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Different types of refinances

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    Whether you want to lower your monthly payment, reduce the total amount you pay for your home or use your home’s equity to take cash out, refinancing can be a great option to meet your financial goals. No matter your reason, it’s important to find the option that works best for you.

    Most refinances fall into one of two categories, no cash out and cash out. We’ll help you understand the differences between them so you can choose the right one for your needs.

    What is refinancing?

    Simply put, refinancing is getting a loan to replace the one you have. But why would you want to do that? Here are the most common reasons:

    • You want to lower your monthly payments
    • You want to pay your home off sooner and lower the amount of interest you’re paying
    • You want to take cash out to help pay for a large purchase such as a remodel, or to pay off high-interest debt
    • You want to change your loan type or term

    Now, let's get into the types of refinances:

    Cash-out refinance

    If you want to use the existing equity in your home to make a large purchase or pay off high-interest debt, a cash-out refinance is a great option.

    With a cash-out refinance, you take on a new mortgage that's higher than the principal balance of your current one. Your current balance will be paid off, a new mortgage will be opened and the balance will be paid to you shortly after closing.

    You can use the cash for things like remodeling your kitchen, adding on to your house or paying for college. However you use it, it's yours to keep.

    To qualify for a cash-out refinance, most lenders require you to have more than 20% equity in the home you're refinancing. Equity is the portion of your home you've paid off versus how much you still owe. For example, on a house worth $200,000, you'll need to have paid off $40,000.

    Done right, a cash-out refinance can help you ease into a more comfortable financial situation. Try to avoid using the extra money to pay for things that won’t improve or increase your financial health, like vacations. Putting the money back into your home to increase its value or paying off high-interest debt is a smart way to go.

    No cash-out refinance

    A no cash-out refinance is a great option when you want to lower your monthly payment, or pay off your home sooner while reducing the total amount of interest you’re paying. With a no cash-out refinance, you take on a new mortgage that is only slightly higher than the existing balance on your mortgage. 

    Looking to increase your cash flow? One benefit of refinancing is that you can free up some money in your budget by reducing your monthly payment. You can do this by refinancing for a longer time frame, like a 30-year fixed loan. Or, if you’re not planning to stay in your home for more than a few more years, you may choose to refinance at a lower interest rate using an adjustable-rate mortgage (ARM).

    If you want to pay off your home sooner and lower the total amount of interest you’re paying for it, you can refinance for a shorter loan term. If interest rates have dropped, you may be able to keep your monthly payment about the same as it is now, and pay off your home a few years earlier. Doing this could potentially save you thousands of dollars in interest over the life of the loan.

    Start shopping, ask questions

    As you consider whether refinancing your current mortgage makes sense, keep your situation and goals in mind. And there may be fees when you refinance, including closing costs.

    Review your current mortgage to see if there's a fee for paying it off early. If you have to pay a high prepayment penalty, you may want to hold off on refinancing. And if you have additional questions, a Chase Home Lending Advisor will be happy to help.

    Have questions? Connect with a home lending expert today!

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