When it comes to refinancing your mortgage, there are two popular options to choose from: standard refinancing and cash-out refinancing. Your home is an investment, so you should get to know the difference between these two types of loans in order to maximize the value of your property.
When Should You Do a Standard Refinance?
Think of refinancing as replacing your existing mortgage with a completely new one. This means you have the chance to reconfigure the terms, interest rate, and more to help you save in the long run.
If you are planning to stay in your home for a while, there are many cases in which you should consider refinance in order to ultimately save money on your mortgage.
- Getting rid of Private Mortgage Insurance
- Converting your Adjustable-Rate Mortgage (ARM) to a Fixed-Rate Mortgage
- Locking in a lower interest rate
- Lowering your monthly payments
- Changing the term of your loan
Additionally, if your credit score has gone up you may be able to qualify for a much lower rate than your current mortgage.
What is a Cash-Out Refinance?
A cash-out refinance is also an entirely new mortgage. It works by paying off your existing loan and replacing it with a new loan for a larger amount, with the extra cash you’re taking out included in the final amount.
A cash-out refinance can help you with all the considerations a regular refinance could while also allowing you to tap into the equity you’ve invested in the property to take care of a large or imminent expense.
When to Cash-Out Refinance?
Many homeowners use a cash-out refinance so they can turn the equity in their home into cash.
The most common reason for getting a cash-out refinance is for large expenses, such as home improvements. This is also a good way to add to your home’s value.
It is also used to help pay off expenses like credit card and student debt at generally lower rates, over a greater period of time.
A cash-out refinance loan may allow you to:
- Use cash for large expenses like home improvements or college tuition
- Pay off high interest debt
- End up with a more stable interest rate
- Lower your monthly payments
Under the right circumstances, a cash-out refinance can offer you flexibility in your long-term financial planning.
Because a refinance leads to the creation of an entirely new loan, make sure you plan for all the additional costs involved, such as origination and closing costs that are incurred by a standard mortgage. Make sure you shop around and get estimates from multiple mortgage lenders to ensure you’re getting the best rates for your refinance.