How A Rate And Term Refinance Works – Your Mortgage Advantage
When mortgage interest rates begin to drop, homeowners often consider refinancing their homes in order to save money or pay off their homes faster. Refinancing an existing mortgage requires careful consideration and may not be for every homeowner. Having a good understanding of the different types of refinancing programs can greatly improve your chances or negotiating a better deal for yourself.
There are two main refinancing options on the market:
- Cash-out refinancing - where money is advanced through the loan by borrowing against equity) rate and term refinancing (where the interest rate and/or term of the loan are changed without pulling out any cash or equity.
- Rate and term refinancing - typically driven by a drop in interest rates, while cash-out refinancing may be motivated by an increase in home values or a need for additional funds for another purpose. The rate and term refinance usually results in lower monthly mortgage payments or less interest paid overall and poses a lower risk than cash-out refinancing.
The most common reason for choosing a rate and term refinance is to reduce monthly mortgage payments by getting a lower interest rate, but that's not the only thing you can do with a rate and term refinance. In addition to (or instead of) altering the interest rate, homeowners can change the term of their existing loan. Switching from a 30 year loan to a 15 year loan, for instance, can allow a homeowner to pay off their home much sooner.
When it comes to rate and term refinancing, the interest rate will depend on many factors, one of which is the loan-to-value (LTV) ratio. Lenders compare what you owe on your home to the value and base their rates on that calculation. For example, if you have a home worth $100,000 and a mortgage loan amount of $50,000, then your LTV ratio would be 50%. In general the most favorable interest rates will be available to those with lower LTV ratios.
Like any mortgage program, their are certain benefits and drawbacks associated with refinancing and each homeowner should carefully weigh the pros and cons before making a final decision.
About the author:
Steph Medeiros is a marketing professional who helps mortgage companies promote their brands and products, such as 15 year mortgage rates and home loan programs, online.