In this article:
Homeowners refinance their mortgages for a range of reasons: to lock in a lower interest rate, shorten the term of their loan or leverage their equity for cash. According to the ZG Survey of Homeowners’ Reasons for Refinancing, 59% of homeowners with a mortgage who have not moved in the last year have refinanced the mortgage on their current home.
If you think refinancing makes sense for you, read on for the most common types of refinance loans and check out our refinance calculator to see your potential savings.
Rate-and-term refinance
A rate-and-term refinance is the most common type of refinancing. In this option, a homeowner’s original loan is paid off by a new mortgage loan, with a new rate and set of terms. Homeowners often do a rate-and-term refinance to lower their interest rate or mortgage payment. A rate-and-term refinance can also be used to get rid of mortgage insurance (PMI) or move from a 30-year to a 15- or 20-year loan. If you have an adjustable-rate mortgage, you can also switch to a fixed-rate mortgage when you do a rate-and-term refinance to help stabilize monthly payments.
Consider a rate-and-term refinance if: Current interest rates are lower than the rate you already have to help lower your monthly payment and pay off your loan faster, or consider this refinance option if you want to remove the PMI. (Note that there are other options for removing PMI if you aren’t able to get a lower rate through refinancing.)
Types of mortgages that qualify: Conventional fixed-rate, adjustable-rate, VA, FHA and USDA loans all qualify for a rate-term refinance. Loans that also qualify include private money or hard money loans, construction-to-permanent loans and seller financed loans.
Minimum requirements: You’ll need a credit score of at least 620, plus show proof of adequate income. Additional requirements vary by lender. Speak to a lender today to see if you pre-qualify for a rate-and-term refinance.
Cash-out refinance
A cash-out refinance allows homeowners to secure a new rate and term by replacing their current home loan with a new mortgage, while also accessing some of their home’s equity as cash. With a cash-out refinance, you will be pulling cash out of your home, which will result in a higher principal balance in your new loan, but it can be an affordable way to access cash for large expenses. There are also no restrictions on how you use the proceeds from a cash-out refinance. Some of the most common reasons homeowners get a cash-out refinance is to pay for home improvements or repairs, consolidate debt, pay for school or buy an investment property or vacation home.
Consider a cash-out refinance if: You need cash and are looking for a more affordable option than a credit card or personal loan. Since cash-out refinances generally offer lower interest rates than credit cards or personal loans, they may be a preferred choice.
Types of mortgages that qualify: Cash-out refinances are available for both conventional and government-backed loans (like VA, FHA, and USDA). However, USDA loans must be refinanced into a new type of loan.
Minimum requirements: Usually a credit score of 620 and debt-to-income (DTI) ratio of less than 50%. You’ll also need to have enough equity in your home that you can retain a portion of your loan-to-value (LTV) ratio after you’ve pulled out the cash you need.
Streamline refinance
A streamline refinance is available to homeowners with government-backed mortgages, like FHA, VA or USDA. As the name suggests, streamline refinances are designed to be less complicated and quicker than rate-and-term refinances, thanks to less paperwork and no home appraisal.
There are two kinds of streamline refinances: credit qualifying and non-credit qualifying. In a credit qualifying streamline refinance, you’ll have to have a credit check. In non-credit qualifying streamline refinance, you typically don’t need a credit check. Upon completion of this type of refinance, you’ll still have a loan with the same government program, just with a new interest rate.
Consider a streamline refinance if: You want to better your interest rate and save money over the life of the loan, yet you’re comfortable staying with the same loan program you’re currently in.
Types of mortgages that qualify: Federally-backed mortgages including FHA and VA, and USDA loans backed by the U.S. Department of Agriculture.
Minimum requirements: You’ll need to have an existing government-backed mortgage and have a strong history of on-time payments.
Cash-in refinance
The opposite of a cash-out refinance, a cash-in refinance is an option for when you want (or need) to infuse cash into your home. A cash-in refinance is less common than both rate-and-term and cash-out refinance, but can be useful for homeowners who are looking to keep their loan amount below a certain threshold or keep their LTV below a certain limit. Cash-in refinance is also popular with people who have recently received an inheritance, settlement or bonus. By decreasing principal, you’ll typically have a lower monthly payment after a cash-in refinance.
Consider a cash-in refinance if: You want to reduce monthly payments, remove PMI, qualify for a better interest rate or have a mortgage balance that is lower than the home’s market value.
Types of mortgages that qualify: Cash-in refinances are offered for conventional loans. They’re less common than other types of refinances, so be sure to ask your lender if they offer them.
Minimum requirements: Since many people use a cash-in refinance to boost the amount of equity they have in their home, they’re usually available even if you don’t have 20% equity in your home. Other requirements vary by lender, but you’ll likely need a credit score of at least 620.
No-closing cost refinance
One reason homeowners often decide against a refinance is because closing costs can be expensive (between 2% and 6% of the new loan amount). A no-closing cost refinance aims to resolve that challenge by using a lender credit to offset the closing costs associated with refinancing.
In a no-closing cost refinance, the lender will agree to reduce or completely eliminate your closing costs in exchange for a higher interest rate. While this can be an attractive option for homeowners who may be short on cash, a no-closing cost refinance only makes sense for homeowners who plan to move or refinance again within five years or so. Otherwise, you’ll likely end up paying more in interest over the life of your loan than you would in up-front closing costs.
Consider a no-closing cost refinance if: You plan to move or refinance again within a few years, or if you don’t have the cash to pay closing costs and interest rates are low.
Types of mortgages that qualify: Most conventional, FHA and VA loans offer no closing cost options. You’ll just need to choose an interest rate with enough rebate to cover the closing costs. Ask your lender for assistance.
Minimum requirements: Like a rate-and-term refinance, you’ll need a minimum credit score of 620, plus proof of income and employment. Additional requirements vary by lender.
Short refinance
Some lenders offer what’s known as a short refinance to homeowners who don’t have an FHA loan and are underwater on their mortgage. In a short refinance, the bank or mortgage lender agrees to pay off your existing mortgage and replace it with a new loan with a reduced balance, essentially helping you avoid a short sale or foreclosure. Lender participation in the short refinance program is voluntary, which makes the refinance option hard to come by. For homeowners at risk of losing their homes, a short refinance can be a helpful alternative. If you owe more on your home than the home is worth, consider discussing a short refinance with your loan officer or mortgage broker.
Consider a short refinance if: You’re current on your mortgage payments but underwater and owe more on your home than the home is worth or you are at risk of foreclosure.
Types of mortgages that qualify: Short refinance loans are available on any non-FHA loan, but it’s up to your lender to offer a short refinance option.
Minimum requirements: You must be current on your mortgage payments and have at least a credit score of 500. Lenders who participate in the short refinance program must also be willing to write off at least 10% of your original home loan.
Fannie Mae High LTV Refinance Option (HIRO)
Commonly called the HIRO program, a High LTV Refinance Option is designed for people who have a conventional mortgage through Fannie Mae and want to refinance but don’t have enough equity to do so. You may even be underwater, which means you currently owe more than your home is worth. HIRO is a similar program to HARP, the Home Affordability Refinance Program, that ended in 2018. Just like other refinances, you’ll need to be able to pay for closing costs on your new mortgage.
Consider a HIRO refinance if: You have less than 3% equity in your home, but you want to take advantage of lower interest rates.
Types of mortgages that qualify: Conventional loans backed by Fannie Mae.
Minimum requirements: To qualify for a HIRO refinance, you need to have lived in your home for at least 15 months, but have closed on October 1, 2017 or later. You’ll also need to be current on your mortgage payments, and you can’t have previously refinanced through HARP.
Which refinance option is best for me?
Choosing the right type of refinance for you is a big decision — one that needs to take into consideration both your financial circumstances and your personal goals. When making your decision, consider the following:
- The type of mortgage loan you currently have
- Your refinancing goals
- Your financial situation
- The amount of equity you have in the home
- Your loan-to-value ratio
- Your ability to meet all eligibility requirements
Once you’ve determined you’re ready to refinance, check out current refinance rates to see if interest rates are lower than what you’re currently paying. Afterward, reach out to a few lenders to talk through the process and determine which refinance loan option is best for you.
How much does it cost to refinance?
Closing costs on a refinance can average between 2% and 6% of the loan amount. On a $300,000 mortgage, that means closing costs will equal between $6,000 and $18,000. Closing costs generally include a loan origination fee, appraisal fee, title fee, credit report fee and mortgage insurance. If you choose to purchase discount points when you refinance to lower your interest rate, that fee will also be added into your closing costs. VA refinance loans require an additional funding fee that other types of refinance loans don’t have. This fee gets looped into closing costs and can range between 0.5% and 3.6% of the loan amount.
The nice thing about refinancing is that no matter which type of refinance you choose, lenders will usually allow you to roll closing costs into the new mortgage. That means if your LTV allows it, you won’t need to bring in cash at closing.
For additional information about refinancing, visit our Mortgage Learning Center.
Source: zillow.com