Simply put, refinancing gives a homeowner access to a new mortgage loan which replaces its existing one. The best part is, the details of the new mortgage loan can be customized by the homeowner, including a new mortgage rate, loan length in years, and amount borrowed.
Refinances can be used to reduce a homeowner’s monthly mortgage payment; to take cash out for home improvements; and, to cancel mortgage insurance premiums, among other uses.
Source: The Mortgage Reports – Dan Green
To refinance your home means to replace your current mortgage loan with a new one. Refinances are common whether current rates are rising or falling; and you can get one here, as you are not limited to working with your current mortgage lender!
Some of the reasons homeowners do this include a desire to get a lower mortgage rate; to pay their home off more quickly; or, to use their home equity for paying credit cards or funding home improvement.
These loans typically close more quickly than a purchase mortgage loan and can require far less paperwork.
3 Types Of Refinance Mortgages
These mortgages come in three varieties — rate-and-term, cash-out, and cash-in. The refinance type that’s best for you will depend on your individual circumstance – and mortgage rates vary between the three types.
In a rate-and-term refinance, the only terms of the new loan which differ from the original one are either the mortgage rate, the loan term, or both. The loan term is the length of the mortgage.
For example, in a rate-and-term refinance, a homeowner may refinance from a 30-year fixed rate mortgage into a 15-year fixed rate mortgage; or, may refinance from a 30-year fixed rate mortgage at 6 percent mortgage rate to a new, 30-year mortgage rate at 4 percent.
With a rate-and-term refinance, a refinancing homeowner may walk away from closing with some cash, but not more than $2,000 in cash.
“No cash out” refinance mortgages allow for closing costs to be added to the loan balance, so that the homeowner doesn’t have to pay costs out-of-pocket.
Most refinances are rate-and-term refinances — especially in a falling mortgage rate environment.
In a cash-out refinance, the refinance mortgage may optionally feature a lower mortgage rate than the original home loan; or shorter loan term, such as moving from a 30-year mortgage to a 15-year mortgage.
However, the defining characteristic of a cash-out mortgage is an increase in the amount that’s borrowed.
With a cash-out refinance, the loan balance of the new mortgage exceeds than the original mortgage balance by five percent or more.
Because the homeowners only owes the original amount to the bank, the “extra” amount is paid as cash at closing, or, in the case of a debt consolidation refinance, directed to creditors such as credit card companies and student loan administrators.
Cash-out mortgages can also be used to consolidate first and second mortgages when the second mortgage was not taken at the time of purchase.
Cash-out mortgages represent more risk to a bank than a rate-and-term refinance mortgage and, as such, carry more strict approval standards.
For example, a cash-out refinance may be limited to a lower loan size as compared to a rate-and-term refinance; or, may require higher credit scores at the time of application.
Most mortgage lenders will limit the amount of “cash out” in a cash-out refinance mortgage to $250,000.
Cash-in refinance mortgages are the opposite of the cash-out refinance.
With a cash-in refinance, a refinancing homeowner brings cash to closing in order to pay down the loan balance and the amount owed to the bank.
The cash-in mortgage refinance may result in a lower mortgage rate, a shorter loan term, or both.
There are several reasons why homeowners opt for cash-in refinance mortgages.
The most common reason to do a cash-in refinance to get access to lower mortgage rates which are only available at lower loan-to-values. Refinance mortgage rates are often lower at 75% LTV, for example, as compared to 80% LTV.
Another common reason to cash-in refinance is to cancel mortgage insurance premium (MIP) payments. When you pay down your loan to 80% LTV or lower on a conventional loan, your mortgage insurance premiums are no longer due.
For more, see Dan’s full article here….