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  • What is a Refinance Loan?

    Refinancing works by giving a homeowner access to a new mortgage loan which replaces the existing one. The details of the new mortgage loan can be customized by the homeowner, include the new loan’s mortgage rate, loan length in years, and amount borrowed. Refinances can reduce a homeowner’s monthly mortgage payment, access cash for home improvements, and cancel mortgage insurance premiums, among other uses.

    Refinance mortgages come in three varieties — rate-and-term, cash-out, and cash-in. 

    Rate-and-Term Refinance
    In a rate-and-term refinance, the only terms of the new loan which differ from the original one are either the mortgage rate, the loan term, or both. Loan term is the length of the mortgage.

    Cash-Out Refinance
    In a cash-out refinance, the refinance mortgage may optionally feature a lower mortgage rate than the original home loan; or shorter loan term, such as moving from a 30-year mortgage to a 15-year mortgage. However, the defining characteristic of a cash-out mortgage is an increase in the amount that’s borrowed.

    Cash-In Refinance
    Cash-in refinance mortgages are the opposite of the cash-out refinance. With a cash-in refinance, a refinancing homeowner brings cash to closing in order to pay down the loan balance and the amount owed to the bank. The cash-in mortgage refinance may result in a lower mortgage rate, a shorter loan term, or both.

  • Key Points:

    • Getting a mortgage with a lower interest rate is one of the best reasons to refinance.
    • When interest rates drop, consider refinancing to shorten the term of your mortgage and pay significantly less in interest payments.
    • Switching to a fixed-rate mortgage—or to an adjustable-rate one—can make sense depending on the rates and how long you plan to remain in your current home.
    • Tapping equity or consolidating debt can be good reasons to refinance—or doing so can sometimes make the debt trap worse.