Refi Strategies

Some people use a cash-out refinance to remodel their home.
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Refinancing involves applying for a new loan that you will use to repay your original mortgage. When you refinance, your new mortgage may have a different term, interest rate or mortgage insurance amount than your old one. The strategy you use to refinance your mortgage will determine the benefits you and your spouse receive.

Lower Interest Rate

When market rates fall, borrowers refinance their mortgages to save on interest. With a lower interest rate, you will not only reduce your payment each month, but you'll also save money over the life of the loan. To use this strategy, look for a loan offer with an interest rate that is significantly lower than the rate on your current mortgage. However, keep in mind that all mortgages have fees, so it'll take some time to recover your costs. Make sure that you will remain in the home long enough to make this strategy worthwhile.

Longer Term

If you've already been paying on your mortgage for several years, or if your original mortgage had a term of less than 30 years, you can use a refinance to lengthen your mortgage's term. Lengthening the term usually results in a lower monthly payment, as long as the interest rate isn't much higher and you keep the same loan balance. However, taking on a mortgage with a longer term will cause you to pay more interest overall.

Shorter Term

If you don't mind a higher monthly payment and you'd like to save some money on interest, you can refinance your mortgage with a shorter term, such as 15 years instead of 30. A shorter term allows you to repay your loan sooner, and it can save you thousands of dollars over the life of the loan. Loans with shorter terms often carry lower interest rates as well.

Cash Out

Cash-out refinancing involves replacing a smaller loan with a larger one. If you do a cash-out refinance, you will receive a check for this difference between the two loan balances. You can then use this money to improve your home, pay other bills or even take a vacation. However, cash-out refinancing also has some drawbacks. To qualify for a cash-out refinance, you must have enough equity in your home to cover the amount of cash you want and your lender's minimum down payment. Cash-out refinancing is also likely to increase your monthly payment. Furthermore, if you take too much out, you may find yourself paying mortgage insurance, which raises your monthly payment even more.

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