Before refinancing, it’s important to discuss all your options with your mortgage lender. 
There are two types of refinancing that we will examine. A rate-and-term refinance refers to when a mortgage loan is refinanced by replacing the existing mortgage with a new loan, typically with a lower interest rate. A cash-out refinance refers to when the mortgage loan is replaced by a new loan, but the loan balance increases since the home’s equity is exchanged for cash.
A rate-and-term refinance can give you more or less time to pay off your loan, a lower interest rate, or a different monthly mortgage payment. It’s common for lenders to refer to rate-and-term refinances as regular refinances. Some reasons to adopt a rate-and-term refinance include lowering your interest rate, reducing your monthly mortgage payment, modifying your term length, and changing your loan type.
With cash-out refinancing, the homeowner takes out a mortgage that is larger than the amount they currently owe. They then pay off the old mortgage and keep the remainder in cash. The cash can be used for any purpose, such as a home remodel, their child’s college education, or to consolidate higher-interest debts, such as credit cards. The unfortunate part is that the cash comes at a cost, meaning the homeowner could be paying interest on it for a long time. These loans require much thought and strategy before taking them on. In particular, homeowners want to be wary about how much cash they take out.
There are several similarities between rate-and-term refinances and cash-out refinance, which include:
- You take out a new loan.
- You can work with a new lender.
- You can change your rate or term.
- There are also a few important differences between rate-and-term refinances and cash-out refinances:
- Your principal balance might not change.
- You take cash after closing.
- There are home equity requirements.
Before refinancing, it’s important to discuss all your options with your mortgage lender. You can refinance your existing mortgage using a rate-and-term refinance, which usually lowers the interest rate. If you need the cash from your home’s equity for a particular reason, a cash-out loan may be valuable. QCBN
By Greg Riordan
Greg Riordan is a loan officer with Legacy Mutual Mortgage. For additional information or to get in touch with Greg, visit legacymutual.com/officers/greg-riordan or call 928-427-5156. You may find his office at 325 W Gurley St #102, Prescott, AZ 86301. Greg cares about the people that choose to trust him with the biggest asset in their lives – their home. He will give straight, honest answers with exceptional advice whether you are refinancing your home to pay off debt, lowering your rate, reducing the length of your loan or looking to purchase your first or next dream home. Greg Riordan, NMLS # 832841 | Gardner Financial Services, LTD., dba Legacy Mutual Mortgage, NMLS #278675, an Equal Housing Lender.
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