Buying a home is an exciting experience and sometimes, the home buyer may obtain a home loan with a higher-than-ideal interest rate. But, if over time, your credit rating and FICO score improves, you may qualify for a lower interest rate on your mortgage loan, thereby necessitating a mortgage refinancing. But when refinancing a loan, you’ll be faced with many options so in today’s article from lending professional and loan officer Sonia Krietz, we’ll explore the three types of refinancing.
Mortgage refinancing, in its simplest form, entails getting a new home loan, with different and more favorable terms, to replace your original home loan. The new home loan is used to pay off the original mortgage, thereby taking its place. The following is a look at the three types of refinancing and how they differ.
Types of Refinancing – Rate and Term Refinance
A rate and term refinance is a common type of refinancing whereby the interest rate and the terms of the home loan are the only two elements that differ between the original mortgage and the new mortgage loan.
So, for instance,a homeowner may refinance from a 30-year fixed rate mortgage with a 5.5% interest rate to a new 30-year fixed rate mortgage with a 4.2% interest rate.
Alternatively, the homeowner could also opt to adjust the term of the mortgage, which refers to the length of time over which the money will be repaid. An example of this would be to refinance from a 15-year fixed rate mortgage to a 30-year fixed rate mortgage loan.
Notably, Rate and Term refinancing is perhaps the most common type of refinancing, as many will opt to get a new home loan when interest rates drop or when their FICO score improves, thereby making the borrower eligible for a better, lower interest rate.
Types of Refinancing – Cash Out Refinance
A cash out refinance occurs when the borrower opts to take more “cash out”, thereby increasing the total amount of the loan.
A cash out refinance can also entail an adjustment in the term or interest rate, although the defining characteristic is the act of increasing the total amount borrowed. Typically, the total amount borrowed is increased by 5% or more. (Anything less than this may not be worthwhile due to the effort and cost associated with refinancing.)
A good example of this type of refinancing is a debt consolidation refinance, where the borrower takes out an additional sum of money that is used to pay off high interest unsecured debt, such as credit cards.
Cash out mortgages can also be used as a method for consolidating a first and second mortgage into one single home loan.
It’s important to note that many lenders have a $250,000 limit on cash out refinancing.
Types of Refinancing – Cash In Refinance
A cash in refinancing is the opposite of a cash out refinance. In this type of refinancing, the borrower pays down a large chunk of the home loan, thereby reducing the total amount owed.
And example might entail a borrower with a $200,000 mortgage. Let’s say the borrower gets a $50,000 inheritance; he or she may opt for a cash in refinance in this case, where they would pay down $50,000, getting a new home loan for $150,000.
Cash in refinancing is a common mechanism for cancelling mortgage insurance premiums (also known as “MIPs”). Once a homeowner has paid down 80%, mortgage premiums can be cancelled.
Let Loan Officer Sonia Krietz Help You Get Refinanced
If you’re ready to get a home loan, wish to refinance a mortgage or need help with credit repair services before you obtain a new loan, contact lending professional and loan officer Sonia Krietz, with Security National Mortgage Company. In addition to offering mortgage loan lending services, Sonia can also guide you through the process of repairing your credit and maximizing your FICO score so you can increase your chances of not only getting approved for a mortgage, but you may also be eligible for a lower interest rate!
Readers may also wish to learn more about the difference between pre-qualification and pre-approval for a mortgage loan, along with what factors impact interest rates.
Also be sure to read Sonia’s related article to learn more about home loan refinancing and how refinancing works.
You may wish to complete the pre-application form and Sonia will be in touch to help you proceed through the process. If you have any questions or concerns, you can also contact Sonia Krietz by phone at 916.385.9716.