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Refi is short for refinance, obtaining financing through a new mortgage loan to pay off an existing one. There are two types: direct refi and cash-out refi. A refi should benefit the borrower by lowering their mortgage interest or providing access to capital at a lower interest rate.
Refi is a term commonly used in the mortgage banking industry. Refi is simply short for refinance. A refi is obtaining financing through a new mortgage loan for the purpose of paying off an existing mortgage loan. Although there are numerous ways to proceed with a refi, there are two basic types, and the reasons for refinancing depend on individual financial situations.
A direct refi is the most common refinancing situation. A direct refi means that a borrower is only refinancing the exact amount they owe on an existing mortgage. Often people do this to change the terms of their home loan or their interest rate. A refi that has an interest rate lower than a homeowner’s current interest rate saves the homeowner money over the course of the loan and sometimes lowers the homeowner’s monthly payment. People sometimes proceed with a refi to extend the terms of their loan, which can also lower monthly payments, but this is a situation to be avoided where possible unless the interest rate can be lowered simultaneously.
A cash out refi is another common refinance. A cash-out repayment means borrowing more than the amount the home is currently worth, up to a maximum allowable. A withdrawal refinance differs from a direct refi in that the homeowner is not only borrowing the amount he or she owes on a current mortgage, but also against the equity in the home. People can use a cash withdrawal refi to pay for college, make home improvements, or consolidate debt. The latter option is generally not recommended, and should be pursued with caution and under the advice of a financial planner or adviser.
The conditions for approval of a refi are slightly different than those of a purchase loan. Most lenders will not allow a homeowner to refinance 100% of the home’s value. Offers from lenders that allow refinancing based on 100% or more of the home’s value should be carefully examined, and one should never borrow more than the home’s actual market value.
A refi, whether cash or direct, should benefit the borrower by lowering their mortgage interest or providing access to capital at a lower interest rate than a conventional loan. A qualified lender will discuss your situation with you and present you with options that are financially in your favor. If the lender only seems interested in closing the loan, find a different lender.
Smart Asset.
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