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Unlocking your home’s potential: cash-out refinance vs. rate and term refinance

In simple terms, a mortgage refinance involves replacing your existing mortgage with a new one that comes with different terms. Two primary types of refinances are available: the “cash-out” refinance and the “rate and term” refinance.

Cash-out refinance

A cash-out refinance empowers homeowners to leverage their equity to use for a variety of purposes, such as debt consolidation, home improvements, investments, or other financial needs. With this type of refinance, your existing loan balance is combined with the amount of cash you take out (plus any financed closing costs) to equal your new mortgage balance. Whether you aspire to eliminate high-interest credit card debt, embark on a kitchen remodeling project, or require access to your equity for any other financial endeavor, a cash-out refinance offers a viable solution. It essentially allows you to convert a portion of your home’s equity into usable funds, putting the value of your property to work for you in a meaningful way.

Rate and term refinance

A rate and term refinance is designed to reduce your monthly mortgage payment by altering the terms of your loan. This can be achieved by lowering the interest rate, extending the loan term, or eliminating mortgage insurance (MI or PMI). You also have the option to shorten the loan term with a refinance, for example, transitioning from a 30-year to a 15-year mortgage. Here are a few examples of how you can lower your mortgage payment through a rate and term refinance:

  1. Interest rate reduction: Suppose your current mortgage carries a 6.5% interest rate (6.6% APR), but with a refinance, you can secure a 4.75% interest rate (4.8% APR). All other factors remaining the same, refinancing would lead to a lower monthly payment.*
  2. Loan term extension: If your current mortgage has 22 years left before it’s paid off, refinancing into a new 30-year loan can decrease your monthly payment since you’re spreading the remaining loan balance over a longer period.
  3. Removing mortgage insurance: If you initially purchased your home with an FHA loan and a 3.5% down payment, you may have been required to pay monthly mortgage insurance. However, if your home’s value has appreciated, reaching the 20% equity threshold, you can eliminate the monthly mortgage insurance by refinancing into a conventional loan.

*Please note that the interest rate mentioned is for illustrative purposes and may not represent current market rates.

When to consider mortgage refinancing

Refinancing may not make sense for every homeowner in every situation. For instance, if you already have a very low interest rate and you have no need to tap home equity, a refinance may not offer significant benefits. At Solcosta Home Loans, we can help you determine if refinancing makes sense based on your short and long-term financial goals – and if refinancing doesn’t make sense, we will tell you. Feel free to contact us for a comprehensive discussion of your options or to request a free, personalized rate quote.

Working with Solcosta Home Loans

  • Since we are a mortgage broker and not a bank, we have the ability to shop multiple lenders to get you the best deal possible.
  • We offer a wide variety of loan products, and we can help you find the loan that is right for you!
  • We are fast and efficient and have the ability to close most of our loans in 18 days or less.
  • We are locally owned and operated in Northern California. That means when you call or email us, you will be speaking with us directly.

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