Mortgages come in all shapes and sizes. Over time, as rates and your financial situation change, you have the option to change your mortgage loan terms. This is called refinancing.
Home refinancing is an excellent way to reduce your monthly mortgage payment, take cash out for a home improvement project, or cancel your mortgage insurance premiums—to name just a few benefits. The idea is that you replace your existing mortgage loan with a new one. And the new loan terms can better align with your current financial situation.
Did you know you aren’t limited to your current mortgage lender? You can get a loan from anyone you choose!
Common when mortgage rates are falling, the “rate-and-term” refinance focuses on two aspects of the loan: the mortgage rate and the length of the loan.
If you originally locked into a 30-year fixed-rate mortgage, but now you would prefer to pay your home loan off sooner, this is the type of refinance mortgage that would appeal to you. Likewise, if your goal is to lower your monthly payments, this is the one for you.
In this scenario, the refinance mortgage may feature a lower rate than your original home loan or a shorter term length. However, what sets apart a “cash-out” scenario is an increase in the amount you borrow. So the loan balance exceeds the original mortgage. You could use this type of refinancing to combine first and second mortgages. Some lenders are stricter about the approval process for “cash-out” refinancing because of the added risk.
Alternatively, with a “cash-in” arrangement, you would bring cash to closing in order to pay down the loan balance and the amount you owe. Therefore, you benefit with a lower mortgage rate and/or a shorter loan term.
Why might you opt for a cash-in refinance? Typically, the motivation is to enjoy a lower mortgage rate, which is only available at lower loan-to-values. Another reason might be to cancel mortgage insurance premium payments.