Many homeowners are choosing to refinance their homes during today’s unpredictable economy. Paying off credit card debt, helping pay for college, or freeing up cash for home improvement are some of the more popular reasons. Refinancing, by definition, is where an existing debt is replaced by a new debt obligation under new terms. Fortunately, borrowers have several options available, each with its own strengths and weaknesses.
· Rate and Term Refinancing—Under this option, borrowers refinance the mortgage they currently have in order to get a better interest rate or loan term. The new interest rate will hinge on how much is being borrowed and the length of the loan term. Borrowers often take advantage of this option when interest rates decrease.
· Cash-Out Refinancing—This option entails extracting the equity borrowers have in their homes to pay down debt. The money can be used how borrowers desire, but a common reason for cash-out refinancing is to make home improvements. Borrowers should be aware that cash-out refinancing is not without risks. It can lead to higher monthly payments, and lenders sometimes charge higher interest rates because the borrower is taking out a new loan.