Refinancing your mortgage is the act of replacing your existing debt obligation with a new obligation under new terms. Simply put, you can renegotiate your mortgage at a rate and term that make more sense for your financial situation and goals. There are two primary motivations to refinance a mortgage: “rate-and-term” refinancing to save money, and “cash-out” refinancing to access equity. Refinancing a mortgage is not without its disadvantages. It will take you longer to own your home outright, and you may end up paying more interest if you choose a “cash-out” option. Speak with your mortgage broker to discuss whether refinancing is right for you.
Let’s explore some of the most common reasons why homeowners choose to refinance their mortgages:
Rate and Term Refinancing
In this instance, the existing mortgage is refinanced to a more advantageous rate and term for the borrower. The mortgage is refinanced at a lower interest rate and term that makes financial sense for the borrower, and generally lowers the monthly payment obligation. No new money is advanced on the loan. This type of refinancing is typically driven by a drop in interest rates.
Cash Out Refinancing
Cash-out refinances differ from rate-and-term refinances as additional money is added to the existing mortgage. The goal of this form of refinancing is to access equity from the home to be used for alternate purposes. Some of these purposes include but are not limited to:
- Paying off other debts (credit card, student debt)
- Purchasing a second home, vacation home, or income property
- Financing a renovation, addition, or home improvement project
- Buying a new car, boat, or recreational vehicle
- Investing in stocks
- Paying for a child’s education
- Starting a small business
Cash-out refinancing differs from rate-and-term refinancing, as you are adding new money to the mortgage. This means the mortgage will take longer to pay off, or carry a higher monthly payment based on the increased debt amount.
However, having a home as an asset makes it much easier to increase your cash flow without the stress and uncertainty of applying for a traditional loan. Consult with your mortgage broker to discuss the pros and cons for your unique situation.
Finally, homeowners often decide to refinance their mortgage in order to consolidate loans and simplify their budget. This may fall under the category of rate-and-term or cash-out depending on your overall financial goals. Your mortgage broker can guide you through the options.
Speak with your mortgage broker from The Mortgage Advisors for more information about whether refinancing is right for you.