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When shopping for a mortgage refinance there are so many factors to consider it can seem a little overwhelming. You really only have two choices. Your first option is to find a loan officer that you trust and just accept their professional opinion. Your second option is to get educated, learn what you are shopping for, and systematically shop your loan at different companies.
I'm going to assume, since you are here that you are looking to get educated and learn what you are shopping for.
The most important factor when start shopping for a refinance is to first determine what type of refinance you are shopping for. There are two different categories of refinance loans available and the terms can vary drastically between the two. The categories are cash out refinance, and rate/term refinance. I will explain the differences below:
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This type of refinance means that you are only refinancing your first mortgage loan and you are not paying off any other debts or loans except for your current first mortgage. This type of loan does not allow cash out to the borrower. This type of loan does allow for incidental cash back to the borrower ($500 FHA, $2000 Conventional). There are very rare circumstances where you may be able to pay off your second mortgage and still have the loan be considered rate/term.
In most situations if you refinance and pay off your first and second mortgage it is considered a cash out refinance, but in certain situations you can refinance your first and second mortgages and have alone be considered rate/term refinance. This is usually only possible if your second mortgage was used to purchase your home with a simultaneous close combination loan. If your second mortgage was obtained after you purchased your home then you're loan would be considered cash out if you paid off that second mortgage.
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This type of refinance means that you are paying off your first mortgage and you are also paying off additional debt or getting cash out at closing. Cash out refinances typically have additional restrictions and additional interest rate adjustments. This means that you may not be able to borrow as high of a percentage against your property on a cash out loan as you would for a rate/term loan.
For example, on an FHA loan a rate/term refinance loan amount can go up to 97% of the value of the property, but on an FHA Cash out refinance the loan amount can only go up to 85% of the value of the property.
You must understand, and properly identify which category your loan falls into. This is important because if you are getting quotes from lenders on a rate/term refinance, and your loan is actually a cash out refinance, you will be in for a rude awakening at some point in the future.
Get more information, and mortgage shopping tips from our free guide The Mortgage Shopping Blueprint.
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