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  • Refinancing

  • How to figure out when and if you should refinance your mortgage

    Here's how to determine whether you will benefit by refinancing your mortgage.

    2 major types of refinances are:

    • Rate-and-term refinancing to save money. Typically, you refinance your remaining balance for a lower interest rate and a term you can afford. (The term is the number of years it will take to repay the loan.)
    • Cash-out refinancing, in which you take out a new mortgage for more than you owed. You take the difference in cash or you use it to pay off existing debt.

    Other reasons people refinance: to replace an adjustable-rate mortgage with a fixed-rate loan, to settle a divorce or to eliminate FHA mortgage insurance.

    Cash-out refinances

    Cash-out refinances often are used to pay down debt. They have pros and cons.

    Imagine that you use a cash-out refinance to pay off credit card debt. On the pro side, you're reducing the interest rate on the credit card debt. On the con side, you may pay thousands more in interest because you're taking up to 30 years to pay off the balance you transferred from your credit card to your mortgage.

    But the biggest risk in this scenario is in converting an unsecured debt into a secured debt. Miss your credit card payments, and you get nasty calls from debt collectors and a lower credit score.

    Miss mortgage payments, and you can lose your home to foreclosure. Home equity debt that's added to the refinanced mortgage always was secured debt.