Before you jump into mortgage refinancing, it is a good idea to consider your options. If you qualify for mortgage refinancing, you will need to decide what type of loan to get. There are a number of options to choose from, though most homeowners end up deciding between a “cash-out refinance” and a “streamlined refinance.” The information below describes these two main types of mortgage refinancing.
Cash-Out Mortgage Refinance
One of the many reasons that people buy homes is that, over time, the value of a home is expected to rise. As the value of your home rises, and as you pay down the principal on your mortgage, you build equity (or ownership) in the home. Mortgage refinancing with a cash-out loan can help borrowers tap into this equity.
When you apply for mortgage refinancing, the lender will require an appraisal of your home. If the market value of your home is more than what you owe on your mortgage, you may be able to participate in cash-out mortgage refinancing.
For Example:
If you owe $150,000 on your mortgage and your home is valued at $200,000, the lender might let you take out a cash-out refinance loan for $165,000. You use that money to pay off your original $150,000 mortgage loan and then you keep the remaining $15,000. Those extra funds can be used to pay off debts, make home improvements, pay for a wedding, go on a vacation, or fulfill some other financial goal.
Cash-out mortgage refinancing allows homeowners to take advantage of the value that has built up in their homes.
Streamlined Mortgage Refinance
A streamlined refinance, on the other hand, does not involve getting cash out of your home. With streamlined mortgage refinancing, you go through the mortgage process quickly. In some cases, you do not even need a home appraisal for a streamlined refinance. For the most part, if you have good credit, adequate income, and sufficient equity, you can get a new loan with a lower interest rate to cover what you currently owe on your mortgage.
In the example used above, a streamlined refinance would result in a loan for $150,000. This would allow you to pay off your original mortgage, but there is nothing left over in the form of cash. However, a streamlined refinance means your monthly mortgage payments will be lower, thanks to the lower interest rate on your new loan, leaving extra money in your monthly budget. If you use streamlined mortgage refinancing to get a 15- or 20-year mortgage loan, you can save more money over the long term.
What you decide depends on your particular financial situation and your personal goals. Carefully consider whether cash-out or streamlined mortgage financing would work better for you.