Refinance and Cash-Out: When Replacing Your Mortgage Makes Sense

What a refinance does

A new loan pays off the old one. With a rate-and-term refinance, the goal is a different rate, a different length of loan, or a different loan type, such as moving from an adjustable rate to a fixed one. With a cash-out refinance, the new loan is larger than what you owe and you receive the difference.

Both come with closing costs, and both restart the loan unless you choose a shorter term. A lower payment on a longer loan can still mean more interest paid overall.

Who it tends to fit

• Owners who can lower the cost of the loan and will keep it long enough to recover the closing costs
• Owners who want to drop mortgage insurance, shorten the term, or leave an adjustable rate
• Owners who need to remove a co-borrower, for example after a divorce
• Owners with a clear use for cash, such as repairs or paying off higher-cost debt, who are comfortable replacing the first mortgage to get it

If your current rate is one you want to keep, compare a HELOC or a fixed second loan before you replace the whole mortgage.

What to gather

• Your most recent mortgage statement
• Your homeowners insurance declarations page
• Your last 30 days of pay stubs and two years of W-2s, or tax returns if you are self-employed
• Two months of bank statements, every page
• Statements for any debts you plan to pay off
• A photo ID

Run the break-even first

Divide the total closing costs by the monthly savings. The answer is the number of months it takes to get your money back. If you expect to sell or refinance again before then, the refinance probably costs more than it saves.

The break-even calculator does the math with your own figures. For cash-out, the question is different: compare the cost of the new first mortgage with the cost of borrowing the same cash another way.

Common snags

• The appraisal. A value lower than expected changes how much you can borrow and sometimes the cost.
• Timing rules. Most programs want you to have owned the home, and had the current loan, for a set period before a refinance.
• Limits on cash. Lenders cap the loan at a share of the home’s value, and the cap depends on the program.
• Stretching short debt over a long loan. Rolling short-term debt into a mortgage may lower monthly payments while increasing total interest and putting your home at risk.
• Changes mid-process. New debt or a job change before closing can change the numbers.

Your next step

Find your mortgage statement and decide what you want the new loan to do. A first call can tell you whether the numbers support a refinance or whether leaving the loan alone is the better move.

When you want to talk it through, book a short phone call with Zak on Chris Lamm’s team at MortgageOne. No credit check is needed for a first call, and you can bring as many questions as you like.