There are two reasons to refinance your home mortgage:
to take cash out of the home's equity or to find a more
favorable rate and terms.
Cash-out refinancing
Cash-out refinancing allows you to take additional
cash above the amount needed to pay off your existing mortgage,
closing costs, points and liens. You can use the cash for anything
you wish. Popular reasons to refinance for a cash-out include paying
off debt and paying for a child's college education.
For example, five years ago, you purchased your home
for $150,000 using a $120,000 mortgage. Your home now appraises for
$250,000. You owe $110,000 on your mortgage. If you take a cash-out
refinancing, you could take out a mortgage for $150,000. You would
pay off the $110,000 from your original mortgage and pocket the
$40,000.
Rate-and-term refinancing
This form of refinancing simply pays off one mortgage
with a new mortgage. This allows you to take advantage of lower
interest rates. You could also shorten the term of your mortgage so
that you build equity faster.
There are many different rate-and-term financing
options. You may be trading your adjustable-rate mortgage in for a
fixed rate. For example, if interest rates are on the rise and your
ARM is about to adjust to a higher rate, you may want to refinance
to a fixed-rate mortgage. But if you have a fixed-rate loan and plan
to move in a few years, you might want to refinance to a lower-rate
ARM.
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