Which Type Of Mortgage Refinance Best Suits Your Needs?
If you’ve built up equity in your home, you have a financial resource that you can use to help you meet your goals. That’s good news if you’re hoping to renovate your home, retire and travel around the world, or pay for your child’s college tuition. Fortunately, there are a wide variety of mortgage refinance products to help borrowers get what they need from their home.
What Is A Mortgage Refinance?
When you purchased your home, you most likely applied for a mortgage to pay for it. But now that you’ve been in the home for a few years, you might be considering a mortgage refinance, or getting a new – and better – mortgage to replace your current mortgage.
In most cases, a refinance means you go through the loan application process all over again. That means you’ll have to factor in closing costs, including a new appraisal, before deciding on whether a refinance is right for you. 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.
4 Different Types Of Refinance Loans
If you have a financial need and you own a home, chances are good there will be a mortgage product designed to help you.
1. Rate-And-Term Refinance
A rate-and-term refinance means you are looking for a better mortgage than you were able to get the first time around. This traditional form of refinancing is perfect for those who want to lower their monthly payments, get rid of MIPs on their FHA loan, extend or shorten the length of their loan term, or refinance their adjustable rate mortgage, or ARM, with a 15- or 30-year fixed-rate mortgage to lock in at today’s historic low interest rates.
Maybe your credit score is much higher now than it was when you first applied, or your income has risen and you want to pay off your mortgage more aggressively. Or maybe you’ve paid down some debt and have a much lower debt-to-income, or DTI, ratio. It’s quite possible that you’ll lock down a substantially lower rate if your credit score has moved up a bracket or two since the last time you applied.
Let’s say you bought a house in 2010, when your credit score was 650. We’ll assume your mortgage interest rate was 5.5% because you had to pay a bit extra because your credit score was relatively low. Now let’s assume that your current credit score is 750, and you apply for a refinance. You might save as much as $400 in monthly payments.
What if you needed to lower your monthly mortgage payment even more drastically, as in the case of a divorce, or the death or disability of a spouse? Again, assuming you bought your home in 2010, you could refinance the balance of your mortgage with a 30-year fixed-rate loan to stretch those monthly payments out over a longer period of time, thereby lowering your monthly payment further still. You will pay more over the long term with this approach, but if your financial situation improves later on, you can always refinance again.
2. Cash-Out Refinance
In terms of the application process, a cash-out refinance is just like a rate-and-term, but the consequences for the borrower are different. Instead of keeping the accumulated equity in the home, the homeowner gets a check on closing day for whatever equity they seek to remove from the home.
If the borrower takes the cash and invests it back in the home, thereby increasing its resale value, the borrower is in approximately the same position, from a loan-to-value proposition, as they were before. In other words, they owe more, but they also own more. If, however, they use the cash-out for some other purpose, they’ll simply owe more.
3. Cash-In Refinance
With a cash-in refinance, you put a lump sum amount of money into your mortgage, either to lower your monthly payment, to build your equity up to 20% so that you can cancel PMI or MIPs, or to shorten your mortgage repayment period. Think of it as a way to make a down payment at any point during your ownership of the home.
4. Streamline Refinance
If you have a government-insured mortgage, such as a Federal Housing Administration (FHA), Veteran’s Administration (VA) or U.S. Department of Agriculture (USDA) loan, you may qualify for a streamlined refinance process. Streamlines require very little paperwork and no new appraisal, so closing costs are low.
The FHA Streamline Refinance does not require a new round of credit or income verification, or a new DTI calculation. Neither do the VA or USDA Streamline programs. Borrowers can qualify for rate and term refinance if they:
- Have an existing FHA mortgage
- Have made 3 months of on-time mortgage payments
- At least 210 days have passed since you purchased or refinanced your home
- Can show a clear monetary benefit to refinancing, either by showing that your monthly payments will be reduced or your repayment period will be shorter
- Can lower your interest rate by at least 0.50%, in most cases
This list is not exhaustive. If you have equity in your home, you’ve got myriad options developed specifically to help you tap it to meet your financial needs. Want to talk to someone to learn more about your refinance options? Chat with us online or call one of our refinance specialists today at (888) 452-0335.