Before you can accurately make the decision to refinance your current home loan, it is in your best interest to know the types of refinances available to you in today’s mortgage lending environment. For all intensive purposes, there are two major types of refinancing options: What the industry calls a Rate & Term refinance (RTR) versus a Cash-Out refinance (COR). Each type of refinance can be beneficial in its own right to accomplish your goals and motivation for completing a refinance, so it’s important for you to be able to distinguish between the two. Let’s dive in a bit further.
You can think of the RTR as the plain Jane & Jim of refinancing. Typically the process is streamlined including waiving the appraisal process (you’ll need to consult your lender to ensure your refinance transaction qualifies for a streamlined refinance as certain guidelines must be met based on your current and future loan characteristics). Completing this type of plain-vanilla refinancing replaces your current mortgage with a new mortgage with no funds back to you at closing. It can be acceptable to include any closing costs or prepaid items into the new loan (meaning you bring zero funds to closing to complete the transaction) as long as loan guidelines are not exceeded. It is not, however, a requirement for you to include closing and prepaid costs into the new loan amount as they can be paid at closing and out of pocket by the borrower.
If the RTR is our plain Jane, think of the COR as her fancy sister Victoria. Cash out refinances typically have slightly higher interest rates and closing costs compared to the streamlined RTR and put money back into your pocket by extracting equity from your home. When completing a COR you pay off the existing mortgage and get the difference in your existing loan amount and new loan amount back into your pocket (less closing and prepaid costs). Because it is likely you’ll receive cash back at closing through the equity you’ve built in our home, the COR can be a popular reason for refinancing for debt consolidation, home-improvement funds, paying off a second mortgage or home equity line of credit, or to buy out the ownership of a lien holder.
Knowing the types of refinance products available to you is an integral part of deciding whether or not you want to complete a refinance or if refinancing is a good option for you presently. There are several reasons why you should consider refinancing, but having the knowledge of what products are available to you is the first step in the decision making process. Now that you’re an expert in the types of refinance transactions, you can feel confident in making the right decision to move forward or not on your next transaction.