Refi is a commonly used term in the mortgage banking industry. Refi is simply short for refinance. A refi constitutes obtaining financing through a new mortgage loan for the purpose of paying off an existing mortgage loan. Though there are numerous ways to proceed with a refi, there are two basic types, and the reasons for refinancing depend on individual financial situations.
A straight refi is the most common refinancing situation. A straight refi means a borrower is only refinancing the exact amount he or she owes on an existing mortgage. Often, people do this to change either the terms of their mortgage loan or their interest rate. A refi that carries a lower interest rate than a homeowner’s current interest rate saves the homeowner money over the course of the loan, and sometimes lowers his or her monthly payment. People sometimes proceed with a refi to extend the terms of their loan, which can also lower monthly payments, but this is a situation that should be avoided when possible, unless the interest rate can simultaneously be reduced.
A cash-out refi is another common refinance. A cash-out refi means borrowing more than the amount one’s home is currently worth, up to an allowed maximum. The cash-out refi differs from a straight refi in that the homeowner is not just borrowing the amount he or she owes on a current mortgage, but also borrowing against the equity in the home. People might use a cash-out refi to pay for college, make home improvements, or consolidate debt. The last option is not usually recommended, and should be pursued with caution and under the advisement of a financial planner or councilor.
The conditions for approval of a refi are slightly different than for a purchase loan. Most lenders will not allow a homeowner to refinance 100% of the home’s value. Offers from lenders that allow refinancing based on 100% or more of the home’s value should be examined closely, and one should never borrow more than the home’s actual market value.
A refi, either cash-out or straight, should benefit the borrower by lowering his or her mortgage interest or providing access to equity at a lower interest rate than a conventional loan. A qualified lender will discuss your situation with you and present you with options that are financially in your favor. If the lender only seems interested in closing the loan, look for a different lender.