A homeowner’s life circumstances can evolve throughout the years of their mortgage, and they may wish to change some terms of the original home loan to reflect those changes. Whether they wish to take advantage of better rates, pay their loan faster, pay off a big chunk of the balance at once to reduce monthly payments, or simply get some extra cash to carry out home improvements, there are several different ways that a home mortgage can be modified to accommodate a homeowner’s current financial situation. So, exactly what is mortgage refinancing?
The Three Types Of Refinance Mortgages
There are three main types of refinance mortgages that homeowners can consider: rate-and-term, cash-out, and cash-in. All of these options involve paying off the original mortgage on the home and replacing it with a new one. The right type will depend on each individual’s circumstances, and the rates vary among the different options.
Rate & Term
The most popular type of mortgage refinance is rate-and-term. With a rate-and-term mortgage refinance, either the mortgage rate, the term of the loan, or both are modified; the rest of the terms in the original loan remain the same.
In this type of refinance, a person might choose to switch from a 30-year fixed-rate mortgage to a 15-year one, and the rate may or may not stay the same. This approach is especially popular at times when mortgage rates are dropping.
Although a homeowner might get some cash out of such a refinance on closing, it generally will not exceed $2,000. Homeowners also have the option of getting a “no cash out” refinance, which allows the closing costs to be added to the loan so that no costs have to be paid out of pocket.
Cash-Out
A cash-out refinance increases the amount of money that is borrowed. The loan balance on the new mortgage will exceed that of the original mortgage by at least 5 percent. Since the homeowner still only owes the bank the original amount, the additional money is paid out to them in the form of cash at closing.
This approach may also be used in a debt consolidation refinance, with the extra amount of money being directed to the person’s creditors, such as a student loan administrator or credit card company. With a cash-out mortgage, the bank is taking on a greater risk than it would with other types of refinance, which means borrowers will need to meet stricter approval standards. Higher credit scores may be needed, and mortgage lenders typically cap the cash-out amount at $250,000.
Cash-In
A cash-in refinance mortgage is the opposite of a cash-out refinance. It involves a homeowner bringing cash to the closing to pay down the amount of the loan balance that is owed to the bank. This might lead to a shorter loan term, a lower mortgage rate, or both. People who opt for this type of refinance are often seeking a lower mortgage rate by reducing their loan-to-value, or LTV. For example, homeowners who have saved some money to pay down their balance can enjoy a lower refinance mortgage rate by reducing their LTV from 80 to 75 percent. Homeowners might also choose this route to cancel their mortgage insurance premium payments. When a conventional loan is paid down to an 80 percent LTV or lower, the mortgage insurance premiums do not have to be paid.
Application & Documents Needed
A mortgage refinance generally requires the same approval process as a purchase mortgage because the borrower is essentially getting a new loan with new terms. Therefore, some paperwork is required. However, it does tend to be smoother than a new purchase loan because the homeowner already owns the home in question.
Borrowers should collect their credit score and payment history, employment and income history, and information about their cash reserves and retirement assets. Proof of income in the form of pay stubs and W-2s will be needed, along with bank statements to prove assets and some proof of U.S. citizenship or residency status. Information about the original transfer of the home will not be needed.
However, less documentation is typically needed for a refinance mortgage compared to a purchasing mortgage. The home will also have to undergo another appraisal to determine its current market value. Although it is possible to refinance a mortgage numerous times, borrowers may have to wait six months after a cash-out refinance before refinancing again.
Speak To The Experienced Mortgage Brokers
Refinancing your mortgage is a big decision, so it is important to take all the variables into account before committing to ensure that the new loan will offer the expected benefits. If you would like to explore whether a refinance mortgage makes sense in your situation, get in touch with the experienced mortgage brokers at My Lending Pal today to discuss your goals. The experts at My Lending Pal can explain the available options and current market conditions to help you determine your ideal loan.
