And by simple, I mean qualifying again and going through a very similar process to that of obtaining a home purchase loan. Now assuming you move forward, there are two main types of refinancing options; rate and term and cash-out click the links to get in-depth explanations of both or continue on reading here.
This type of transaction is also known as a limited cash-out refinance or a no cash-out refinance. Simply put, a rate and term refinance is the act of trading in your old mortgage s for a new shiny one without raising the loan amount. As noted, the motivation to do this is to lower your interest rate and possibly shorten the term in order to save on interest. Or to change products, such as moving from an adjustable-rate mortgage to a more secure fixed-rate mortgage.
In my example above, the refinancing results in a shorter-term mortgage and a substantially lower interest rate. Two birds, one stone. You can simply refinance from one year fixed into another year fixed, or from an adjustable-rate mortgage into a fixed mortgage to avoid a rate reset.
If you go with another year loan term, the refinance will generally serve to lower monthly payments, which is also a common reason to refinance a mortgage. They include moving out of an adjustable-rate mortgage into a fixed-rate mortgage or vice versa , going from an FHA loan to a conventional loan , or consolidating multiple loans into one.
There are many good reasons to pursue a refinance, the biggest of which is lowering your interest rate. If you can reduce your rate by one-half to three-quarters of a percentage point or more, refinancing is likely worth it, as long as you plan to stay in the home long enough to recoup the closing costs.
You can also refinance to shorten your loan term and pay it off faster, resulting in less interest paid over the life of your loan. One option is refinancing a year mortgage into a year one.
If you have an adjustable-rate mortgage, refinancing to a fixed-rate loan can be a smart move, too. There are a few types of mortgage refinancing options to choose from:. Before you start applying for offers:. Take the time to compare offers from a few different mortgage refinance lenders.
The interest rate is of course a major consideration, but also take the time to review the closing costs and other loan terms. If one of the offers includes an early repayment fee, for example, that means paying more if you decide to refinance again sometime in the future. When you actually apply for a refinance as opposed to getting a preapproval or prequalification , the lender is going to take a very close look at your credit and financial situation. With a locked rate, even if market rates rise before you close on the loan, your rate will stay the same.
This can occur for multiple reasons:. In general, these effects will only be felt for a short period of time. Any credit pulls related to your refinance in this timeframe will only be counted as one inquiry.
How We Make Money. Erik J. Written by. How does a cash-out refinance work? Home Articles Mortgage. Written by David Mully Read Time: 5 minutes. Cash-out refinancing and home equity To qualify for a cash-out refinance, you need to have a certain amount of home equity. Advantages of cash-out refinancing Refinance mortgage rates tend to be lower than the interest rates on other types of debt, so it's a very cost-effective way to borrow money.
If you use the cash to pay off other debts such as credit cards or a home equity loan, you'll be lowering the interest rate you pay on that debt. Mortgage debt can also be repaid over a considerably longer period than other types of debt, up to 30 years, so it can make your payments more manageable if you have a large amount of debt that must be repaid in years. If market rates have dropped since you took out your mortgage, a cash-out refinance can let you borrow money and reduce your mortgage rate at the same time.
Mortgage interest is generally tax-deductible, so by rolling other debt into your mortgage you can deduct the interest paid on it up to certain limits, assuming that you itemize deductions. Disadvantages of cash-out refinancing One of the big drawbacks of a cash-out refinance is that you pay closing costs on the entire loan amount.
Frequently Asked Questions. What is a cash-out refinance loan? How does refinancing a loan work? How long after refinance do I get the money? How much cash-out can I get on a refinance? Can you pull money out of your house? The purpose of this question submission tool is to provide general education on credit reporting.
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