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Rate-and-Term vs.
Cash-Out Refinancing
Let's take a look at the two basic choices when refinancing your mortgage: rate-and-term and cash-out. By weighing the benefits of each, you can better understand which mortgage refinance option works best for your financial goals.
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What's rate-and-term refinancing?
Also known as a traditional refinance, rate-and-term refinancing changes the rate and/or term of your existing mortgage. It pays off your original loan and replaces it with a new mortgage. Typically, the new mortgage has a rate and/or term that's better suited to your financial goals. This type of refinancing is ideal when you want to take advantage of lower interest rates or lower your monthly payments for more financial flexibility.
Key benefits
Lower your interest rate
Refinancing to a lower interest rate than the one you currently have could save you thousands over the life of your loan.
Lower monthly payments
Refinancing to a longer term can reduce your monthly payments and free up funds for other expenses. Keep in mind you'll pay more in interest over the life of your loan when you extend your term.
Pay off your loan faster
By refinancing to a shorter loan term, you can build your home equity faster and pay your loan off sooner. Your monthly mortgage payments will likely be higher, but you end up paying less in interest over the life of your loan.
What's a cash-out refinance?
Cash-out refinancing lets you draw on your home's equity and use it as a financial tool. You can turn equity into cash while making changes to your loan rate and term at the same time. As in rate-and-term refinancing, a new loan replaces your existing mortgage, but the amount of cash you take out gets added to the loan balance. The difference is then paid out to you as a lump sum payment at closing. This type of refinancing is helpful if you need extra cash for home improvements, paying off high-interest debt or even college expenses.
Key benefits
Pay for large expenses
The money you take out can be put toward other costs or a big project, such as renovations that could boost your home's value.
Get a bigger tax deduction
You can also use cash-out refinancing to pay off non-deductible debts. Since mortgage interest is tax-deductible, this may qualify you for a larger tax refund. Speak to your tax advisor for guidance.
Consolidate your debts
This type of refinancing can help you take out money to pay off a lot of high-interest debts at once. With a cash-out refinance rate, you can then move that debt into a single monthly payment with lower interest.
Which type is right for you?
A rate-and-term refinance helps you achieve different things than a cash-out refinance. What makes sense for you will depend on your reasons for refinancing and whether you meet the requirements. For example, if you want to do cash-out refinancing, you'll need to build enough equity in your home and get a home appraisal. Identifying your goals and speaking to one of our mortgage representatives will help you narrow down the choice.