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 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 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.
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