Better Understanding the World of Refinancing

I’m sure you’ve seen commercials about refinancing or have even heard from people at work discussing refinancing their home. But what is it exactly? And how can you get started?

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First, let’s break refinance down. There are two types of refinancing:

  1. Rate and Term Refinancing, and
  2. Cash Out Refinancing

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Rate and term refinancing is usually done in order to save some money. It is the renegotiation of the rate and/or the term (number of years it will take to repay the loan) of your mortgage with no actual change to the mortgage.  You might want to consider this type of refinance if your current mortgage is an adjustable rate mortgage and the fixed period is about to expire. Or if mortgage rates have significantly dropped since you’ve taken out your original loan.

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The second type of refinancing is cash out refinancing. This option is not as common as rate and term refinancing because it can be a bit riskier. Cash out refinancing is refinancing your mortgage for more than you owe, then being able to keep the difference. A cash out refinance is basically a replacement of your first mortgage and the interest rates on cash-out refinancing are usually (but not always) lower that the interest rates on a home equity loan. Many people turn to this type of refinancing when they need some quick cash but I would recommend looking into a personal loan instead of a cash out refinance, as the risk might be too high for some.

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For both of these types of refinancing there will be closing costs. These closing costs can go anywhere from hundreds to thousands of dollars. However, the monthly savings from refinancing will usually end up covering these costs over time. You might also come across “No Cost Refinancing.” Which is basically a way to refinance that you won’t have to pay any money up front but you might end up paying more over time in the form of a higher mortgage rate. A no cost refinancing might be an acceptable option if you are only planning to be in a home for a short period of time but does not really make sense if you plan on living in your home for over five years. It’s all about doing the math and making sure that your method of refinancing is right for you and fits your budget.

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