When you refinance your mortgage, you can complete a cash-out refinance or a straight refinance. Both processes result in a new mortgage. However, a cash-out refinance allows you to borrow from your home equity and roll the balance into a new mortgage. A straight refinance includes only the balance of your previous mortgage.
When you obtain a straight refinance, the lender will pay off your original mortgage loan and create a new loan for the same amount. The new loan will typically have a different interest rate and loan term, and most refinance loans have a term of 30 years. Straight refinances involve closing costs similar to those associated with initial mortgages, but in many cases, the lender will roll the closing costs over to the new loan.
When you obtain a cash-out refinance, the lender will still pay the balance on your previous mortgage with a new loan. However, the new loan will be larger than the balance on your previous mortgage, so you will receive a check for the difference. Cash-out refinances also involve closing costs. In most cases, you can choose to roll over the closing costs into the new loan, or you can ask the lender to deduct the fees from the check you receive.
Differences In Rules
Most lenders won't loan more than 75 percent of your home's value during a cash-out refinance. However, you may be able to refinance a larger percentage of your home's value with a straight refinance. Cash-out lenders may require better credit scores, and they may not approve your application if your previous mortgage is less than one year old. Cash-out lenders may also impose higher interest rates.
Most homeowners refinance to lower their payment or interest rates, or to change from an adjustable-rate mortgage to a fixed-rate mortgage. Homeowners who opt for cash-out refinances may do so to finance a remodeling project or pay other debts, such as college tuition or medical bills. You can use a cash-out refinance or a straight refinance to obtain a lower interest rate or a lower payment. However, cash-out refinances sometimes result in higher payments because the loan balance increases.
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