How Mortgage Refinance Works

How Mortgage Refinance Works

Mortgage Refinancing with Bad CreditRefinancing your home for the first time can be a very different and often times confusing process for many home owners. Just as you may have felt as a first time home buyer, these same emotions and questions may arise in your mind as you begin to explore your possible refinance options. In this article, you will learn what a refinance is and different types of refinance transactions you will be presented with when you apply with your lender of choice.

What exactly is a mortgage refinance? A refinance of your home loan is simply paying off your existing mortgage(s) with the proceeds from a new loan. It’s also important to note that there are two distinct types of refinances and depending on which option you decide upon to meet your needs, you will have to follow and meet certain criteria in order to qualify for the loan. These two types of refinance transactions are known as ‘No Cash-out’ and ‘Cash-out’ mortgages.

A No Cash-out refinance transaction is typically referred to as a ‘Rate and Term’ refinance amongst mortgage brokers and lenders because the sole aim of this transaction is to either lower the interest rate and/or term of your mortgage. For example, if you purchased your home with a 30 year fixed rate mortgage that has a 7.25% interest rate, a ‘Rate and Term’ refinance would help you lower the interest rate to a 6.25% loan and/or change the term from a 30 year fixed rate mortgage to a 15 or 20 year fixed rate loan.

A very important point to remember is that at the time of funding, you may not receive over $2,000 in loan proceeds or 2% of the loan amount (which ever is less) to have your refinance be considered a ‘No Cash-out’ transaction under Fannie Mae conventional lending guidelines. A Rate and Term refinance is also cheaper, less expensive loan option because the lender carries less risk than a Cash-out refinance.

A Cash-out mortgage refinance is when a home owner takes out a slightly higher loan amount and receives that small increase as ‘cash’ at closing. This loan option typically involves what brokers and lenders refer to as ‘add-on’ pricing which increases the costs or interest of your loan. The increase is very minimal depending on how much you want to cash out on. Typical reasons why a home owner many want to cash out some of their equity is to pay-off high interest credit card debt which will help you save considerably on interest payments. The other most common reason for a cash-out refinance is to have money available to repair or upgrade the home.

While refinancing your home loan for the first time can seem like a daunting task with all the different types of mortgages out there to choose from, you are now equipped with the basic knowledge you will need to get started in the right direction. Remember that there are two distinct types of mortgage refinance loans that will meet your needs, this is the ‘Rate and Term/No Cash-out’ mortgage and the ‘Cash-out’ options which every broker and lender has access to. Past that, the loan application and qualification process is almost identical to when you applied for your mortgage as a first time home buyer.

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