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When it comes to home mortgage refinancing, there are two main types of refinancing options; Rate & Term or Cash Out. A Rate & Term refinance is just as it sounds. The purpose of the refinance loan is simply to get a better rate and extend the term, or length, of the loan. Rate & term refinancing rates vary based on the lender, but there are other factors that are involved in determining your rate as well.
First, in a rate and term refinance, the amount money you are borrowing based on the value of the home will factor into your refinancing rates. This is called the ‘loan to value' ratio. Basically, if you have a home that is worth $200,000 and you have an existing mortgage of $100,000, you would have a 50% loan to value (LTV) in your refinance. Refinancing rates will vary after you rise above an 80% LTV ratio.
Typically, refinancing rates will change at 90%, 95%, and 100% LTV. The higher the LTV, the higher your rate will be. Rate and term refinancing is a great way to save on your monthly mortgage payments if you have already built up a good amount of equity. Remember to take the closing costs into account when deciding whether to go with a refinance loan.