If you want to opt to refinance home mortgage then you should have a clear idea about what it is all about. Refinancing your mortgage wouldn’t pay off your debts, it will just help you to restructure it. This new mortgage is often received at a lower interest rate and a different loan tern as compared to the current interest rate. Most of the times reduction of interest rate is the most lucrative reason for opting for a refinance but extending the loan term up to 30 years can also be a major reason which usually reduces your monthly payments.
What are the reasons for opting to refinance home mortgage?
There are several reasons why you may want to refinance your home mortgage. These reasons are elucidated below.
- If you have a fixed rate mortgage (FRM) with a high interest rate and you are looking for an option with a lower interest rate.
- If you have an adjustable rate mortgage (ARM) and you are looking to get a fixed rate mortgage.
- If you have a first mortgage and a home equity mortgage and you would want to consolidate both the debts you can opt for refinancing. This helps by combining the two mortgages into one fixed rate mortgage and equals out the payments over the loan term.
- If you have a long term loan and would like to opt for a short term loan so that you can pay it off faster and build equity in a shorter span of time.
- If you have a short term loan and would like to opt for a longer term so that the monthly payments you have to make towards paying off the mortgage reduces.
- If you want to move from an interest-only mortgage to a loan that has principal pay down option.
- If you want some extra cash for some important need.
What are the types of mortgage refinancing?
There are three types of mortgage refinance loans that you can take out. Read on to know more about them.
- Cash-out refinance – Cash-out refinance is a type of mortgage refinance in which the new mortgage amount is greater than the current mortgage amount including the loan settlement costs. The main purpose of cash-out refinance is to take out equity from your home. Usually cash-out refinances are popular as they help you to access the equity on your homes in order to make cash payments for paying off your debts or making any important additional purchases. It is important that you make a risk based assessment whether it is economical to extract equity from your home.
- Cash-in refinance – A cash-in refinance is exactly the opposite of cash-out refinance, that is, you have to bring in additional money to pay down your loan principal instead of borrowing against your home equity as in a cash-out refinance. The best part of this is that it makes you easier to qualify for a refinance, particularly if your home has lost value.
- Loan refinancing – There is a standard loan refinancing option also known as rate-and-loan refinance in which the rate of interest on the loan and the loan term is adjusted in a refinancing program. You may want to change your fixed rate mortgage to an adjustable one to tap on the lower interest rate option or you may change your adjustable rate mortgage to a 30-year fixed rate one to gain stability and reduce the monthly payments by increasing the loan term.
You should keep in mind that if you refinance home mortgage then you tend to spend extra amount of money on closing costs ad such others. Hence you should only opt to refinance home mortgage only if you need to.
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