Refinancing a house means replacing the current mortgage with a new one that has more favorable terms. The new mortgage can have a different principal amount, interest rate, and payment schedule. The lender pays off the old mortgage with the new one, leaving the homeowner with just one loan and one monthly payment. There are two main types of refinancing:
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Rate and term refinance: This type of refinancing allows homeowners to change their existing loans mortgage rate, loan term, or both. The goal is to obtain more favorable borrowing terms, often in response to shifting economic conditions. Common goals from refinancing are to lower ones fixed interest rate to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM) or vice versa.
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Cash-out refinance: This type of refinancing allows homeowners to refinance up to 80% of their homes current value for cash. The lender pays off the old mortgage with the new one, and the homeowner receives the difference in cash. This option is often used to make use of the homes equity, but it can also be used to pay off other debts or make home improvements. However, its important to note that taking a cash-out mortgage increases the amount of the lien, which could mean larger and/or longer-term payments.
When applying to refinance, the lender will ask for the same information that was provided when buying the home, such as income, assets, debt, and credit score. The lender will use this information to determine whether the homeowner meets the requirements to refinance and can pay back the loan.
