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Mortgage Refinancing: Cash-Out vs. Rate-and-Term

By March 6, 2017 No Comments
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If you’re a homeowner, you’ll be aware of your monthly mortgage payment and interest rate. And you might have wondered about refinancing your mortgage to change these figures.

Refinancing lets you replace your current mortgage with a new one. Two of the most common mortgage refinance methods are rate-and-term, and cash-out. What’s the difference between them?

Rate-and-term refinancing can change your mortgage rate and loan term
The simplest and most common refinancing method, rate-and-term refinancing replaces either / both your original loan term (length of time to pay off your loan) and mortgage rate. For example, you might refinance a 30-year fixed rate mortgage into a 15-year fixed rate mortgage. Alternatively, you could refinance from a 30-year fixed rate mortgage with a 4.5% mortgage rate into a 30-year mortgage rate at 3%.

Rate and term refinancing activity is driven primarily by a drop in interest rates. While there will be closing costs with your newly refinanced mortgage, obtaining a lower interest rate could offset these costs and save you money over the long-term.

Cash-out refinancing lets you refinance your mortgage for more than you owe
Need money for an important home improvement or another financial goal? Is your home increasing in value? You may want to consider cash-out refinancing. With cash-out refinancing, you refinance your mortgage for more than you owe, then pocket the difference.

For example, imagine you owe $80,000 on a $150,000 home, and you want a lower interest rate. You also want $20,000 cash for home remodeling projects. You can cash-out refinance your mortgage for $100,000. Ideally, you’ll obtain a lower interest rate on the $80,000 you owe on the home, and you’ll get a check for $20,000 to spend on your remodeling projects.

Rate-and-term refinancing and cash out refinancing have strengths and weaknesses
It doesn’t make financial sense to refinance your mortgage into one with a higher interest rate. Because of this, loan originators won’t refinance at a higher rate, and must show that it’s in your best interest to refinance.

Considering mortgage rates have risen since the November presidential election, speak with an Open Mortgage loan originator about whether refinancing your mortgage is a good financial option.