One of the most common reasons people refinance is to change their loan terms to save on the interest they pay. For instance, if you started with a 30-year loan but can now afford more on your monthly payments, you could refinance to a 15-year loan to get a better interest rate, thereby saving money on interest over the long term.
If rates are considerably lower now than when you got your loan, you might want to consider refinancing. Lowering your interest rate can lower your monthly payment, meaning you’ll pay less interest over the life of your loan.
Cash-out refinancing allows you to leverage the equity you’ve accumulated to borrow a bigger sum of money. While this adds to your debt, it can help you secure funding for big expenses — home improvement projects, college tuition, etc. — at a relatively low interest rate.
Replace the uncertainty of an adjustable-rate mortgage with a fixed-rate mortgage. Or maybe stop paying FHA mortgage insurance by switching to a conventional loan. Whatever the reason, refinancing gives you the chance to explore a range of home loans to find an option that works better for your finances.
Rate-and-Term Refinance
This is a basic form of refinancing that changes either the interest rate of the loan, the term (repayment length) of the loan or both. This can reduce your monthly payment or help you save money on interest. The amount you owe generally won’t change unless you roll some closing costs into the new loan.
Cash-Out Refinance
When you do a cash-out refinance, you’re using your home to take cash out to spend. This increases your mortgage debt but gives you money that you can invest or use to fund a goal, like a home improvement project. You can also secure a new term and interest rate during a cash-out refinance.
Cash-In Refinance
With a cash-in refinance, you make a lump sum payment in order to reduce your loan-to-value (LTV) ratio, which cuts your overall debt burden, potentially lowers your monthly payment and also could help you qualify for a lower interest rate. Before making a cash-in refinance, you’ll want to evaluate whether paying the lump sum would deprive you of more lucrative opportunities or needlessly drain your savings.
No-Closing-Cost Refinance
A no-closing-cost refinance allows you to refinance without paying closing costs upfront; instead, you roll those expenses into the loan, which will mean a higher monthly payment and likely a higher interest rate. A no-closing-cost refinance makes most sense if you plan to stay in the home short-term.
Debt Consolidation Refinance
Similar to cash-out refinances, debt consolidation refinances give you cash with one key difference: You use the cash from the equity you’ve built in your home to repay other non-mortgage debt, like credit card debt. Your mortgage debt will increase, but because mortgage rates are usually lower than those for other forms of debt, this can save you money in the long run. Plus, you might be able to take advantage of the mortgage interest deduction.
The cost is dependent on a couple of factors, such as your lender and the value of your house. Refinancing usually comes with closing costs, so you should determine whether getting a new mortgage makes financial sense for your budget. These costs can run between 2% and 6% of the amount you refinance. Common closing costs include discount points, an origination fee and an appraisal fee.
You’ll need to calculate the break-even point to determine whether you’ll stay in your home long enough to recoup the closing costs and benefit from the savings of the refinance.
Refinancing a mortgage can have some impact on your credit, but it’s usually minimal. This can occur for multiple reasons:
In general, these effects will only be felt for a short period of time. If you’re concerned about hurting your score while you compare refinance offers, try to shop for loans within a 45-day window. Any credit pulls related to your refinance in this timeframe will only be counted as one inquiry.
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