Sometimes the mortgage loan you have no longer meets your needs. You may decide that current market conditions would give you a lower payment. Or, perhaps by refinancing you can finance improvements to your home, or pay for a college education, or put a down payment towards a vacation home or investment property.
Whatever the motivation, if you tell your loan officer exactly what you hope to accomplish with a refinance, he or she can direct you to the right program at the right price!
If your goal is to lower your payment, or to pay the loan off earlier by going with a shorter term (which is usually at a lower rate of interest), you will do what’s called a “rate and term refinance”. That means you don’t need money out for any other purpose. In most cases, you only need pay for your appraisal up front (via credit or debit card). All other costs are rolled in and paid at closing from proceeds. If you are paying your taxes and insurance with your mortgage payment, you will need to fund a new escrow account, meaning some money needed at closing. You can use proceeds of the loan for that and still be a “rate and term refinance”. You’d then receive a check from your current lender for whatever funds were remaining in your old escrow account at the time that old loan was paid off. Additionally, when you refinance, you’ll find that you probably will skip one month of payment, due to the timing of closing and payoffs. Your loan officer will explain all of this to you at application.
If you need to use some of the extra equity in your home for another purpose, you’ll have a “cash out refinance”. Again, the only out of pocket expense should be the appraisal fee paid up front. Your loan officer will figure out how much money you can anticipate receiving after your refinance closing.
One extra bit of information that is important to know: when you borrow against your primary residence, so with any refinance, you must be given three days to cancel the transaction AFTER your closing. Funds are disbursed on the fourth business day. If you close on a Monday, the money to pay off the old loan or to be sent to you will go out (via overnight mail or, if you designate, by wire) on Friday. Keep this in mind if the timing is especially important to you for some reason.