The mortgage you sign when you first buy your home is not necessarily the mortgage you’ll keep paying until you own your home free and clear. It’s common for homeowners to refinance their mortgages at some point in time, whether to take advantage of better rates or access some of the equity they’ve built.
Here, we’ll review some home loan options for refinancing your house.
Key Takeaways:
- There are different home loans for refinancing you can consider, depending on your goal and the type of mortgage you have.
- Refinancing a mortgage could allow you to lower your monthly home loan payments or use your home equity to meet a financial need.
- Make sure to weigh the pros and cons of each choice carefully and understand the costs involved.
- You pay closing costs and fees with most home refinance options, which can be between 2% – 6%.
What Is A Mortgage Refinance?
When you purchased your home, you most likely applied for a mortgage to pay for it. But once rates drop lower than your current rate, it may be worth considering a mortgage refinance. If you’re able to replace your current mortgage with a new home loan on better terms, it could save you money by reducing your monthly payments, extending or shortening your loan term, or allowing you to tap your home equity for other needs.
In most cases, a refinance means you go through the mortgage application process all over again. A lender will review your finances to make sure you qualify, and you may have to get a new home appraisal.
Once your loan is approved, a new closing day is scheduled, and the proceeds of the new loan are used to pay off the old mortgage.
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Types Of Home Loans for Refinancing
As a homeowner, you have a variety of home loan options for refinancing that you may want to explore depending on your goal. Let’s take a look at each of these refinance types.
1. Rate-And-Term Refinance
A rate-and-term refinance means you’re seeking more favorable mortgage terms than what you got the first time around. This traditional form of refinancing is perfect for those who want to lower their monthly payments, get rid of mortgage insurance premiums (MIPs) on their Federal Housing Administration (FHA) loan, adjust the length of their loan term, take advantage of lower interest rate or swap an adjustable rate mortgage (ARM) for a 15- or 30-year fixed-rate mortgage with predictable monthly payments.
Maybe your credit score is much higher now than it was when you first applied for a mortgage. It’s quite possible that you’ll be able to lock in a lower mortgage rate if your credit score has moved up a bracket or two since then.
Or it could be that your income has risen a lot since you put your original mortgage in place. Switching from a 30-year to a 15-year mortgage could leave you with higher monthly payments but save you a lot of money on interest. If you can afford those higher payments, it might make sense to shorten your loan term.
Conversely, you might want to refinance your mortgage into a term that’s easier for you to manage financially. You may have started with a 15-year mortgage to enjoy a lower interest rate on your home loan, but if you’re having a hard time making payments, you might be able to lower your monthly payments significantly and buy yourself some breathing room by refinancing into a 30-year mortgage.
Whatever the reason, with any rate-and-term refinance, the amount of the mortgage loan remains the same as your current mortgage balance.
2. Cash-Out Refinance
A cash-out refinance is a good way to tap the equity you’ve built in your home. With this type of refinance, you borrow more than your original mortgage balance. The amount not needed to pay off your original mortgage is given to you in cash, and you can spend that money however you want.
Here’s an example of how a cash-out refinance might work: Let’s say you owe $200,000 on your mortgage, your home is worth $350,000 and you need $50,000 to finish your basement. With a cash-out refinance, instead of just borrowing your current mortgage balance of $200,000, you’d take out a $250,000 loan. The first $200,000 would pay off your existing home loan, and the remaining $50,000 would be yours to finance your renovation.
Although some people do a cash-out refinance to pay for home improvements, you’re not required to spend the funds from a cash-out refinance on something related to your home. You can spend the money on anything you like, such as a vacation, tuition, to pay off debt or to start a business without having to apply for a separate business loan.
3. Cash-In Refinance
A cash-in refinance is basically the opposite of a cash-out refinance. With a cash-in refinance, you pay a lump sum of money into your mortgage. Paying down a substantial amount of your mortgage principal lowers your loan-to-value ratio (LTV) and increases your equity. This can help you lower your monthly payment, shorten your repayment period or build your equity up to 20% so you can cancel private mortgage insurance (PMI) for your conventional loan or your MIP if you have an FHA loan. At the same time, you may be able to qualify for a better interest rate because your principal will now be lower.
4. Streamline Refinance
If you have a government-insured mortgage, such as a Federal Housing Administration (FHA) loan, Department of Veterans Affairs (VA) loan or U.S. Department of Agriculture (USDA) loan, you may qualify for a streamlined refinance process. Streamline refinances require very little paperwork and no new appraisal, so their closing costs tend to be relatively low. They also do not tend to look at income, credit scores or debt-to-income ratios.
To qualify for a streamline refinance, you need to be current on your mortgage payments, and your refinance must provide a net tangible benefit for you. That could mean that it lowers your loan’s interest rate, results in lower monthly payments or both. You also might qualify for a streamline refinance if you’re looking to switch from an ARM to a fixed loan for more predictable monthly payments.
To qualify for an FHA streamline refinance, you must have made at least six payments on your mortgage and at least six months must have passed since the first payment on your mortgage was due. In addition, at least 210 days must have passed from the closing date of your mortgage.
For a VA loan streamline refinance, you need to certify that you live in the home or used to live in the home covered by the mortgage you’re looking to refinance.
For a USDA loan, to do a streamline refinance, your loan must have closed 12 months prior to your refinance application, and your loan needs to have been paid on schedule for 180 days (6 months) before applying to refinance.
5. No-Closing-Cost Refinance
Homeowners who choose a no-closing-cost refinance don’t have to pay closing costs up front on the loan, as the name suggests. But don’t assume that you won’t pay in other ways. With a no-closing-cost refinance, your lender will generally make up the difference by rolling your closing costs into the principal of the loan or charging you a higher interest rate.
A no-closing-cost refinance is great for homeowners who want to save money on a refinance up front and aren’t sure if they’ll stay in their home very long after the refinance.
6. Short Refinance
A short refinance is a type of home loan refinance for people who are underwater on a mortgage, meaning your mortgage balance is higher than the value of your home or you’ve missed monthly payments.
With a short refinance, your lender agrees to a new mortgage in an amount that’s lower than your current mortgage balance, and the remainder is forgiven. The goal is to make your monthly payments more affordable and keep you in your home so you can continue paying off your loan.
Why would a lender agree to a short refinance? It could help them lose less money than they would in the event of a foreclosure, which can be a cumbersome process for lenders to initiate, so they tend to avoid it when they can.
A short refinance is ideal for homeowners who want to stay in their homes but need more affordable monthly payments to be able to do so. A short refinance could also hurt your credit, depending on the circumstances; these loans should only be used when absolutely necessary.
What’s Your Goal?
Buy A Home
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Refinance
Refinance your mortgage to have more money for what matters.
Tap Into Equity
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How To Navigate Your Mortgage Refinance Options
When deciding if you should refinance your mortgage and the type of loan you should choose, consider these factors:
- The type of loan you currently have; some mortgages may not allow you to refinance into a different type of loan
- The amount of equity you have in your home. Lenders may have different equity requirements to approve a refinance. Some lenders may approve a higher loan-to-value ratio based on creditworthiness.
- Your primary goal in refinancing (for example, saving money versus tapping home equity)
- Your credit score and debt-to-income ratio; a minimum 620 credit score is usually needed for a conventional mortgage, and other loan types may have other requirements
- Your home’s current value
You also can consult with your lender to go over your refinance options and get recommendations on which is the best for your situation.
Keep Closing Costs in Mind
Any time you refinance a mortgage, you pay closing costs, which are generally about 2% – 6% of your refinanced loan’s value. A no-closing-cost mortgage is the exception, but even then you’re paying in other ways, such as with a larger principal or interest rate. So, make sure that the cost of refinancing makes sense for your situation.
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The Bottom Line on Mortgage Refinance Options
As you can see, there are different home loans for refinancing you can consider to lower your monthly payments or tap your home equity. by exploring your different refinance options, and see what benefits you could enjoy with a new home loan.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
