Refinancing Purpose
Borrowers typically refinance in an attempt to get a lower payment, cash out their equity, or sometimes both. In this scenario, the first thing to do is to completely understand your loan.
Loan Options
There is a wide variety of loan options available to borrowers. These loans range from 30-year fixed loans, to interest-only loans, to minimum payment loans. Usually 30-year fixed mortgages have the highest interest rate. Generally the longer the loan is fixed for, the higher the interest rate will be. Higher interest rates translate into higher monthly payments.
Lower Your Payment
You may be able to use additional equity, if your property increases in value, as leverage to lower monthly payments. The more equity present in a property, the lower your interest rate will generally be on that property. Mortgage lenders perceive higher equity properties to be less risky, because they can seize the house and pay off the mortgage based on equity if you ever stop making payments. This way, they are more likely to get all of their money back.
Little or no equity is a much higher risk for the lender.
Cashing Out
While cashing out, the mortgage lender may decide to pay off some of your credit lines including credit cards, car loans, etc. Some lenders actually even make this a requirement for approval. They will often require that the escrow company directly pays off your creditors from the refinancing proceeds, to make sure that the debt is paid off.
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