Types of Mortgage Refinance Options: How to Choose the Best Fit for You

There are quite a few different mortgage refinance options on the market today. While every type one won’t be a fit for every borrower, there will likely be an option that will satisfy your specific financial goals. To that end, take a look at the nine home refinance options below to get a better sense of which type might be your best choice.

Types of mortgage refinances at a glance

  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 process is usually the same as when you bought your home and includes income, credit and home value verification for approval. 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.

Rate-shopping tip: Consider an ARM loan

If you’re looking for short-term savings at a lower rate than you’d typically find on fixed-rate mortgages, you may want to explore an adjustable rate mortgage (ARM) when you refinance.

Read more about when it’s a good time for an ARM refinance.

2. Cash-out refinance

In a cash-out refinance, you take out a new mortgage for more than you currently owe on the house and the extra cash goes 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 a credit card.

Government-backed loans, like FHA or VA mortgages, have their own cash-out refinancing programs, which you can learn more about below.

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 the removal of extra monthly costs like 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.

Happy with your current interest rate? Consider recasting instead of refinancing

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 mortgage. For a small fee, you can keep your current rate, pay down your principal balance 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 will stay the same. With a recast, you’ll end up with a lower payment without having to refinance.

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 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 — 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 type of refinance.

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 your property.

6. USDA streamline 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 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 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 any closing costs — instead, the lender raises your 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 the added cost of financing the closing fees as part of your loan is worth it.

Always calculate your break-even point before you refinance

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.

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 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 mortgage — however, the only type backed by the U.S. government is called a home equity conversion mortgage (HECM), which is available via the FHA.

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, it will likely be less than they 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.

How to choose the right mortgage refinance for you

Like any financial decision, choosing between home refinance options can be intimidating. After all, each one will have its own unique set of benefits and drawbacks. However, here are some factors you can weigh as you make your decision.

• Your existing loan terms: Consider your current loan program, interest rate and repayment term.
• 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.