Types of Refinancing
When approaching a California home mortgage loan refinance, you have many options to consider. Since a home loan refi requires a significant investment on your part, it is in your best interest to do your homework and understand what type of home mortgage refinance best suits your goals for your financial future.
Rate and Term Refinancing
Rate and term refinancing is a type of mortgage refinancing in which the principal stays the same and the interest rate and term of the mortgage are adjusted. Homeowners either negotiate their rate and term to receive a lower interest rate or to change the length of their loan for interest rate savings, for better budgeting or to build up home equity more quickly. Two of the most common vehicles for adjusting your mortgage rate and term are home equity loans and home equity lines of credit:
- Home Equity Loan (HELs): Home equity loans are sometimes called “second mortgages” because they are secured against the value of your property in the second lien position. During your California home equity loan refi, you may be able to obtain a better home mortgage refinance rate than your original rate, however, home equity loan interest rates are often higher than that of a first mortgage and usually require a shorter term in which to be paid off.
Home Equity Lines of Credit (HELOCs): A home equity line of credit is a line of revolving credit that allows you to borrow against the equity in your property (sometimes up to 100% its value, less any liens). Similar to a credit card, a HELOC allows you to finance expenses by tapping the equity in your home whenever you need it according to a variable interest rate. However, just like with credit cards, HELOCs can spell danger if not used with care. Be sure you understand the risks associated with borrowing against your home and understand the dangers involved with “reloading” your mortgage.
Cash-out refinancing is when you refinance for a loan amount that totals more than the cost of your home, paying off the original lien and providing you with additional money that you can use to finance large expenses. A cash-out refinance may charge a much higher interest rate than a California home equity loan refinance or home equity line of credit. If you are seeking this type of mortgage refinancing, you need to be prepared to weigh the proposed benefits with the projected costs.
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