Homeowners have several options when it comes to a mortgage refinance:
- A "cash-in" refinance: they bring cash to the settlement to reduce the size of the principal remaining on their home loan
- A "cash-out" refinance: they take some of the equity out of their home and therefore increase the size of the principal remaining on their home loan
- A "rate-and-term" refinance: they simply adjust the interest rate and term of the mortgage while maintaining the original remaining principal amount. Instead of shrinking or enlarging the balance of the mortgage, this option leaves it unchanged.
Rate and term refinance
Homeowners have a variety of reasons for refinancing and each reason can indicate that one refinance option or another makes the most sense. Before choosing a new home loan, think about your goals for refinancing. If you want to pay off your loan faster, see if you can afford the payments on a shorter-term loan. If you are focused on reducing your monthly mortgage payments, a lower rate or a longer mortgage term might be a better choice, so check out today's mortgage rates and use a mortgage calculator to estimate your savings.
A rate-and-term refinance works best for borrowers who want to take advantage of lower interest rates to reduce their payments or to reduce the overall amount of interest they will pay on their mortgage. This type of refinance is also valuable for homeowners who want to completely pay off their mortgage before a certain date, such as retirement or when their children go to college.
Just remember to calculate the closing costs when evaluating your refinance. Borrowers have several options for paying closing costs, such as wrapping them into the principal balance of the loan, paying them in cash or paying a higher interest rate to cover the costs. HSH’s Tri-Refi Calculator can help you see how those options will work out for you.
Michele Lerner contributed to this answer
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.
