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To Refinance Or Not To Refinance And How

By Expert Author: Adam Ibrahim

As any company offering debt management services will tell you, identifying your goal is the first step towards mortgage refinancing. To decrease the interest rate is the common objective of refinancing, but in many cases, people also want to stretch their loans back to the maximum term, thus cutting down their monthly payments. On the other hand, another goal of mortgage refinancing might be to consolidate debts, so if you have both a home equity and first mortgage loan, taking the two as one debt will generally level out your payments.

Vanilla Refinancing

There are two types of refinancing, one of which is vanilla refinancing where you get a new mortgage that has a lower interest rate in place of an old one. In this scheme, no cash is involved, except in paying closing expenses. One benefit of vanilla refinancing is its lower interest rate as opposed to that of cash-out refinancing. Another is that you don’t have to substantially raise your remaining mortgage debt. Therefore, if your main goal for refinancing is to pay off debt, the cash-out option might be better for you. It’s good to consult a company that offers debt management services to get advice on how to refinance your mortgage. Definitely, it will take a professional to determine your best course of action if you are having a hard time understanding the mortgage business, and especially if you’re dealing with a significant amount of debt.

Cash-out Refinancing

On the other hand, cash-out refinancing requires taking out a refinance mortgage loan that is more than the actual amount of your existing mortgage. Whatever the difference, you can take as cash. This is called cash-out refinancing where you pay an interest rate that is a bit higher than what vanilla refinancing requires, simply because the lender assumes more risk with his money. This is usually the best option for decreasing debt, but it will have its good and bad points. For example, a cash-out will let you settle your credit card debt at a lower interest rate, and you get extra room on your credit. On the other hand, you could be paying so much more in interest since it will take you way longer to pay off the debt that you’ve added to your mortgage from your credit card. Additionally, you also stand the risk of moving the debt back to your credit cards and being unable to pay up.

Should You Go for It?

To know if refinancing by extending your loan term allows you to save on interest, look into two possibilities - your old and new loan having the same loan terms, and your new loan having a term that is the same as your prospective refinance mortgage loan. Now check if refinancing lets you achieve your goal by comparing the interest you save. On the other hand, look into the time in which you intend to stay in the house. If your planned occupancy is short-term, perhaps you should keep your existing mortgage. In this case, how long it takes for you to recover your closing costs becomes the main issue.

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