The complete guide to mortgage refinance options
There are many types of mortgage refinance programs and loans. Knowing as much as you can about them will help you understand their benefits, clarify which one you qualify for and help you learn how they could save you money.
When you have looked at the types of mortgage refinance options and decide which one is right for you, you will be ready to start your refinance application.
What are the types of mortgage refinances?
With many types of mortgage refinancing, there are options available to help borrowers change their loans in ways that could benefit them the most. Understanding what the types of refinances are could help you determine which one is best for you and your situation.
The primary goals of refinancing your home
A mortgage refinance changes the terms of your loan and, in some cases, can offer you access to some of the value you’ve built in your home. Many borrowers choose to refinance their homes to lower their monthly mortgage payments. Refinancing can do this by reducing the interest you pay, extending the length of your loan or removing any mortgage insurance you may have.
How to choose the right refinance for your financial situation
With many choices for refinancing your home, you may wonder how to select the right option for your financial situation.
When looking to choose the right refinance, consider how you will get the funds and what repayment looks like. Depending on the refinance you choose, when you have to start principal repayment can vary. Consider which option is best for you.
Cash-out refinance: Tapping into your home equity
Getting a cash-out refinance allows you to access some of your home equity, or the amount of home you own outright, as a lump-sum shortly after closing on your refinance.
How a cash-out refinance works
A cash-out refinance replaces your current mortgage with a larger mortgage, offering you a portion of the difference between the two loans in cash. The amount you receive through a cash-out refinance is based on your home’s value and remaining mortgage amount.
Common ways to use your home equity cash
The home equity funds you have access to can be used for any expenses you may have or want. One popular use for home equity cash is home improvements.
Home improvements can be repairs, renovations or upgrades to your property. This is a very popular use of your funds as it reinvests your home equity funds into your home. Some home improvements made using your equity could even boost your property value and be tax-deductible.1
Other common uses for home equity funds include consolidating debt, covering educational costs and paying off emergency expenses.
The 80% loan-to-value rule for cash-out loans
The 80% loan-to-value (LTV) rule generally states that in most cases you can only access up to 80% of your home’s value for cash-out loans, leaving you with 20% equity in your home after your refinance. This rule is set by the Federal Housing Administration (FHA), and many lenders follow the same cap on cash-out loans. The U.S. Department of Veterans Affairs does allow 100% LTV for some VA loans.
Cash-in refinance: Reducing your loan balance
A cash-in refinance differs from a cash-out refinance as instead of receiving money when refinancing your mortgage, you pay an additional lump-sum when closing on your refinance. Think of a cash-in refinance like choosing to make a second down payment when closing on your refinance.
Why homeowners choose to bring cash to the closing table
Borrowers choose a cash-in refinance to reduce their monthly mortgage payments, secure better terms on their loans or just lower the amount owed. Putting extra money toward your mortgage when refinancing increases the equity you have in your home.
Removing private mortgage insurance (PMI) with a cash-in refi
A cash-in refinance could help borrowers remove any private mortgage insurance (PMI) they may have, though refinancing is necessarily not required to remove PMI. Since they will add to their home equity by refinancing their loan, if their home equity after their refinance closes is above 20%, they could reduce their monthly payments by removing PMI.
Streamline refinance options for government-backed loans
If you are looking to refinance a government-backed loan, you could qualify for a quicker loan refinance with less paperwork.
FHA streamline refinance: Lower rates with less paperwork
If you have an FHA loan and are looking for a quicker refinance, an FHA streamline refinance could get you lower interest rates and reduced monthly payments with less paperwork. If you qualify for this refinance, a credit check or income verification may not be required and, in many cases, a home appraisal is not needed. This could save you time and money on your refinance.
VA Interest Rate Reduction Refinance Loan (IRRRL)
If you are a Veteran or eligible military service member looking to refinance your VA home loan to reduce your interest rate or switch to a fixed-rate loan, an IRRRL could help you reduce the time it takes. An Interest Rate Reduction Refinance Loan (IRRRL) often does not need credit or income verification and, in some cases, it will not require an appraisal.
This refinance is available for qualifying borrowers looking to refinance their VA loan into a new VA loan.
USDA streamlined-assist refinance
A USDA streamlined-assist refinance is similar to the previous two streamlined refinance, but for USDA home loans. It allows borrowers to reduce the interest rate on their mortgages and monthly payments often with less documentation.
Consolidation refinance: Managing multiple home loans
If you have multiple mortgages on your home, refinancing could let you consolidate them into one. This could reduce the number of payments you make a month, convert any from adjustable rates to fixed rates and even lower the amount of interest you pay each month if current rates are lower.
Combining a primary mortgage and a HELOC
A home equity line of credit, or HELOC,2 is a type of second mortgage, meaning that you will be responsible for paying it alongside your primary mortgage. Some borrowers would prefer not to deal with both primary and second mortgages and may decide to refinance to combine them into a single home loan.
Comparing fixed-rate vs. adjustable-rate refinance options
Fixed-rate mortgages are great for someone trying to plan out future expenses, as the interest they pay on their loan will stay the same. Adjustable-rate mortgages start with a lower interest rate for a set amount of time before changing according to current market rates.
If you are looking for a period of lower rates after you refinance, you may want to consider an adjustable-rate refinance. If you have an adjustable rate and are looking for something more stable, you could consider switching to a fixed rate after your refinance.
How to determine which refinance type is best for you
Determining which refinance type is best for you depends on your current situation and what you are hoping to get out of your refinance.
If you aren’t sure which refinance type is best for you and your needs, talk to a professional Loan Officer and see what your options are. A Loan Officer could walk you through your options and talk to you about what your new loan would look like after a refinance.
When you have considered your options and needs, you will be ready to begin a mortgage refinance application.
1Rate does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.
2Rate's HELOC is a fixed-rate open-end product using your home as collateral. Not available in all states. Go to rate.com/HELOC for information including important property and borrower requirements and restrictions which impact rate and max available loan amount. Subject to approval.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate for current rates. Restrictions apply.
Rate is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate. Rate, its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
