A refinance simply replaces the current mortgage loan with a new loan with more favorable terms. A refinance must have a “net tangible benefit” in order to be approved by the lender. A net tangible benefit means that the benefits of the refinance outweigh any costs that are associated with the loan. If the refinance does not have a net tangible benefit, then it will not be approved by the lender.
Three Types of Refinances
There are three types of refinances available on the market today, rate and term, cash out, and cash in.
Rate & Term
A rate and term refinance simply changes the interest rate and or the term of a mortgage without advancing new money on the loan. Rate and term refinances typically carry lower interest rates than cash out refinances. If you are looking to lower your monthly payment or reduce your interest rate while staying in a secure fixed rate mortgage loan, then a rate and term refinance is probably for you. Or maybe you’re looking to pay off your mortgage early and save a great amount of money that would otherwise be wasted on interest payments. If that’s the case, then you can reduce the term of your loan from a traditional 30 year term to a term of 15 years. 15 year loans have lower interest rates than 30 year loans. Generally, the rate can be anywhere from a quarter of a percent to 1 percent less. Your monthly payment will be significantly higher, but you will save a substantial amount of money with a 15 year loan. The savings on 15 year loans are quite amazing, as a 15 year loan typically cost 50% less than a 30 year loan.
A cash out refinance pays off your current loan balance and converts a desired amount of equity of your home into cash. This new loan balance is often significantly higher than the previous balance, so expect for your monthly payment to rise. Debt consolidation, home repairs, and remodeling are a few very common reasons why people take cash out on their properties.
In a cash in refinance, you would bring in a desired amount of money to pay down your loan balance. The amount of money that you save depends on how much you paid down your loan balance.