Cash-out refinancing: A cash-out refinancing refers to situations where you obtain a new loan that is for more money than you owe on an existing debt obligation for the purpose of receiving cash when the new loan closes. For example, if you owe $250,000 on your mortgage and refinance with a new $300,000 loan, you could receive $50,000 (minus any fees) back at closing. This is most common when refinancing mortgages, as it is usually one of the cheaper ways to borrow money for things like home improvement projects and other large expenses.
Debt consolidation: Refinancing doesn’t necessarily mean that you replace one loan with another. If you have several credit cards with balances, transferring all of those balances to a different credit card with a 0% intro APR, or obtaining a personal loan to pay them all off, is also a form of refinancing.
When is refinancing a loan a good idea?
Of course, every financial situation is different. But the basic concept is that refinancing can be a great financial move if the benefits outweigh the costs.
With mortgages in particular, refinancing is not free -- not even close. It generally costs about 2% of the loan amount in closing costs and fees to refinance. However, if the interest savings over the long term are greater than the costs, it can be worthwhile. As an example, if it will cost $5,000 to refinance, but you'll save $10,000 on interest over the next five years, refinancing could be a smart move.
When you consolidate credit card debt, there are costs to consider. For example, if you transfer balances to a 0% intro APR credit card, you’ll typically pay a 3% to 5% fee for doing so. However, if this allows you to not pay 20% (or higher) interest rates on the debt for a year or more, it could be worth absorbing the cost.
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