Cash-out vs. change term mortgage refinancing

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Mortgage refinancing has long been a valuable option for homeowners looking to save money. Refinancing has become an especially enticing option since the onset of the pandemic, as mortgage interest ranks have sunk to historic lows. Despite that, a recent survey from Bankrate found that 74 percent of homeowners who have had the same mortgage since before the pandemic have not refinanced. Homeowners who haven’t yet refinanced but are considering doing so can consider two types of mortgage refinancing options.

• Cash-out: According to the mortgage experts at MortgageCalculator.org, a cash-out mortgage extracts equity from a home. Homeowners in the United States have more than $6 trillion in untapped home equity, and that can be used to pay for various expenses, including home improvements, tuition and medical costs. The financial experts at Nerd Wallet note that a cash-out refinance works by replacing an existing mortgage with a new home loan for more money than homeowners owe on their homes. The difference is then given to the homeowners in cash, which they can use for the aforementioned expenses or other costs, including paying down high-interest debts. Lower interest rates typically entice homeowners to refinance, but if homeowners are solely looking for lower rates, then a cash-out refinance is probably not the best option.

• Change term: Also known as a rate-and-term refinance, a change term is a refinance characterized by shifting to a lower interest rate. Homeowners also may refinance utilizing a change term to shift from an adjustable rate mortgage to a fixed-rate loan. Change term refinancing also is popular for homeowners who want to switch from the standard 30-year fixed rate to a 15-year fixed rate. This can shorten the term of the loan, saving homeowners a lot of money in interest over the 15-year period. However, homeowners should note that switching from a 30-year to a 15-year loan will lead to higher monthly payments. This switch might be most suitable to individuals earning significantly higher salaries than they were at the start of their initial mortgages and/or homeowners whose cost of living has recently decreased due to certain changes, such as children graduating from college. Homeowners also may consider change term mortgages to lower their monthly payments. In such instances, they simply swap out an existing 30-year mortgage for a new 30-year mortgage with a lower interest rate. That can save money up front, but homeowners should calculate the long-term interest costs of switching to a new 30-year mortgage. The lower monthly payments might be tempting, but homeowners may ultimately pay more in interest over the life of both loans by switching to a new 30-year mortgage. MM21C519

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