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How Does Refinancing Work?

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How Does Refinancing Work?

When you sign up for a mortgage, it comes with an interest rate and term length. Those interest rates can fluctuate from year to year (even day to day!) and depending on your financial situation, it may be in your best interest to shop around for a new loan rate and/or term. This is called refinancing.

There are several reasons you may choose to refinance, including:

Secure a lower interest rate

Moving from FHA loan to conventional loan

Consolidating multiple loans

Moving from a fixed-rate mortgage to an adjustable rate mortgage (or vice versa)

Moving to a shorter term mortgage

Here’s how it works: the lender essentially pays off your existing mortgage and creates a second loan. This either allows you to pay off your home in less time, have a lower monthly payment, or even walk away with cash in your pocket. There are two main types of refinancing: rate & term and cash-out.

Rate & Term

These types of mortgages basically refer to trading in your old mortgage for a new one, without raising the original loan amount. Sometimes this means going from a 30-year fixed rate to a 15-year fixed rate at a lower interest level. In this scenario you would pay off your loan faster, and with less interest. Another example - If you have an adjustable rate mortgage (ARM) and interest rates are at an all-time low, it may be a good time to switch. It’s important to note there are closing fees associated with refinancing, however. Be sure to take this extra cost in to consideration when determining your break-even point.

Cash-Out Refinancing

If your home equity (value of the property) has increased and you’re looking for cash for a down payment on another home, or a new car, or other large purchase, cash-out may be an option for you. This allows the borrower to refinance their mortgage for a larger amount and take the extra as a lump sum. However, this usually leads to higher mortgage payments and can be risky if life changes make it hard for you to continue to pay off your loan. You must still pay back the money you borrowed.

Talk to a trusted lender to see if refinancing makes sense for your unique situation.

Citywide Home Loans make the loan process simple. Visit to see how much home you can afford and find a loan program that’s right for you.