Understanding the different types of refinancing
When it comes to refinancing, you have several options available. From simple rate-and-term refinancing to debt consolidation, the type of refinancing you opt for depends on your circumstances and what you want to achieve.
Let’s take a look at the four kinds of refinancing and what you might use them for.
What is rate-and-term refinancing?
If you want to take advantage of a lower interest rate or change your loan term, the most common method is rate-and-term refinancing.
This type of refinancing will keep your loan amount the same, and is primarily used to save interest on your home loan repayments, or switch to a different type of interest rate, i.e. from a variable to a fixed home loan.
What is a cash-out refinance?
If you want to borrow some extra cash, whether it’s for renovations, repairs, or to buy a second home, cash-out refinancing can convert some of your home equity into a usable line of credit. This will increase your principal loan amount, but frees up your equity.
What is a cash-in refinance?
The opposite of cash-out is cash-in refinancing. If you want to get a better interest rate or pay off your mortgage faster, this type of refinancing could be for you.
Cash-in refinancing involves taking out a new home loan that is worth less than your initial loan amount. You’ll then pay the remaining balance of your old home loan, using a lump sum of cash, so that it can be closed.
This refinance option can benefit you by reducing your loan amount and repayments and dropping your loan-to-value ratio (LVR), which can help you get a lower interest rate.
What is consolidation refinancing?
If you have other types of debt that you’d like to organise, such as credit cards or a personal loan, you can roll them all into one when you do a consolidation refinance.
When you consolidate your debts by refinancing, your new lender agrees to pay off each of the debts you’re bringing over, which then get added to your home loan amount.
Consolidation refinancing is useful for converting your existing debts into one loan and one repayment.
Which type of refinancing is right for you?
Choosing which route to take when refinancing takes time and careful consideration. You might want to enlist the help of a financial advisor or have a go at crunching the numbers yourself, keeping in mind that there are additional costs associated with refinancing.
For more information, click here to read about how refinancing works.
