Have you been considering refinancing your home, but not sure what to do about it? Refinancing is when you take out a new loan and use it to pay off your current mortgage. It usually occurs when the homeowner can get a lower interest rate or if they want to lower the monthly payment by extending the repayment term. Refinancing can help out a lot with paying off a home, but it does have it’s drawbacks.

Why would you refinance?

You can lower your interest rate. When you first got your mortgage, your credit score might not have been the best, or the housing market had a higher interest rate. Another term would be consolidating your debt.

You can change the rate type. With some loans, you’re not able to get a fixed rate, which means your payments can be different every month or can steadily go up in price. Refinancing can not only lower the rate but make it a fixed rate as well.

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You can change the loan term. Every loan has a specific time you need to pay the loan back. The standard is 15, 20, or 30 years. You have two options. If you shorten your time frame, you’ll have a lower interest rate, but if you lengthen your loan time, each monthly payment will be shorter. It comes down to what you’re able to afford each month and why you’re refinancing in the first place.

You can get a cash-out. As you pay off your home, you develop equity, which is “the amount of financial interest in a property.” (See other terms you might be unfamiliar with in our Mortgage Glossary.) If you have a large amount of equity in the home, you can cash it out to help out with bills, pay for something expensive, or buy out an ex-roommate or spouse when they move out.

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