Cash-out refinances are useful when you need to tap into your home’s equity to finance something else. Perhaps you’d like to remodel the kitchen and need a lump sum of money, or you’d like to pay off high-interest debt like credit cards. You can borrow money for these needs against the value of your home by refinancing. The drawback of a cash-out mortgage is the increase in the amount you’re borrowing. If you time things right, you can get a lower interest rate that could offset the higher loan amount, making your monthly payments about the same. Banks consider cash-out mortgages riskier and may require a higher credit score to qualify, or limit the cash-out amount to $250,000.
A cash-in refinance it the opposite of a cash-out refinance, where a homeowner pays a lump sum towards their mortgage balance owed to the bank. A cash-in refinance may result in a shorter term, lower refinance mortgage rates or both. The most common reason for a cash-in refinance is to get rid of the mandatory monthly private mortgage insurance (PMI) payments required because you paid less than a 20% down payment when you purchased the home. PMI will cost 0.5% to 1.0% of the loan amount, which can add up to hundreds of dollars per month. Pay down your mortgage to an 80% loan-to-value (LTV) ratio and you’ll save yourself the insurance cost.
Rate-and-term refinances are popular because they allow you to change the interest rate and/or loan term. When interest rates fall, most refinances are rate-and-term refinances. A homeowner can refinance from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage, or lock in a lower interest rate. You can also cash out some of your equity, but usually not for more than $2,000. Closing costs in this type of mortgage can be added to the loan balance, so you save yourself from having to pay the costs out-of-pocket.