Refinancing replaces your current mortgage with a new loan that has a more favorable interest rate and terms that you can afford to manage. The new loan is secured on the same property as your current loan. The new loan funds are used to pay down the current mortgage while any remaining money can be used to your best advantage.
Example: Mr. R.T. and Mr. C.O. both took out a mortgage loan worth $400,000. After 4 years, both of them paid off $200,000. Mr. R.T. then took out another home loan worth $200,000 in order to repay the existing loan balance.
On the other hand, Mr. C.O. took out another mortgage worth $300,000 in order to repay the unpaid loan balance which is $200,000. Mr. C.O. could use the remaining balance in order to fulfill other financial obligations, or use the extra cash for any other reason.
The first scenario of R.T. is a "Rate and Term refinance" while the second scenario of C.O. is that of a "cash-out refinance".
If you're thinking of refinancing your house, check out these 6 reasons why a mortgage refinance might be right for you.
- You want to save more:
Your monthly payments will be reduced if you get a lower interest rate or when the term of the loan is extended. However, with an extended term, you will be paying more in interest during the life of the loan.
- You want to pay down your mortgage quickly:
You can shorten the length of your mortgage by reducing the term of the loan. Your Monthly payments will go up, but you will be able to save more in interest payments. Moreover, you'll be debt free sooner.
- You need extra cash to pay off credit cards:
If you have enough equity in your home, you can refinance and borrow more than the current loan balance. With the extra money, you can pay off high interest debts such as credit card balances or installment loans. This refinance loan may be tax deductible under certain conditions.
- You want to consolidate 2 loans into one:
If there's enough equity (due to high appreciation), you can consolidate a 1st and 2nd mortgage into a single mortgage. The monthly payment on the new loan might be lower than the combined payments on the first loan and the second mortgage.
- You want to convert an Adjustable Rate Mortgage (ARM) into a Fixed Rate Mortgage (FRM):
A FRM prevents the lender from increasing your monthly interest payments over the life of the loan, unlike with an ARM. This means your monthly payments will remain the same
