Types of Home Mortgage Refinances

As mortgage interest rates drop, refinancing becomes the talk of the town—and for good reason. A lower interest rate can open the door to a lower monthly payment, resulting in significant savings.

Mortgage refinancing involves applying for a new home loan to replace an existing home loan. Although this is a common borrowing practice, it’s important to know the different types of refinance transactions. Understanding your options is the only way to know which one is right for you.

1. Rate-Term Refinance

A rate-term refinance is the simplest form of refinancing. Basically, you’ll apply for a new mortgage with the intent of modifying your rate and term—without changing the mortgage balance.

If you have a fixed-rate mortgage, your interest rate remains the same for the life of the loan. When mortgage rates decline, the only way to take advantage of a lower rate is to refinance the mortgage.

Of course, to benefit from a rate decrease, you must be able to qualify for a new mortgage. Plus, your credit score must be high enough to qualify for a more favorable interest rate. If you’re eligible for a better rate, there’s a chance to pay less interest over the life of the loan, and potentially reduce your monthly payment.

But even if you refinance with the sole purpose of getting a better interest rate, you’ll also need to choose a new mortgage term. Several options are available to you. Some homeowners reset the mortgage clock and refinance into another 30-year mortgage. But you could also choose a 15-year or 20-year mortgage term.

One benefit of a shorter term is that you can get rid of the balance sooner. The upside to choosing another 30-year mortgage is that you’ll get the lowest monthly payment possible. This can free up cash in your budget to potentially use for other things, like paying off other debts* or saving an emergency fund.

2. Cash-Out Refinance

Along with refinancing to adjust your mortgage rate and term, you can also get a cash-out refinance. This option, however, isn’t available to all applicants.

To qualify, you must have sufficient home equity. And if you do, you might be able to borrow up to 80% of your equity. You can use proceeds from a cash-out refinance for any purpose. Some people use funds for home improvements, debt consolidation*, college, or a wedding.

If you decide to cash out your equity, only borrow what you need and can afford. It’s important to note that a cash-out refinance does increase your mortgage balance. Therefore, you could end up with a more expensive mortgage payment.

3. Mortgage Buyout

If you’re getting a divorce, separating from a domestic partner, or parting ways with another co-borrower, you could also refinance a mortgage and buy out the other owner.

In these situations, it’s often easier to sell the property and split the proceeds. But sometimes, one owner chooses to retain ownership while the other gives up any interest in the property. Buying out an owner involves getting a cash-out refinance, but the process is slightly different from an ordinary cash-out refi. Basically, the person retaining ownership of the property must apply for a new mortgage loan in their name only—removing the other person’s name from the mortgage and deed.

Final Word

Mortgage refinancing is useful in many scenarios. To learn more about your refinancing options, give the loan experts a Blue Spot Home Loans a call today. We can answer any questions you have about credit qualifications, interest rates, and affordable home loan programs.

Cherry Creek Mortgage Co., Inc. NMLS #3001, dba Blue Spot Home Loans. *Debt consolidation does not pay off the debt, please consult a financial advisor regarding the effect of consolidating short-term debt into long-term debt. This material is informational only and not an advertisement to extend credit as defined by TILA/Regulation Z nor an application for credit as defined by RESPA/Regulation X. All applications are subject to underwriting approval and determining applicant’s ability to repay. Not all applicants are eligible for or qualify for all loan products offered. All loan programs, terms and conditions are subject to change without notice. Rates and terms are valid as of the date of printing/distribution.