Types of Refinances

1) Rate-term refinance:  this is used when the borrower is simply replacing one mortgage with another – generally to just lower their interest rate and payment.  The new loan amount is based on the amount owed on the old mortgage plus any closing costs that the borrower wants rolled into the loan.  If the borrower has a first and second mortgage and both mortgages were taken out when the property was purchased, then both loans can be paid off and it still will be considered a rate-term refinance.

2) Cash out refinance: when a borrower wants to use some proceeds from the new mortgage to pay off bills, or walk away with cash for other uses, then the refinance is called a cash-out refinance.  The new loan amount is greater than the amount needed to pay off the existing mortgage and the closing costs.  If the borrower is paying off a first and second mortgage and the second mortgage (or line of credit) was taken out at a date after the initial purchase of the home, then the new mortgage is considered a cash out refinance regardless of whether any other bills are being paid off or whether the borrower is receiving any additional cash.  Cash out refinances are priced slightly higher at some loan-to-values.

Types of Second Mortgages

1) Second mortgage with a fixed interest rate:  the interest rate and the payment is fixed over the life of the loan – which is usually amortized over 15-20 years.  This is the best type of second mortgage if the borrower knows just how much money they need and they need the full amount at the current time.  It is also best if the person wants to have a stable payment where the payment is the same each month and it will contain not only interest but also an additional amount going toward the principal and a date on which the entire balance must be paid off in full.

2) Second mortgage with a variable interest rate (line of credit): this type of mortgage is like a credit card against your home.  The amount the borrower owes changes over time depending upon how much of the credit limit has been “pulled out.”    As an example, maybe someone gets a $25,000 line of credit against their home because they want to go buy car.  They take their time to find the car they want and do not draw any money out while they are looking and therefore do not make any payment as no money is owed.  Then, the borrower finds a car that only costs $20,000 so they draw out $20,000 for the car.  They will then be charged interest on the $20,000 which has been paid out.  The smallest payment allowed is the interest due but the borrower can pay a greater amount back at any time.  This type of second mortgage is very flexible in that the borrower is only charged interest on any monies which are puled out.  If all of the balance is paid in full, there will be no payment or interest charged - though the line of credit is still there and available anytime monies are needed without the borrower needing to apply for a new loan.  Lines of credit generally have a $75 – 100 annual fee – just like a credit card does – regardless of whether a balance is owed or not.