In this day or automation, bill paying online and Internet loan applications, one would think that conducting a refinance loan is the same, no matter what. However, there are three main types of refinances, so it is important to learn the difference if you are considering refinancing.

Rate/Term- This is the most basic refinance transaction that occurs, which ultimately simply lower the interest rate paid on the loan and pays off the existing mortgage balance only. Sometimes, the term may also be reduced. For example, an old loan with a 30-year term is paid off with a new loan that carries only a 15-year term. All closing costs are paid outside of the new loan by the borrower.

Limited Cash Out - This type of transaction is often confused with a rate/term refi, with the main difference being the fact that closing costs are often rolled into the new loan with a limited cash out refinance transaction. Additionally, Fannie Mae and Freddie Mac, two government sponsored agencies, will allow borrowers to obtain up to $2000 or 2% of the loan amount, whichever is less, back at closing in the form of cash. Both agencies have also determined that you can payoff an ex-spouse and still have the loan considered as a limited cash out refinance transaction, so long as the appropriate divorce papers are supplied to the lender.

Cash out/debt consolidation - With this type of refinance, consumers are often looking to get cash back or payoff debts in addition to the mortgage(s). For instance, a borrower might have several credit cards and a student loan that they would like to roll into one easy payment. A cash out refinance transaction would payoff all of the debts at closing.

Also, Fannie Mae and Freddie Mac have determined that if a borrower is paying off a home equity line of credit or a second mortgage with a refinance loan, the transaction is considered a cash out refi unless the second mortgage was used to purchase the home originally.

With this knowledge, you should be a refi expert in no time!