When you apply for a refinance mortgage, you might tend to get a little confused as there are several things that you would have to think about before you decide to go ahead and apply for a particular refinancing option.
Other than considering a lower rate of interest you would also have to take into consideration factors like the tenure of your stay in the house, the closing cost of the loan that you wish to opt for and your share or equity in the house for which you are seeking a mortgage refinance loan. Apart from this, you would also think about whether or not you would like to go ahead and apply for a cash-out refinance option.
When you choose to apply for a refinancing plan, you could choose to go ahead with the plain-vanilla refinance plan. If you choose to apply for the plain-vanilla plan, you would be able to enjoy benefits such as making monthly payments that are lower and also paying a lesser rate of interest. Besides, you could also avoid paying the Private Mortgage Insurance completely if your equity or share in the house is quite high, that is, in accordance with the standards required. However, to enjoy the benefit of paying a rate of interest that is comparatively lower, you would be expected to pay the closing cost for that specific loan.
In case you thought that you could completely avoid paying the closing cost for a low-cash or no-cash refinance option, you are mistaken. In the case of these refinance plans, although you might feel you are avoiding the closing cost, the truth is that you pay it. This is because the rate of interest is much higher as compared to a plain-vanilla plan. Besides, there are times when the principal balance is inclusive of the closing cost for low-cash or no-cash refinance plans.
Remember, too, that in case you are not planning to live in the same house for a long time, the lower payments that you make towards the loan would not cover the closing cost for that loan.
Apart from the options mentioned above, you could choose to use the cash-out refinance plan. In this plan, you can actually seek refinancing for an amount that is higher than the amount of mortgage that you have to pay.
Here is a simple example of a cash-out refinance plan. Let's say you have to pay a mortgage that amounts to $80,000 for a house that is almost worth $1,500,000. In addition, you also need an additional $20,000 to spend for consolidation of a particular debt or for the admission of your children into a good college. You could actually go ahead and seek a refinance plan for $100,000. Thus, you not only have $20,000 extra to spend, but you are in fact paying a rate of interest for $80,000 that is comparatively lower.
Thus, a cash-out refinance option is a good one. However, you must remember that this plan is different from an equity home loan. The cash-out plan actually replaces your first mortgage, whereas the equity home loan is used to pay your first mortgage. Besides, the refinance plan allows you to enjoy lower interest rate in most cases.