Mortgage Refinance Options: How To Choose the Best Fit for You
If you’re considering refinancing your home loan, you might be overwhelmed by the different mortgage refinance options on the market today. We’ll cover several home refinance options below to help you get a better sense of which type might be your best choice.
- Match the refinance type to your specific goal, rather than defaulting to a rate-and-term refinance. Whether you need cash now, want to eliminate private mortgage insurance (PMI), can’t afford closing costs or need to avoid foreclosure, there’s an option designed for your situation.
- Calculate your break-even point before refinancing to determine how long you need to stay in the home to make refinancing worthwhile.
- Streamline refinances offer a faster, cheaper process if you already have an FHA, VA or USDA loan, as they skip income documentation and appraisal requirements that traditional refinances require.
Types of mortgage refinances at a glance
| Refinance type | A good option if you want to … |
|---|---|
| Rate and term refinance | Lower your rate or change your loan term. |
| Cash-out refinance | Convert your home equity to a lump sum of cash. |
| Cash-in refinance | Pay down your loan balance and build equity faster. |
| FHA streamline refinance | Change your FHA loan terms with less paperwork and without a home appraisal. |
| VA streamline refinance | Change your VA loan terms with less paperwork and without a home appraisal. |
| USDA streamline refinance | Change your USDA loan terms with less paperwork and without a home appraisal. |
| No-closing-cost refinance | Avoid paying money up front by rolling your refi closing costs into the new loan balance. |
| Reverse mortgage | Borrow against your home equity and receive retirement income when you’re age 62 or older. |
| Short refinance | Negotiate with your lender to adjust your mortgage payments as a way of avoiding foreclosure after mortgage default. |
Overwhelmed with options? Here’s how to choose the right mortgage refinance for you.
9 mortgage refinance options
1. Rate-and-term refinance
With a rate-and-term refinance, you’re typically changing your mortgage interest rate, loan term or both. The approval process is usually the same as when you bought your home and includes income, credit and home value verification. Both conventional and government-backed lenders can offer rate-and-term refinance loans.
Rate-and-term refinances are typically popular when interest rates are lower. While your loan balance stays the same after this type of refinance, it can be a smart way to lower your monthly payment or pay down your loan faster.
If you’re looking for short-term savings, an adjustable rate mortgage (ARM) or shorter-term loan can offer a lower rate than you’d typically find with a 30-year, fixed-rate mortgage.
Read more about when it’s a good time for an ARM refinance.
2. Cash-out refinance
A cash-out refinance allows you to take out a new mortgage for more than you currently owe on the home and have the extra cash go straight to you.
Borrowing against your home equity is typically the most economical way to pad your wallet for a major expense, like home improvements or tuition costs. The interest rate on a cash-out mortgage refinance will likely be lower than what you’d be offered on a large personal loan or credit card.
Government-backed loans, like FHA or VA mortgages, have their own cash-out refinancing programs, which you can learn more about below.
While both allow you to tap into your home’s equity, a cash-out refinance results in a new mortgage, whereas a home equity loan is a separate loan alongside your existing mortgage.
When to choose each option:
- Cash-out refinance: Best for homeowners looking to refinance at a lower interest rate or consolidate debt.
- Home equity loan: Suited for homeowners who want to keep their current mortgage terms while accessing cash.
3. Cash-in refinance
The idea behind this type of refinance is in its name — you literally put “cash in” to the refinance to reduce your current loan balance and lower your rate at the same time. Benefits may include smaller monthly payments, a lower annual percentage rate (APR) and getting rid of private mortgage insurance (PMI) all in one transaction, as long as you can afford to make a sizable payment toward your home loan. In the mortgage world, this is also called a “principal paydown” or “principal reduction.”
Whether you’re underwater on your mortgage or you simply want to build more equity in your home by reducing your loan-to-value (LTV) ratio, a cash-in refinance can strengthen your personal financial position.
If you’ve come into a big pile of cash from a bonus or tax refund but are happy with your current interest rate, ask your lender about recasting your mortgage. For a small fee, you can keep your current rate, pay down your principal balance and have your lender recalculate your payments at the lower loan amount.
Normally, if you just pay a big chunk toward your principal, the loan balance will shrink, but your monthly payment will stay the same. With a recast, you’ll end up with a lower payment without refinancing.
4. FHA streamline refinance
Compared to conventional mortgages, Federal Housing Administration (FHA) loan requirements are much more flexible, even allowing credit scores as low as 500 for some refinance types. No matter your current mortgage type, as long as you meet FHA qualifications, you can refinance to an FHA loan, including an FHA cash-out refinance.
If you already have an FHA mortgage, you may qualify for an FHA streamline refinance — this allows you to skip income documentation and appraisal requirements, leading to fewer closing fees.
5. VA streamline refinance
If you’re eligible for a home loan backed by the Department of Veterans Affairs (VA), you can take advantage of a “regular” VA refinance or a VA cash-out refinance. An added bonus: You can borrow more of your home’s value with a VA cash-out refinance than with an FHA or conventional cash-out refi — up to a 90% LTV.
If your current mortgage is already a VA home loan, you could do a VA streamline refinance, known as a VA interest rate reduction refinance loan (IRRRL). Like the FHA streamline, you won’t need to prove your income or home’s value with this refinance type.
While the VA offers special loans for people who want to purchase and renovate homes, VA renovation refinance loans are rare. Consider a VA cash-out refinance if you’d like to refinance your VA loan and remodel your property.
6. USDA streamline refinance
The USDA backs mortgages for rural homeowners with low incomes. USDA loan qualifications include requirements for the home’s physical location — you can check this eligibility map to ensure you qualify.
Like FHA and VA refinancing, USDA refinancing offers a streamlined option. It doesn’t offer a cash-out refinancing option, but does allow borrowers to roll eligible closing costs into the refinance loan amount.
7. No-closing-cost refinance
Writing a check out of pocket for refinance closing costs can be pricey, running from 2% to 6% of your loan amount in most cases. Most lenders offer no-closing-cost refinance options if you’re tight on cash for closing.
The term “no-closing-cost” doesn’t mean you won’t pay any closing costs — instead, the lender raises your mortgage rate and pays the costs on your behalf.
This will, of course, increase how much you’re borrowing, so be sure the math checks out and that it’s worth it to finance your closing costs as part of your loan.
To determine your break-even point, divide the total closing costs by your monthly savings. This tells you how many months it’ll take to recoup the money you pay to refinance.
For example, if you spend $5,000 to save $200 per month, you’ll break even in 25 months ($5,000/$200 = 25). If you plan to stay in your home for at least that long, the refinance makes sense.
8. Reverse mortgage
A reverse mortgage is only available for homeowners who are at least 62 years old and have at least 50% equity. It works in the “reverse” of a regular mortgage — that is, you receive a payment instead of making one. However, that means your loan balance actually increases each month rather than shrinking.
There are three types of reverse mortgages — however, the only type backed by the U.S. government is called a home equity conversion mortgage (HECM), which the FHA insures.
9. Short refinance
A short refinance is an option for borrowers who are dealing with mortgage default and at risk of foreclosure.
In this scenario, the lender lowers your loan balance — and, by extension, your monthly payments — to an amount you can comfortably afford, allowing you to keep your home. While the lender will lose out on some funds by agreeing to reduce your loan balance, the amount lost will likely be less than the lender would spend going through the foreclosure process.
However, it’s important to note that your loan servicer will need to approve you for this refinance type. Plus, going through with it has the potential to negatively impact your credit score.
Mortgage refinance requirements
| Loan program | Refinance purpose | Credit score | LTV ratio | DTI ratio |
|---|---|---|---|---|
| Conventional | Rate and term | 620 | 97% | 45% to 50% |
| Cash out | 620 | 80% | 45% to 50% | |
| FHA | Rate and term | 500 to 580 | 97.75% | 43% |
| Cash out | 500 | 80% | 43% | |
| Streamline | N/A | N/A | N/A | |
| VA | Rate and term | No minimum, but lenders typically require 620 | 100% | 41% |
| Cash out | No minimum | 90% | 41% | |
| Streamline | No minimum | N/A | N/A | |
| USDA | Streamline | N/A | N/A | N/A |
How to choose the right mortgage refinance option
| Financial goal | Best refinance option | Advice |
|---|---|---|
| Lower monthly payments | Rate-and-term refinance | Search for a refi loan with a lower interest rate or longer loan term than your current mortgage offers. |
| Access cash for major expenses | Cash-out refinance | Be sure your refinance comes with a lower interest rate than your current mortgage. If it doesn’t, consider a home equity loan instead. |
| Cheapest or fastest refinance | Streamline refinance | Your current mortgage must be an FHA, VA or USDA loan. |
| Refinancing with bad credit | FHA or VA loan | FHA loans require only a 500 credit score, and VA loans don’t have a minimum credit score requirement. |
| Remove PMI or build equity | Cash-in refinance | Bringing cash to closing can reduce your loan balance enough to get below an 80% LTV ratio, which allows you to eliminate PMI. |
| Pay off your mortgage faster | Rate-and-term refinance (shorter term) | Refinance to a 15-year or 20-year mortgage to build equity faster. Your monthly payment may increase, but you’ll save significantly on total interest paid over the life of the loan. |
| Avoid out-of-pocket closing costs | No-closing-cost refinance | The lender pays closing costs but raises your interest rate in exchange. Run the numbers carefully — the higher rate will cost more over time. Best option if you don’t plan to stay in the home long term. |
As you make your final decision, don’t forget to weigh these important factors:
- Your existing loan terms: Consider your current loan program, interest rate and repayment term. Your new loan will need to offer better terms or some other advantage, otherwise it’s not worth it to refinance.
- Your financial qualifications: Be realistic about financial factors that could impact your eligibility, including your credit score, debt-to-income (DTI) ratio and LTV ratio.
- Your break-even point: Think about how long you plan to stay in the home and whether refinancing aligns well with your other financial goals.
- Your savings: Weigh whether you have enough savings to pay closing costs on your new loan. Typically, they account for 2% to 6% of the total loan amount.
When in doubt, contact a refinance lender to help you decide.
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