more manageable and reduce the overall interest.
  • Education. Some homeowners use cash-out refinancing to cover the cost of education expenses. This can include college tuition or student loans for themselves or their children.
  • Investments. Homeowners may choose cash-out refinancing to access funds for investment opportunities such as starting a business, purchasing stocks, or purchasing additional real estate. The hope is that the investment will yield returns greater than the cost of the mortgage.
  • Emergency expenses. In times of unexpected hardship or expenses, homeowners may use cash-out refinancing to access cash quickly. This can help cover medical bills, legal fees, or other urgent needs.

While the positives can sound great, keep in mind that cash-out refinancing will increase the loan amount and monthly mortgage payments, which can be a long-term financial commitment.?

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