Types of Refinancing

Refinancing is a financial tool that can help people achieve a range of financial goals. Whether you’re looking to save money, reduce your monthly payments, or access cash for various expenses, there’s likely a type of refinancing that can fit your needs. Let’s discuss the three main types of refinancing that we handle at Mortgage Specialists and the situations in which they can be beneficial.

Rate and Term Refinance

A Rate and Term Refinance is the most common type of refinancing. This is where an existing mortgage is replaced with a new one that has a lower interest rate and/or a different loan term. This type of refinance is typically used to reduce monthly mortgage payments or to pay off the home loan faster. Keep in mind that Rate and Term Refinances may come with closing costs and fees, so borrowers should carefully weigh the potential savings against these costs. Three main reasons why people choose a Rate and Term Refinance include:

• To obtain a lower interest rate. One of the primary reasons people pursue this type of refinance is to secure a lower interest rate on their mortgage. Lower interest rates can significantly reduce monthly payments, saving homeowners money over the life of the loan.
• To reduce monthly payments. By obtaining a lower interest rate or extending the loan term, borrowers can achieve a lower monthly mortgage payment. This can improve the monthly cash flow for a homeowner and make their lifestyle more affordable.
• To secure a shorter loan term. Some homeowners may want to shorten the term of their mortgage, such as switching from a 30-year to a 15-year loan. This allows them to pay off their home and build equity faster. Additionally, shorter-term loans often come with lower interest rates.

Cash-Out Refinance

In a cash-out refinance, you borrow more than what you owe on your existing mortgage and receive the difference in cash. This is often done to access home equity for various reasons, such as home improvements, debt consolidation, or other financial needs. Generally speaking, homeowners will only be able to borrow about 80-85% of their home’s total value. Here are some common reasons why someone might opt for cash-out refinancing:

• Home improvements. One of the most common reasons for cash-out refinancing is to fund home renovations. Borrowers can use the cash to remodel their home, add an extension, upgrade appliances, or make repairs. These improvements can increase the property’s value while enhancing its livability.
• Debt consolidation. Cash-out refinancing can be used to consolidate high-interest debt, such as credit card debt or personal loans, into a lower-interest mortgage loan. This can make debt repayment more manageable and reduce the overall interest.
• Education. Some homeowners use cash-out refinancing to cover the cost of education expenses. This can include college tuition or student loans for themselves or their children.
• Investments. Homeowners may choose cash-out refinancing to access funds for investment opportunities such as starting a business, purchasing stocks, or purchasing additional real estate. The hope is that the investment will yield returns greater than the cost of the mortgage.
• Emergency expenses. In times of unexpected hardship or expenses, homeowners may use cash-out refinancing to access cash quickly. This can help cover medical bills, legal fees, or other urgent needs.

While the positives can sound great, keep in mind that cash-out refinancing will increase the loan amount and monthly mortgage payments, which can be a long-term financial commitment. 

Divorce Refinancing

Refinancing a home before, during, or even after a divorce is a common situation done primarily to disentangle a couple’s financial and housing affairs. Refinancing often serves to remove one spouse from the mortgage while enabling the other to maintain the home/buy out the other’s share. Lowering monthly payments, accessing cash for equity buyouts, and ensuring compliance with the divorce settlement are all addressed when completing a divorce refinance. Note that the ability to refinance and the terms available will depend on each spouse’s individual financial circumstances. Ultimately, the goal is for both parties to achieve financial independence and clarity. The following issues are addressed during a divorce refinancing:

• Removing a spouse from the mortgage. Oftentimes, the marital home is jointly owned and financed with both spouses on the mortgage. Refinancing allows one spouse to take over the mortgage entirely, removing the other spouse’s financial responsibility for the property.
• Equity division. When a marital home has built up equity, refinancing can help one spouse buy out the other’s share of the home’s value. This allows one spouse to keep the home while compensating the other spouse for their share.
• Lowering monthly payments. Refinancing can lead to lower monthly mortgage payments by securing a lower interest rate and/or extending the loan term. Lower payments can be beneficial for the spouse who will retain the home on their own.
• Changing official ownership. If one spouse wants to retain the marital home, refinancing allows them to transfer the mortgage into solely their name. This change in ownership can be important for control and decision-making regarding the property.

In Conclusion

As always, the specific type of refinancing you should consider depends on your financial goals, the debt you have, and your current financial situation. Before refinancing, carefully evaluate the costs, benefits, and potential risks associated with the new loan. Whether you’re refinancing for the first time or you’ve refinanced before, Mortgage Specialists is here to help. We strive to help you make the best financial decisions for you and your future.