Refinancing replaces an existing loan with a new loan that pays off the debt of the old loan. The new loan should have better terms or features that improve your finances. The details depend on the type of loan and your lender, but the process typically looks like this:
Rate-and-Term Refinance Loans
The rate-and-term refinance loan is the most popular refinancing loan. It is used to pay off the original mortgage, which is then replaced with a new loan.
Fixed-Rate Refinance Mortgage Loans
A fixed-rate mortgage loan sets a monthly payment during the time of the loan. The monthly principal and interest payment are typically higher than a long-term loan. It also protects from increasing interest rates.
Adjustable-Rate Refinance Mortgage Loans
An adjustable-rate refinance mortgage loan has a fixed interest rate for about 5-7 years. After that period, its rate adjusts based on the conditions of the market. This loan often includes an interest rate cap, limiting how high your interest rate can increase. It gives you some flexibility, especially if you are planning to refinance again in a few years.
Cash-Out Refinance Loans
A cash-out refinance loan works best if you’re in need for some extra cash. It is only used when homes are worth more than what is owed on the existing mortgage. This type of loan replaces your mortgage by paying it off. It then refinances the current mortgage and allows you to keep the difference of the two mortgages in cash.
Advantages of Refinance:
Disadvantages of Refinance
What Doesn’t Change
Debt. Your loan balance will not change unless you take on more debt while refinancing. It’s possible to do cash-out refinancing or roll your closing costs into your loan, but that just increases your debt burden.
Collateral. If you used collateral for the loan, that collateral probably will still be required for the new loan.