How Does Refinancing Work?
Refinancing occurs when an existing loan is replaced with a new loan. Billions of dollars in mortgage loans are disbursed each year—but that doesn’t mean a borrower’s standing loan is set in stone. Depending on credit and individual factors, financing on a loan can be readjusted to fit specific needs, and refinanced rates can carry over great benefits to the mortgagee.
3 Major Types of Refinancing
A Rate-And-Term Refinance is the most common method of refinancing. It replaced the old loan with the same balance but adjusts to a different interest rate and/or term of the mortgage.
A Cash-out Refinance involves pulling equity from your home, resulting in an increased loan balance but a sum of money available to you. It’s possible to pull equity out of a home and secure a lower interest rate at the same time.
A Cash-in Refinance happens when borrowers bring an additional sum of money in during the refinancing process, perhaps to bring down interest, lower the number of payments, or to set the loan amount below a certain threshold.
Benefits of Refinancing
The potential for lower monthly payments is available with refinancing, some borrowers saving hundreds of dollars per month with a slight percentage change—allowing for quicker mortgage payoffs or extra resources for other expenses.
Refinancing can convert home equity into cash. The equity in your home can be used to your advantage, especially if you have a substantial home renovation, need quick cash for debt consolidation, or require funds for a large purchase.
Refinancing can reduce loan time. Many borrowers opt for a 30-year fixed mortgage, but after years pass, some find it in their interest to adjust the time scale of their loan to pay their mortgage off quicker. Payments increase with condensed time, but potentially securing a lower interest rate may help to mitigate this.
There are some risks to refinancing, including restarting your amortization process with a new 30-year loan, thereby lengthening the loan and building upon interest payments. But generally, refinancing is a surefire way to obtain better rates and ultimately save you money on your mortgage.
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