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What is Refi?
Refi is a commonly used term in the mortgage banking industry. Refi is simply short for refinance. A refi constitutes obtaining financing through a new mortgage loan for the purpose of paying off an existing mortgage loan. Though there are numerous ways to proceed with a refi, there are two basic types, and the reasons for refinancing depend on individual financial situations.
A straight refi is the most common refinancing situation. A straight refi means a borrower is only refinancing the exact amount he or she owes on an existing mortgage. Often, people do this to change either the terms of their mortgage loan or their interest rate. A refi that carries a lower interest rate than a homeowner’s current interest rate saves the homeowner money over the course of the loan, and sometimes lowers his or her monthly payment. People sometimes proceed with a refi to extend the terms of their loan, which can also lower monthly payments, but this is a situation that should be avoided when possible, unless the interest rate can simultaneously be reduced.
A cash-out refi is another common refinance. A cash-out refi means borrowing more than the amount one's home is currently worth, up to an allowed maximum. The cash-out refi differs from a straight refi in that the homeowner is not just borrowing the amount he or she owes on a current mortgage, but also borrowing against the equity in the home. People might use a cash-out refi to pay for college, make home improvements, or consolidate debt. The last option is not usually recommended, and should be pursued with caution and under the advisement of a financial planner or councilor.
The conditions for approval of a refi are slightly different than for a purchase loan. Most lenders will not allow a homeowner to refinance 100% of the home’s value. Offers from lenders that allow refinancing based on 100% or more of the home’s value should be examined closely, and one should never borrow more than the home’s actual market value.
A refi, either cash-out or straight, should benefit the borrower by lowering his or her mortgage interest or providing access to equity at a lower interest rate than a conventional loan. A qualified lender will discuss your situation with you and present you with options that are financially in your favor. If the lender only seems interested in closing the loan, look for a different lender.
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![Home refinancing is the process of replacing a current home mortgage loan with a completely new mortgage loan.]()
By: itsallgoodHome refinancing is the process of replacing a current home mortgage loan with a completely new mortgage loan. -
![With a straight refi, a borrower only refinances the exact amount that they own on an existing mortgage.]()
By: darko64With a straight refi, a borrower only refinances the exact amount that they own on an existing mortgage.
Discussion Comments
@andee - I'm glad it worked out for you, but I think those days of easy cash-out mortgage refi are gone. They were based on rapidly rising home prices that gave people a lot of equity very quickly.
And a lot of people who did those got screwed in the long run. When the values of their houses dropped, they wound up underwater.
Some could keep paying their mortgage, others were able to short sell; other went into foreclosure. But did you know that if your mortgage company accepts a short sale or forgives any of your debt in foreclosure, you have to pay taxes on the difference? So if you owed 200,000 and your bank accepted 150,000, the government thinks you have 50,000 in *income* and it taxes it!
Now, for a lot of homeowners, this tax was waived in 2009 and 2010 (don't know about this year). But guess which homeowners did not qualify for the tax relief? That's right - the ones who had done cash out refinancing.
If you have a fair amount of equity in your home and need some cash, I think a cash-out refi is a good option. You can usually get a much lower interest rate by doing this than by getting any other type of loan.
When our kids were teenagers, we used this type of refi more than once. We have used the money for an extra car and for some college education expenses.
We tried to take out as small amount of money as possible. Even though you are borrowing against the equity in your home, you still have to pay back the loan and that means it will also take longer to eventually get your house paid off.
I think if you are in a position where you qualify for any type of home refi, that is the best place to start if you need to borrow some extra money.
We have done a mortgage refi on our home more than once. If you know you are going to be in your home for a few more years, and you can reduce your interest rate by at least 1%, you can end up saving a lot of money.
If you refinance for the same number of years, your monthly payment will also be lower. We have tried to refinance for less years and keep our payment about the same. This way we will have our home paid off faster.
It is a pain to have to go through all the paperwork again and pay for another appraisal, but when we realized how much money we could save in interest, we thought we would be foolish not to refi our house.
@Comfyshoes -You also have to consider what your current interest rate on your mortgage because sometimes it is not worth doing a refi loan if for example you will be selling your home in a few years down the road.
It will not save you that much money if your interest rate is only slightly above the current rates. You also have to factor the closing costs associated with the loan and this can give you an idea if the refinance will be worth it to you.
You want to be able to stay in the home long enough to recoup those expenses. A great site that has information on refi rates and even includes a refi calculator is Bankrate. They will give you the best rates available all over the country. I go to that site all of the time.
I don’t think too many banks are offering cash-out refi loans for more than the property is worth. I think those days are gone forever because the banks are still recovering from the foreclosure mess and I heard on the news that many real estate analysts say that the recovery is years away.
Now in order to get a mortgage refi you have to have equity in your home and about 30% of people out there are upside down in their home and can’t refinance their property.
A lot of these homes unfortunately were bought with an adjustable rate mortgage that is now resetting to really high rates that many people cannot afford. The sad thing is that these people who would really benefit from a loan refi so that they can take advantage of the record low rates, but can’t refinance their home because they have no equity in the home.
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