- A refinance pays off the existing mortgage's balance and replaces it with a new mortgage. If the old mortgage was a 30-year fixed rate mortgage and 24 monthly payments were made, the loan would have 28 years left before it was paid off. If the borrowers obtain a new 30-year mortgage, the clock resets at 30 years. Often, the refinance provides a lower interest rate and monthly mortgage payment.
- Mortgage lenders offer two main types of refinance loans, rate and term refinances and cash-out refinances. Choosing the right one for you means knowing what your goals are for the house. Decide how long you want to live in the home. If you plan to have a baby in the next few years, you may not want to stay in a one- or two-bedroom home for 10 years. If your children are almost grown, you may not want the maintenance of a four-bedroom, 2500-square-foot home forever. If you live in the home you want to retire in, and then consider that in your decision as well.
- A rate and term refinance provides the ability to change the interest rate, loan terms or amortization period of a loan without allowing access to the majority of the home's equity. If your current loan is an adjustable-rate mortgage and you prefer a fixe- rate mortgage, a refinance helps you change the loan type. If you goal is to pay off your home in 15 years, change your loan's amortization from a 30-year loan to a 15-year loan with a refinance. Usually lenders allow the loan to include closing costs and for the borrower to receive up to the lesser of $2,000 or 2 percent of the loan amount back at closing.
- Cash-out refinances offer the opportunity to make all of the changes a rate and term refinance allows, but also lets the homeowner access the equity in the home. Instead of only having access to $2,000 or 2 percent, homeowners may access the majority of their equity. Lenders will only let borrowers borrow up to a fixed percent of the home's value. This varies by lender and loan program.
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