Refinancing is the process of paying off the existing mortgage(s) with the proceeds from a new loan and using the same property as collateral. It can be done with your current lender or a different one. Refinancing is done for a variety of reasons:
To Reduce the Interest Rate: Interest rates constantly fluctuate, so at some point in the future you may be able to get a rate that is lower than the one on your original mortgage. Obviously the lower your rate, the less interest you are charged. However, keep in mind that refinancing costs money – a new loan means you will have to pay most of the same closing costs as the first time around.
To Lower the Payment: There are many ways to obtain a lower payment, including reducing the interest rate, extending the repayment period, and refinancing for less than what was initially borrowed.
To Turn Equity Into Cash: With a cash-out refinance, you refinance your existing mortgage and also borrow an additional sum from your equity (your home’s value minus the amount owed on your mortgage(s)), giving you cash that you can use for whatever you want. You should carefully consider if you can handle this increase before you do a cash-out refinance.
Also, bear in mind that when you take cash out, you increase the principal you owe and decrease your equity. Depending on your new interest rate and how much cash you take out, it is possible that your mortgage payment will increase. Using the funds to make improvements to your home is generally a better use of your equity as it can help your property appreciate in value.