Exploring your Refinance Options
Once you've identified your refinance goal, it's time to figure out which kind of loan can help you get there. Let's talk about which loan features are best for helping you lower your payment, take cash out or shorten your mortgage term.
Looking to get more flexibility in your monthly budget? Here are a few different ways to lower your mortgage payment.
Lower Your Interest Rate
If you're interested in getting the lowest rates available, you might want to consider an adjustable rate mortgage (ARM). ARM rates are typically lower than fixed rates because of the risk that your rate could increase after the initial fixed-rate period is over. However, if you're planning to move or refinance in the next 5 to 10 years, an ARM could be a good option for you.
Keep in mind that refinancing with a lower interest rate doesn't guarantee that your payment will be lower. A lower rate will shrink the interest portion of your monthly payment, but many factors – such as your term, taxes and insurance – affect how much you're required to pay each month.
Change Your Mortgage Term
If having a lower payment is more important to you than paying off your loan quickly, then changing your mortgage term could be right for you. Lengthening your mortgage term allows you to stretch your payments out, which makes each payment smaller. Going from a 15-year term to a 30-year term, for instance, is a great way to lower your payment.
Eliminate Mortgage Insurance
Eliminating mortgage insurance can save you hundreds of dollars a month, but to get rid of it, you first have to know which kind you have:
- Conventional loans have private mortgage insurance (PMI). PMI is usually paid as part of your monthly mortgage payment. In most cases, you'll stop paying PMI when you have about 20% equity in the home.
- FHA loans have mortgage insurance premiums (MIP). Client with FHA loans pay a premium upfront at closing and as part of their monthly payment. When you stop paying MIP depends on how much you put down when you bought your home and when you closed. However, if you put less than 10% down on an FHA loan after June 3, 2013, the only way to get rid of MIP is to refinance.
If you have a conventional loan or an FHA loan that is eligible for MIP removal, it might make sense to make extra payments or just keep paying on your loan to raise your equity and drop your mortgage insurance. If you want to get rid of it immediately, however, you could look into refinancing with lender-paid mortgage insurance – a type of mortgage insurance that's rolled into your loan instead of your monthly payments. Lender-paid mortgage insurance could work in your favor if you're planning to stay in the home for a while.
Want to Eliminate PMI?
See how PMI Advantage can help you lower your monthly payment.Learn about PMI Advantage
Take Cash Out
There are a lot of loan options to choose from if you're looking to get cash out. It all depends on your situation and goals.
If you're simply looking to take out as much cash as possible, a 30-year loan is probably your best bet. Since you're upping your loan amount by taking cash out, the 30-year term will give you the lowest monthly payment.
If you're taking cash out with a goal of becoming debt-free, a shorter term could be a better choice. You could use your cash to pay off credit cards and other debt while paying off your home and saving on interest.
Whether you go with a conventional or an FHA loan depends on your personal situation. For many homeowners, an FHA loan is less expensive than a conventional loan. However, if you already have a conventional loan, refinancing into another conventional loan could be the right choice. Your lender can help you determine which loan option is the most affordable way for you to take cash out.
Shorten Your Term
Shortening your term is a smart way to pay off your home quickly and cheaply. A shorter term usually has a lower interest rate, and since there are fewer payments, you'll pay significantly less interest overall.
There are a variety of loan options that make a shorter term possible, and the right one for you will depend on your situation. A conventional loan is a great choice for those with good credit. If you're a service member or veteran, a VA loan is almost always your best choice. Talk with your lender to see which loan option makes shortening your term the most affordable.
Options for Refinancing if You've Been Denied Before
Have you been denied when you've tried to refinance in the past?
Recent changes in the mortgage industry have made it easier for homeowners to qualify. Less restrictive guidelines mean that homeowners who were previously denied for an FHA, conventional or VA loan may have a better shot now.
If you haven't been able to refinance because you have little or no equity, the U.S. government's Home Affordable Refinance Program (HARP) is one option you should consider. You can learn more about HARP here or see if your loan may be eligible for HARP.