Home Refinance Options
Home refinancing can have a major impact on your finances. Whether you’re looking to lower your interest rate, shorten your loan term, ditch mortgage insurance or tap equity, you have several home refinance options to help you meet your financial goals.
|Refinance type||A good option if you want to…|
|Cash out||Convert your home equity to a large lump sum of cash|
|Streamlined||Refinance without a ton of paperwork|
|Rate and term||Lower your rate or switch terms and roll in your closing costs|
|No closing cost||Reduce your closing cost bill at closing|
|Conventional||Save money and avoid mortgage insurance|
|FHA||Refinance with credit blemishes|
|VA||Use your military home loan benefits to refinance|
|USDA||Replace the mortgage on a rural home|
|Reverse||Convert home equity to income and are age 62 or older|
|Cash in||Pay off your loan balance and build equity faster|
|Bonus: How to choose the right mortgage refinance for you|
1. Cash-out refinance
In a cash-out refinance, you get a new mortgage for more than what you currently owe on the house, and the extra cash goes straight to you.
Borrowing against your home is typically the most economical way to pad your wallet for a major expense, like a home renovation. The interest rate on a cash-out mortgage refinance will is likely cheaper than what you’ll be offered on a large personal loan or putting several thousand on a credit card.
Government-backed loans, such as FHA or VA mortgages, have their own cash-out refinancing programs, which you can learn more about below.
2. Streamlined refinancing
When it comes to refinancing, the term “streamlined” means less paperwork and a simpler process than a standard refinance. Streamlined refinancing offers a quick, less intensive way to replace your mortgage. You won’t need to have your home reappraised, and if you pay closing costs out of pocket, you won’t even need a full credit check or income verification process.
However, streamlined refinancing is only available for government-backed mortgages from the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA).
3. Rate-and-term refinance
From the lenders’ perspective, there are three types of refinancing: cash out, streamlined and rate and term. A “rate-and-term refinance” is any home refinance loan that isn’t a cash-out or streamlined refinance. It’s a general term for refinancing, since you’re typically changing your mortgage rate, loan term or both. The process is usually the same as when you bought your home and includes income, credit and home value verification for approval.
One major perk of a rate-and-term refinance is you’ll need little to no equity for approval — as long as the lender can prove there’s a financial benefit to refinancing.
You may want to explore an adjustable-rate mortgage (ARM) when you refinance, if you want some short-term savings at a lower rate than you’ll typically find on fixed-rate mortgages. Read more about when it’s a good time for an ARM refinance.
4. No-closing-cost refinance
Writing a check out of pocket for refinance closing costs can be pricey, running between 2% and 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 don’t pay costs — instead, the lender raises your rate and pays them on your behalf.
This will, of course, increase how much you’re borrowing, so make sure the math checks out and that the increased cost of financing the closing fees is worth it to you.
5. Conventional refinance
Conventional loans typically have the lowest rates but the most stringent borrowing requirements. This generally means you need a credit score of at least 620 and a debt-to-income (DTI) ratio of 45% or lower.
Refinancing to a conventional loan from an FHA loan can help you get rid of expensive FHA mortgage insurance. You may also be eligible for an appraisal waiver on a conventional rate-and-term or cash-out refinance, which speeds up the loan process and saves you the $300 to $500 it usually costs for a home appraisal.
The standard for the lowest conventional rates was raised to 780, 40 points higher than the previous 740 benchmark.
6. FHA refinance
Compared to conventional mortgages, Federal Housing Administration (FHA) 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, which allows you to skip income documents and appraisal requirements, leading to fewer closing fees.
The FHA reduced the annual FHA mortgage insurance premium, which translates to lower monthly payments for FHA refinances.
7. VA refinance
If you’re eligible for a VA-backed home loan, 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.
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.
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 mortgage and remodel.
8. USDA refinance
The USDA backs mortgages for rural homeowners with low incomes. USDA loan qualifications include your home’s physical location — you can check this eligibility map to ensure you meet it.
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.
9. Reverse mortgage
A reverse mortgage is only available for homeowners who are at least 62 years old and have more than 50% equity. It works 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.
You can read about the three types of reverse mortgages here. However, the only type backed by the U.S. government is called a home equity conversion mortgage (HECM), which is available via the FHA.
10. 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 APR and removal of extra monthly costs like private mortgage insurance all in one transaction, if you have the cash. In the mortgage world this is called a “principal paydown” or “principal reduction.”
Whether you’re underwater on your mortgage or you want to get ahead, a cash-in refinance can strengthen your personal financial position. You can also look into a high-LTV refinance program.
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 current lender about recasting your loan. For a small fee, you can keep your current rate, pay down your principal and the lender will recalculate your mortgage 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 stays the same. With a recast, you’ll end up with a lower payment without having to refinance.
How to choose the right mortgage refinance for you
The mortgage refinance that gets you what you want for the lowest cost is usually the right option. When you start shopping around online, look at the advertised rates and the qualification requirements. Apply with several refinance lenders and see what they offer.
It’s possible to refinance with bad credit — and it won’t hurt your credit score to apply with multiple lenders any more than it does to apply to one, provided you complete all your applications within a 45-day window. The three major U.S. credit bureaus allow this window so consumers aren’t unduly penalized for rate shopping.
To determine your break-even point divide the total closing costs by your monthly savings. This number 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.