This play allows you to refinance your mortgage for more than you currently owe. The difference and the equity is converted into cash for the homeowner.
If you currently have a high fixed-rate mortgage and the rates have dropped due to market conditions, you may want to refinance to a lower fixed-rate loan. Also, if you have an ARM, you might consider this option in order to get the security of a fixed rate. Even if your adjustable rate is low now, it is not guaranteed to remain that way; however if you refinance into a new lower fixed-rate term, you are locked into that new fixed interest rate for the life of the loan. This option is a good choice if you are not planning on moving within the next five years.
If your main goal is to quickly build up equity and to pay off your mortgage sooner, then the shorter-term loan is probably your best choice. A lot of times, if you refinance to this type of loan, your monthly payments will be higher, but you will pay substantially less interest and your mortgage will be paid off sooner. Also, you would benefit from a larger tax deduction on interest if you move from a 30-year fixed to a 15-year fixed loan. There are some cases, however, in which you may be able to refinance to a shorter-term loan without raising your monthly payment -if you’ve had your current mortgage for enough years.
If your current monthly payments are higher than is comfortable for your financial situation, then you might want to consider refinancing to a longer-term loan. This will result in a decrease in your monthly payments, since you will have more time to repay the loan. Examining your current mortgage and knowing how you would like to improve it are the first steps you need to take when starting the refinancing process. Once you know this, you can choose the option that will best help you achieve your goals.
** By refinancing your existing loan, your total finance charges may be higher over the life of the loan. **