Refinancing means replacing an existing mortgage with a new mortgage, typically to take advantage of a lower interest rate, reduce monthly payments, or change the loan terms. When a homeowner refinances, they pay off their current mortgage and take out a new mortgage with different terms and conditions.
There are different types of refinancing options, including rate-and-term refinancing, cash-out refinancing, and cash-in refinancing. In a rate-and-term refinance, the borrower replaces their current mortgage with a new mortgage that has a lower interest rate or different loan term, but doesn’t borrow additional funds. In a cash-out refinance, the borrower refinances for more than the current balance on their mortgage and takes the difference in cash. Cash-out refinancing is often used to pay off high-interest debt or finance home improvements. In a cash-in refinance, the borrower pays money at closing to reduce the loan balance and potentially lower the interest rate.
Refinancing can have both advantages and disadvantages, and it’s important to carefully consider the costs and benefits before deciding to refinance. Refinancing can involve closing costs, application fees, and other expenses, and it can also extend the term of the mortgage, potentially increasing the total interest paid over the life of the loan. However, if done strategically, refinancing can potentially save money on monthly payments and interest over the life of the loan.