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What is mortgage refinancing?

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Mortgage refinancing is simply the process of taking out a new loan and paying off your existing loan. Mortgage replacement is perhaps a more accurate term for what occurs. The new loan, like the old loan, is a secured loan, and it is secured by the same assets (probably your home) as is your existing loan. The differences lie in the terms of the new loan.

Mortgage refinancing allows you to take advantage of changes in either your financial situation or the general trend of the market. Perhaps you want to lower your monthly payments or pay off your loan more quickly than you originally intended. Alternatively, you may want to obtain cash that you can use to pay for items that you otherwise could not afford.

Based on your reasons for refinancing, you'll need to choose between the two types of mortgage refinancing: rate-term and cash-out.

• Rate-Term: Rate-term refinancing adjusts the interest rate and/or the term (the time period allowed for repayment) of your mortgage. You'll take out a new loan for the exact amount of your existing loan, pay off the existing loan, and set a new interest rate or term on your new loan.
• Cash-out: Cash-out refinancing, on the other hand, is the taking out a new loan that exceeds the current balance of your existing loan. You pay off the existing loan and then receive the excess funds in cash. This type of refinancing helps borrowers consolidate their debts and purchase big ticket expenses such as college education or home improvements.

Fortunately, you don't need to be a financial genius to refinance your mortgage. You do, however, need to do your homework to determine whether refinancing can really help your financial situation.

Next Page: What are the advantages of mortgage refinancing?

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