May 5, 2017
Sorry but we mortgage companies do have our fair share of
loan terms and when someone is refinancing a mortgage yes there are different
types. The most common are the cash-out refinance and rate and term. What are
the differences between the two terms and why should it matter? Let’s take a
closer look at refinancing and what makes one and what makes the other.
A rate and term refinance is a transaction where a new
mortgage replaces an old one. A refinance can replace a new interest rate on a
loan. This is the “rate” part of the rate and term refinance. It’s easy enough
to understand as it becomes apparent that refinancing to a lower rate will
benefit the borrower with lower overall monthly payments.
You can also adjust the term during a refinance. Terms for conventional
mortgages can be as short as 10 years and as long as 30. Most lenders offer
loan terms of 10, 15, 20, 25 and 30 years. Why the different terms? A longer
term keeps the payment lower than a shorter one yet at the same time it takes
longer to pay down the mortgage and there is much more interest paid over the
life of the loan with a 30 year loan compared to a 20 year, for example.
Or, a borrower has a 30 year loan but is five years into it.
If the borrower sees a lower rate and refinancing makes sense it might not make
sense to take out another 30 year loan, losing five years of payments. In this
example it might be better to refinance from a 30 year loan into a 25 or 20
Finally, a borrower can refinance both the rate as well as
the term. Getting a lower rate while shortening or lengthening the term of the
loan. This is a rate and term option.
A cash out loan is one that refinances the rate, the term or
both while at the same time pulling out equity in the form of cash at the
closing table. Most conventional loans allow borrowers to pull up to 80% of the
equity in their home when refinancing and pulling out cash although there are
slightly better terms if the borrowers pull out cash if the loan is at 75% or
even 70% of the current appraised value of the home. There are times when a
cash out refinance will have a higher rate, albeit slightly, compared to a rate
and term refinance.
A cash out refinance should only be considered if a rate and
term makes sense, anyway. Why? Because there are closing costs with any
mortgage and those costs must be considered when deciding whether or not to
refinance. If a rate and term makes sense then why not consider pulling out
some very cost effective cash with very low rates compared to other lending
options. If all the home owner needs is cash, a less expensive option is a home
equity loan or home equity line of credit.
For more information or questions about mortgage loans, please call (855) 757-8748.