March 8th, 2018 10:26 AM by Jackie A. Graves, President
and term refinance is the refinancing of an existing mortgage for the purpose
of changing the interest and/or term of a mortgage without advancing new money
on the loan. This differs from a cash-out refinance, in which new money is
advanced on the loan. Rate and term refinances can carry lower interest rates
than cash-out refinances.
and term refinancing activity is driven primarily by a drop in interest rates,
while cash-out refinance activity is driven by increasing home values. Because
there are pros and cons associated with a rate and term and cash-out
refinancing, the borrower must weigh the pros and cons of each before making
any final decisions.
potential benefits of rate and term refinancing include securing a better
interest rate and more amenable term on the mortgage, though the same principal
balance will remain. Such refinancing could lower the payments the homeowner is
responsible for, or potentially set a new schedule to pay off the mortgage more
quickly. For example, upon seeing interest rates drop, a homeowner who has been
paying their 30-year mortgage for 15 years already might want to take advantage
of the new rate without. They could refinance the loan at that lower rate for a
new 30-year full term—but it would essentially be like starting over with a
lower rate. By using the rate and term refinancing option, they might pay the
new market rate, but the term would be for the remaining 15 years only. The
monthly payments would be higher than taking a new 30-year term, but the
payments would be lower than what they negotiated initially. The homeowner
would have the same balance to pay off, however they would typically finish
sooner within the remaining term from the original financing.
refinancing, on the other hand, takes equity from the home for the homeowner to
make use of. This might be done as the overall value of the home increases, but
in the process a cash-out refinance will also increase the principal that
remains on the mortgage. This might call for a reappraisal of the home to gauge
its new value. Homeowners might seek such refinancing in order to gain access
to capital from the value of the home that they otherwise might not see until
the home was later sold.
converse option called cash-in refinancing means putting more money towards the
settlement of the mortgage in order to reduce any remaining principal.
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