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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. (Use this mortgage
calculator to see how you can pay off your
loan faster.)
Rate-and-term refinancing refers to myriad strategies,
including switching from an ARM to a fixed or 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 additional cash above the amount
needed to pay off your existing mortgage, closing costs, points
and any mortgage liens. You may use the additional cash for any
purpose.
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| Calculate the equity in your home |
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| For example, 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. |
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