An In-Depth Look at Cash-Out and Rate-and-Term Mortgage Refinancing
According to a study by the Federal Reserve Bank of New York, American homeowners took out $8.4 trillion in new mortgages over the last couple of years. That’s more than a third of our country’s total GDP! One of the main reasons why this occurred is because countless Americans sought to refinance their mortgages in a bid to keep up with payments during the economic turmoil brought about by COVID-19.
While the worst of the pandemic is now behind us, housing affordability is still at a record low due to surging prices. This is likely to affect the demand for cash-out and rate-and-term refinancing services moving forward—but how do these services work, and how are they beneficial?
Continue reading to find out!
Mortgage Refinancing in a Nutshell
Mortgage refinancing is all about closing one home loan in favor of opening another on different terms. Borrowers refinance their mortgages for various reasons—some switch loans to capitalize on a federal decision to lower the national interest rate, while others do it as a way to access cash in the short term.
Ultimately, people demand refinancing services to save money and stay on top of their financial commitments without giving up their dream of owning a home.
Rate and Term Refinancing
What Is It?
As the name suggests, rate and term refinancing involves swapping out your old mortgage for a new one with lower premiums (a lower rate) and/or a more favorable loan period (term). Borrowers typically do this by contacting a mortgage refinance company to ask whether they’re eligible to close their current home loan and take out a new one. The company then makes an offer based on the borrower’s financial stability (evaluated using factors like their credit score and debt-to-income ratio) as well as the national interest rate at the time.
Why Is It Beneficial?
It Helps Borrowers Save Long-term Costs
One of the biggest benefits of rate-and-term refinancing is how much money it saves borrowers in the long run. Here’s an example to illustrate:
Let’s say you’ve got a 15-year fixed-rate mortgage on a house worth $250,000 at an APR of 15%. You’re 7 years into your term, and you’ve paid half of the loan with interest—so you’ve got 8 years left to pay $125,000 ($15,625 per year) plus $2,343.75 a year on top in premiums. If you refinance your loan to an APR of 13%, your yearly premium will drop by $312.50 per year. That might not seem like much, but over 8 years you’ll save $2,500!
It Gives Borrowersthe Chance to Pay Back Their Mortgages Early
Another major benefit of this type of mortgage refinancing pertains to time. For instance, suppose you take out a 30-year mortgage because you can’t afford to pay higher premiums on a shorter loan. Fortunately, you get promoted and receive a nice bump in income5 years into the loan term.
In this scenario, rate-and-term refinancing is a great way to swap your initial loan for a shorter mortgage with higher monthly premiums (which you can now afford). Sure, you’ll be parting ways with a bigger amount of money every month—but you’ll also shave years off your term and own your home far earlier than if you didn’t seek rate-and-term refinancing services!
Cash-Out Refinancing
What Is It?
If you’re keen to swap your old home loan for a bigger one and ‘cash out’ the difference, cash-out refinancing is for you! This form of mortgage refinancing gives borrowers the option to withdraw a portion of the total value of their home in exchange for a new loan with updated terms. Here’s an example to illustrate:
Suppose you’ve got a 30-year mortgage on a house worth $400,000. After 17 years of repayments, you have $150,000 left to pay—but in the 18th year, you suffer a medical emergency that requires a payment of $50,000 upfront.
If you go for cash-out refinancing in this situation, you can withdraw $50,000 from your home equity(leaving you with $200,000 left to pay) to settle your medical bill. The mortgage lender will subsequently offer you a new home loan for $200,000 on different terms!
Why Is It Beneficial?
Consolidating Debt
Struggling to keep up with debt repayments because you’ve got too many lines of credit? It’s time to consider cash-out refinancing. All you’ve got to do is calculate the total value of your debt before contacting a mortgage refinance company to withdraw the amount from your mortgage. This will make it much easier to manage your finances as you’ll be able to close all your debt accounts except for a single mortgage!
It’s a Great Way to Access Funds Urgently
As we mentioned earlier, cash-out refinancing is immensely beneficial to borrowers that urgently require funds. Mortgage brokers don’t typically ask clients to justify why they want to cash out funds from their loans—so whether you’re settling unprecedented expenses such as medical bills or you simply want a bit of extra cash to upgrade your home, cash-out refinancing is for you!
Atlantic Home Capital’s Mortgage Brokers Have Provided Cash-Out and Rate-and-Term Refinancing Services to Clients in Fort Lauderdale for 15 years
If you’re looking to capitalize on the benefits of rate-and-term and cash-out refinancing we’ve touched on today, book a consultation with our refinancing experts at Atlantic Home Capital!
We guide clients through the process of applying for all kinds of refinancing services in Fort Lauderdale. We also provide various home loans such as VA loans for armed forces personnel, mixed-use financin gfor buyers of mixed-use developments, and FHA loans for borrowers with low credit scores.
Drop us a message on our website today and experience the joys of working with an experienced, bilingual team of mortgage consultants to refinance your home loan on the best terms possible!
