What is Refinancing and When Does it Make Sense?

Content provided by Bellco Home Loans

A refinance (commonly referred to as a “refi”) is when you pay off an existing loan and replace it with a new loan. You can refinance a mortgage loan, home equity loan, car loan, and even a signature loan.

A refinance may make sense when you can lower the term of a loan and/or reduce your monthly payments by borrowing at a more favorable interest rate. Some homeowners are able to obtain a cash-out refinance that replaces their existing loan with a new one, providing them with additional cash from the equity in their home to pay off higher interest debt, such as credit cards.

There are many good reasons to refinance a loan. Besides being a response to changing economic conditions, refinancing may help you reach financial goals by lowering your interest rate, reducing your payments, or even consolidating your debt*. If you’ve had a change in your near-term or long-term financial goals or enjoyed improvement in your credit profile, a refi could help you obtain a lower interest rate. 

There are basically two types of refinancing:

  1. Rate/Term Refinancing: A common type of refinance in which the original loan is paid off and replaced with a new loan with more favorable terms.   
  2. Cash-Out Refinancing:  Commonly used when the collateral for the loan (your home, for instance) increases in value. Cash-out involves refinancing at a higher loan amount than your current principal balance, and obtaining the cash difference without selling the asset. A cash-out refi is common when paying off other debts with the proceeds of the new loan, or when using the extra cash for home remodeling or even taking a vacation.

No matter which type of refinancing you’re looking for, borrowers usually need to contact their lender and begin a new loan-application process. This can mean qualifying for the new loan and paying for a new appraisal, as well as any closing costs.

Before applying, you should evaluate the costs and determine if the refinance will save you enough money to recoup the new loan costs (if any) in a reasonable amount of time. Often times, lenders will allow you to roll the closing costs into the new loan, so that out-of-pocket expenses are minimized. In all cases, a proper refinance should help you meet your financial goals and provide a benefit. 

Bellco Home Loans is a collaboration between Bellco Credit Union and Cherry Creek Mortgage, an independent mortgage lender that has helped families attain home ownership since 1960. Bellco Home Loans was born from a desire to provide a premier mortgage experience for Bellco’s members by partnering with a leading mortgage company with an established reputation in the industry. Cherry Creek Mortgage was recently purchased by Guild Mortgage, but that same level of service will continue. Bellco Home Loans is an equal housing opportunity lender. All applications subject to approval. Bellco Home Loans, LLC, NMLS #2085298.

*Debt consolidation does not pay off the debt, please consult a financial advisor regarding the effect of consolidating short-term debt into long-term debt.

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