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How does mortgage refinancing work?

When a mortgage is refinanced, the old loan is practically traded for a new one with a new interest rate and a different mortgage term. And maybe a new balance too.

In other words, refinancing of mortgage works by offering a new mortgage loan to a house or homeowner which then replaces the one that already exists. The new mortgage details can be changed or customized by the owner, and this includes the new mortgage rates, the loan term (in years) and the amount which is borrowed

There are three types of mortgage refinancing and here are the three types.

  • Cash out refinance

In the cash-out refinancing, the refinance mortgage may have a rate of mortgage lower than the original mortgage loan; or loans of shorter terms, such as the transition to a 15-year mortgage from a 30-year mortgage.

One of the defining characteristics of a cash-out mortgage, however, is the increase in the loan amount.

The initial balance of the mortgage exceeds the original balance of the old mortgage by 5% or more.

As the homeowner only owes the bank the original amount, the extra amount you will pay in cash is at the close or in the instance of debt consolidation refinancing which is directed to creditors, such as student loans and credit card companies.

The cash-out mortgages may also be used in consolidating the first and second mortgages if the second mortgage wasn’t taken as at the time of purchase.

Cash-out mortgage loans are riskier for a bank than the rate and term refinancing-mortgage and therefore have stricter approval standards.

  • Cash in refinance

Cash-in refinancing mortgage is the exact opposite of cash-out refinance.

The cash in refinance allows the refinancing owner pay a sum to settle the balance of the loan and the amount due to the bank. This cash-in mortgage can result in lower mortgage interest rates or shorter repayment terms, or even both.

There are quite some reasons why many homeowners love cash-in refinance mortgage. The most common of the reasons for a cash-in refinancing is access a lower mortgage rate and cancellation of Mortgage insurance Premium Payments (MIP).

  • Rate-And-Term Refinance

In the rate and term refinancing, either or both of the initial terms of the new loan are different from the original (these terms are either, the repayment term, the mortgage rate, or in some cases, both can be different).

The length or duration of the SunWest Mortgage is also known as the loan term.

Take for instance, in the rate and term refinancing, an owner can refinance a thirty-year fixed rate mortgage turning it to a 15-year mortgage of fixed rate; or the homeowner can refinance from a 30-year term with a mortgage rate of 6% to a new 4% mortgage rate over 30 years.

The no cash-out refinancing mortgages also allow the inclusion of closing costs to the loan balance so that the owner does not have to pay out of pocket fees.

Particularly in an environment of falling or low mortgage rates, most refinancing are rate and term refinance

Outcomes of mortgage refinancing

The common reasons you may want to refinance your mortgage is to decrease your interest rate, move to a fixed or an adjustable mortgage rate or you may want to pull out of your home equity.

Mortgage refinancing, like mortgages generally, is expensive. The costs are not just the interest, but the closing costs or additional costs on the price of the home, such as the origination rates (this is a fee charged by your lender to create the loan), credit reporting fee, appraisal fee, and more.

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