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The Curious Bag
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To refinance a mortgage is to replace the old mortgage debt with a new debt that pays off the old loan in full upon closing. A borrower can refinance to take advantage of lower interest rates or to use his built-up equity for other purposes.
Significance
A refinance of a mortgage can help a borrower to consolidate debt by allowing him to use his equity to pay off higher-interest debts, such as credit cards.
Function
A refinance replaces the original home loan giving the borrower a new rate and term for his mortgage. If the borrower receives a lower interest rate than his current mortgage, his payment could be lowered in the process.
Types
There are two types of mortgage refinances, cash out and rate and term. A cash out mortgage allows the borrower to add extra debt to his original mortgage by using his equity. A rate and term mortgage merely pays off the original debt and renegotiates a borrower's rate and term.
Considerations
A mortgage refinance can cost a borrower between 3 and 6 percent of his loan amount.
Benefits
If a borrower lowers his interest rate more than a full percentage point during his refinance, he should see noticeably lower monthly payments on his mortgage.
Source:
FederalReserve.gov: A Consumer's Guide to Mortgage Refinancing
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