There are two primary reasons to refinance a mortgage: to get more desirable rate and terms or to extract cash from the home's equity.
Rate-and-term refinancing pays off one loan with the proceeds from the new loan, using the same property as collateral. This type of loan allows you to take advantage of lower interest rates or shorten the term of your mortgage to build equity faster.
Rate-and-term refinancing refers to myriad strategies, including switching from an ARM to a fixed and vice versa. For example, if you have an ARM that is set to adjust upward in a few months, you can refinance into a fixed-rate mortgage. Or if you have a fixed-rate loan and you know you'll move in two or three years, you could refinance into a lower-rate 3/1 hybrid ARM.
Cash-out refinancing leaves you with cash above the amount needed to pay off your existing mortgage, closing costs, points and any mortgage liens. You may use the cash for any purpose.
Calculate the equity in your home
|Say you bought your house for $150,000 a few years ago and borrowed $120,000. Now the house has an appraised value of $250,000 and you owe $110,000. With a cash-out refinance, you could get a mortgage for $150,000. You would pay off the $110,000 you owe and pocket the $40,000 difference, minus closing costs.|
|Original house value:||$150,000|
|Cash-out refinance loan amount:||$150,000|
|Pay amount owed:||-$110,000|
|Pocket the difference:||$40,000|