Rate and Term, Cash-Out refinancing and Home Equity Loans

Cash-Out refinancing, Rate and Term Refinancing and Home Equity Loans

When you decide to refinance your mortgage, you will basically have two options available. There is Cash-Out refinancing; which is when you receive the difference between the value of your original mortgage and the amount you have already paid. In this method, you get the money right away, and you can use it on anything. Many people use this refinance money to make improvements around their house, pay off some debt or finance an education. Your other option for refinancing is Rate and Term refinancing, which is when you simply get another mortgage, but at a more preferable rate than the first one.

Many people wonder if one of these options is better than the other, as well as the benefits of both. The clear benefit of both plans is that you can reduce your mortgage rate to one that is more beneficial and saves you some money. This is the most obvious advantage of refinancing in general. Getting into specifics, it is likely that one of these two options will work out more to your advantage. It is simply a matter of taking the time to figure out which one is best for you. Both options have their good points as well as their drawbacks.

As far as determining which refinancing method is best for you, it is important to first assess what you are looking to get out of it. If you simply want to have lower mortgage rates, and aren’t in any dire need of extra cash, rate and term refinancing would probably be your best option. Many people want nothing more than a better rate on their mortgage and an adjusted payment schedule. It is important to keep an eye on the markets when planning to do rate and term refinancing since the rates will vary from time to time. Rate and term refinancing should only be done if you know you will save a significant amount from your original mortgage since you’re going to be investing a lot of time and research into it.

On the other hand, if there are specific projects around your house that you’re in need of extra money for, or if you are sending a kid off to college in the near future, cash-out refinancing is probably the way you want to go. With cash-out refinancing, you get the money right away, and it can be used on anything you’d like. Aside from simply getting better mortgage rates, you will get some money that can be put to use for you immediately. Another nice aspect of cash-out refinancing is that while the new mortgage rates may take a few months for you to see a noticeable difference in your finances, the cash you receive will make you notice a larger impact immediately.

Another option for you to consider is forgetting about the refinancing, and simply taking out a home equity loan. A home equity loan is also referred to as a second mortgage, the only difference being you get to use the cash you receive on anything you wish. This is for people who would normally be looking into cash-out refinancing. If you need the cash, but don’t want to go through the hassle of refinancing, or if rates are not good enough to refinance, then it is probably more worth your while to simply get a home equity loan. Home equity is a much simpler process than refinancing since it has nowhere near the amount of research and preparation involved. Furthermore, if you are satisfied with your current mortgage rates, then there’s no reason for you to go through all the complexities of refinancing when you can simply put your home equity to work for yourself.

Cost is another fact that you should keep in mind when deciding. Home equity can be much cheaper than refinancing. Many times the fees for refinancing can be relatively high, whereas getting a home equity loan is much cheaper. If you find yourself torn between the two, this fact might help you make your final decision: a home equity loan can be a faster option when it comes to receiving your money. When you refinance, it might take awhile for the loan to fully come into effect and be approved. Home equity loans on the other hand tend to close much more quickly. This might not be a big deal if you’re using the money for a luxury purchase like a car or even using it to pay for tuition, but in the event of an emergency, if you need the money fast, a home equity loan might be the better way to go. Also keep in mind that if you refinance, it will likely be another 15- or 30-year loan. Unless the rates on it make the lengthy repayment schedule worthwhile, you might be better off with a home equity loan that would be repaid in a much shorter timeframe.

To decide between these three options, your best bet is to simply sit down and figure out whether your goals can be met through refinancing or home equity. If getting additional cash is unnecessary for your plans, then basic rate and term refinancing would probably suit you just fine. Should you need money to accomplish some projects or pay some bills, then you will have to decide whether you want to refinance along with getting the cash, or if all you need is a home equity loan.

If you have concluded that your best bet would be to refinance, you now only have to decide between the two refinancing options. Again, this decision should not be too difficult if you have an idea of what you’re looking for.

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