Should I refinance my home mortgage?

Refinancing - how does it work?

The idea behind refinancing a home is that you are replacing the current mortgage with a new mortgage. The new loan is typically at a reduced interest rate, more desirable term, provides cash
out for various reasons or combines multiple debts in order to improve the homeowner's financial situation. At the closing of a refinance, the new home loan pays off the current financing and becomes the new lien on the home, releasing the prior lien(s). There are two main types of refinancing:

• Cash out refinance - As the name implies, in many cases a cash out refinance is when a borrower receives cash back at the closing. However, it may also mean that the borrower has paid off other debts as part of the process. Example: A homeowner pays off their current mortgage and some credit cards as part of the transaction, but doesn't receive any actual cash back at the loan closing. This is still considered a cash out refinance because the borrower is paying off more than the current loan amount.
• Rate and term refinance - A rate and term refinance is a loan process in which a current mortgage is replaced by a new mortgage with more favorable rates and/or terms. This is also called a limited cash out refinance in many cases. Rate and term refinances do not include the payoff of any other debts beyond the current loan balance...with one exception. If you are paying off a current first mortgage and a second mortgage or home equity line of credit (HELOC) that was used to purchase the home, it is still considered rate and term or limited cash out.

If I roll my closing costs into the loan amount on a refinance, is it considered a cash out loan?

A common point of confusion is whether or not a loan is considered a cash out refinance when the closing costs are included in the new loan amount. This scenario is not considered cash out and, in fact, many borrowers can receive up to $2,000 or 2% of the loan amount (whichever is lower) as cash back at the closing table without it being considered a true cash out loan.

Why does it matter if it is a cash out or rate and term refinance?

• Rates and fees - The terms (interest rate, points, fees) are typically more favorable for a rate and term refinance than they are for a cash out refinance. This doesn't mean all cash out loans are bad, it just means relative to rate and term refinances, they are typically higher.
• Approval - Some loan scenarios are possible with just a rate and term refinance, but are not possible for a cash out refinance. In some cases certain combinations of credit score, loan-to-value, property type, property use, etc. will not be allowed with a cash out refinance, but will be with a simple rate and term loan. 

What are some of the benefits of refinancing a home?

A refinance may help in one or more than one of the following ways depending on a homeowner's specific situation and goals:

1. Lowering the interest rate on the home mortgage
2. Lowering the monthly payments on the home mortgage
3. Increase the term of a mortgage for lower monthly payments
4. Decrease the term of a mortgage to pay it off quicker
5. Changing from an adjustable rate mortgage (ARM) to a fixed rate mortgage
6. Cash out for debt consolidation
7. Cash out for home improvements
8. Cash out for other reasons 

This is not an all inclusive list, but it covers many of the main reasons people choose to refinance. It is important to consult a mortgage professional and possibly a financial advisor to best accomplish your individual goals.

How much does refinancing cost?

This answer can vary greatly and, as such, I have written a specific post addressing this topic. You can read it here: How much does it cost to refinance a home? 

Thanks for reading my blog!

Website: Arizona Mortgage Refinance

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