Function

• A mortgage refinance creates a completely new loan. Borrowers can refinance with their present mortgage lender, or submit an application with a new lender. Once a lender approves the refinance, the new home loan replaces the old, and borrowers obtain new loan terms. A refinance is ideal for borrowers who want to get rid of an interest only or adjustable rate mortgage and switch to a fixed rate mortgage. Additionally, a refinance can put instant cash in a borrower's pocket, and he can use the funds for any purpose, such as debt consolidation or home improvement.
  
  

Types

• There are two types of mortgage refinances. Borrowers can apply for a simple or no-cash refinance, in which they obtain a new home loan with new terms. The new terms may consist of a 15-year mortgage, 30-year mortgage or a fixed rate home loan. On the other hand, borrowers can apply for a cash-out mortgage refinance. This provision lets homeowners borrow money from their equity. In essence, they borrow more than the balance owed on the mortgage loan. A cash-out refinance increases the mortgage loan balance, which can increase monthly payments. However, borrowers can use the cash to pay off debts, pay for college tuition, make home improvements or start a business.
  
  

Considerations

• Because a mortgage refinancing creates a new home loan, borrowers have to submit a new home loan application and pay mortgage-related fees. This includes an application fee, credit report fee, title search fee, appraisal and settlement fees. Borrowers can negotiate a no-fee or no-closing cost mortgage refinance, wherein lenders wrap some of the closing fees into the new loan balance. However, borrowers will need cash on-hand to meet the additional expenses.
  
  

Benefits

• Mortgage refinancing is beneficial for several reasons. Homeowners with interest only or adjustable rate mortgages deal with periodic or annual rate adjustments, in which their mortgage rate and payments can increase. With a mortgage refinance, these borrowers can obtain a low, fixed rate mortgage and enjoy predictable payments for the life of the loan. A reduced mortgage rate can save you money each month, and the funds acquired from a cash-out refinance can eliminate debt.
  
  

Expert Insight

• To get the best deal on a mortgage refinance, it's important to shop around and obtain quotes from various refinance lenders. Contact your current mortgage lender and request a no-obligation quote. Next, contact a mortgage broker. Mortgage brokers are useful because they work with a multitude of lenders, and they can help you find the lowest interest rate. Once you have the quotes in hand, carefully consider each estimate. What is the interest rate? Estimated closing fees? Loan term? Choose the mortgage lender that offers the best refinance package.