The term “refinance” refers to the practice of obtaining a new primary mortgage to replace your original primary mortgage. Generally, the purpose of refinancing is to get better rates and terms than you had on your original mortgage.
Refinancing a mortgage is different from getting a second mortgage, and it’s important to understand the difference between the two. When you get a second mortgage, you are taking on a second obligation in addition to your original primary mortgage. When you refinance your home, the second loan pays off the first mortgage and becomes your primary mortgage.
There are many reasons why people refinance their home mortgages. If you acquired your original mortgage during a time when interest rates were high, you might want to reduce interest rates by refinancing at a later time. You can see how much you can potentially save each month by using a mortgage payment calculator.
Another reason would be to reduce your monthly mortgage payments. Sometimes, people refinance to a longer-term mortgage, thereby reducing the amount they must pay out of pocket every month.
Cash-out refinancing is the term used for a refinancing option that allows the homeowner to liquidate all or part of their home’s equity through refinancing their mortgage. Although, it is not always the homeowner’s main goal to access their home equity in the process of refinancing, if you are considering the difference between refinancing and a second mortgage, this is an option you might be looking at.
When done correctly, cash-out refinancing not only allows a borrower to withdraw against the equity on their home, but it also allows them to enjoy substantial savings in lower interest and/or lower monthly payments. However, cash-out refinancing does have some disadvantages in comparison to a second mortgage. Most significantly, the closing costs associated with refinancing are the same as they would be on a primary mortgage. If you are considering a cash-out refinance, take a look at the costs and benefits involved to determine if it is the right option for you.