The term “loan amortization” refers to the payoff of your loan over time. In the case of a mortgage, the amortization period is typically 15 or 30 years. If you complete a cash-out refinance, however, your loan amortization will change.
Understanding Loan Amortization
When you close on a mortgage, you may receive a copy of an amortization schedule, which is a table that shows you how your loan amortizes over time. In the earliest phases of the loan, most of your monthly payment is used to cover interest charges. As your mortgage progresses, however, more of your loan payment will go toward principal and less will go toward interest. Portions of your payment will also go toward property taxes and homeowner’s insurance.
About Cash-Out Refinancing
When you refinance your mortgage with or without cash out, you take out a new loan that replaces the old one. This loan will typically have a different payment amount, term and interest rate. With a cash-out refinance, you also receive some of your equity in the form of cash, which raises the balance of the new loan.
Because of all of these changes to the loan’s terms, you will notice changes to your amortization schedule as well. However, the exact changes that take place will depend on your circumstances. For example, if your previous loan had 20 years of its term remaining and you refinanced with a 30 year mortgage, your payoff date will be approximately ten years later. However, if you refinanced for a shorter term, your payoff date will be sooner than it would have been with the previous loan. Because you are beginning a new loan, you will also notice that your early payments will have larger portions going toward interest and smaller portions going toward principal.
Making a Decision
Cash-out refinancing has its advantages, but it isn’t the right choice for every borrower. If you are considering a cash-out refinance, contact Starboard Financial to discuss your options and find out if cash-out refinancing is the best course of action for you.
For more information about mortgage expenses or to check the latest loan rates, contact Starboard Financial. We have offices in both Arizona and Illinois, as well as loan officers nationwide who are ready to assist you.