The type of loan a borrower decides on is dependent on the needs of the borrower. The most common type of refinancing is called the rate-and-term. This occurs when the original loan is paid and replaced with a new loan requiring lower interest payments. Another type of refinancing is the cash-out. Cash-outs are common when the underlying asset collateralizing the loan increases in value. The transaction involves withdrawing the value or equity in the asset in exchange for a higher amount. In other words, when an asset increases in value on paper, you can gain access to that value with a loan rather than selling it. This option increases the total loan amount but gives the borrower access to cash immediately while still maintaining ownership of the asset.
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