Refinance: Everything you need to know

Cash-out

In this case, you are using your house to draw cash out to then spend. While this option usually increases your mortgage debt, it also provides you with the funds to invest in goals such as a home improvement project, for instance. During cash-out refinance, you can also secure a new interest rate and loan term.

Cash-in

Here, you would make a payment in a lump sum to reduce your LTV (loan-to-value ratio). This usually reduces your debt burden and your monthly payment and may help you get a lower interest rate. Before choosing cash-in refinancing, you should make sure paying a lump sum makes sense for you financially, rather than depriving you of better opportunities.

While rate-and-term, cash-out, and cash-in refinancing are the more common types, there are others, such as no-closing-cost refinance, short refinance, reverse mortgage, debt consolidation refinance, and streamline refinance, to name a few. Before committing yourself, it is important to know which will work best for your financial situation.

Before refinancing your mortgage, it is important to weigh the risks and benefits to make sure it is right for you.

Risks:

It makes no sense. Make sure the interest rate on your new loan is at least 1% less than your current mortgage. If you have not had enough time to accumulate much equity, then this is especially true.

Cashing out too much. Make sure you do not leverage too much money out of the equity of your home. You may run the risk of paying too much in monthly mortgage payments and having no leeway if property values drop.
Refinancing too often. Just because you technically can refinance, it doesn’t necessarily mean you should. If you refinance too often, you can lose your savings by paying too much in fees and closing costs. Think long-term.