Home Refinance Options
Home refinancing can be a great way to make a major impact on your finances. Whether you’re looking to lower your rate, shorten your loan term, ditch mortgage insurance or tap equity, you have several home refinance options from which to choose.
|Refinance type||An option for…|
|Cash out||A large lump sum of cash|
|Cash in||A quick way to build equity|
|No closing cost||No up-front costs|
|Streamlined||Quick and inexpensive process|
|Rate and term||A regular refinance|
|Reverse||Homeowners 62 and older|
|Bonus: What type of mortgage refinance is right for you?|
1. Cash-out refinance
Borrowing against your home is typically the most economical way to pad your wallet for a major expense, like a home renovation. A cash-out mortgage refinance is likely cheaper than taking out a large personal loan or putting several thousand on a credit card.
In a cash-out refinance, you get a new mortgage for more than what you currently owe on the house, and the extra goes straight to you.
Government-backed loans, such as an FHA or VA mortgage, have their own cash-out refinancing programs, which you can learn about below.
2. Cash-in refinance
The benefit of doing a cash-in refinance — over simply making extra payments to the principal — is that you can obtain lower monthly payments, a lower APR and remove extra fees like private mortgage insurance all in one transaction. In the industry it’s mostly 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. If you got a Home Affordable Refinance Program (HARP) after the 2008 mortgage crisis, you can also look into the HARP replacement program.
3. No-closing-cost refinance
If the closing costs of refinancing are a bit of a roadblock, consider a no-closing-cost refinance. The term itself is misleading because there are closing costs associated with the loan — you’re just not paying them out of pocket. Instead, you’re financing them.
Of course this increases how much you’re borrowing, so make sure that the math checks out and that the increased cost of financing the closing fees is worth it to you.
4. Streamlined refinancing
You can find streamline refinancing only for government-backed mortgages from the Federal Housing Administration (FHA), the Veterans Administration (VA) and the U.S. Department of Agriculture (USDA).
Streamlined refinancing offers a quick, less intensive way to change your mortgage. You don’t need to have your home reappraised; if you pay closing costs out of pocket, there’s not even a full credit check or income verification process. This drastically reduces the cost to refinance. For example, you’ll pay only 0.01% of the loan amount for an FHA streamline refinance versus 2% to 6% for a non-streamline refinance.
5. Rate and term
From the lenders’ perspective there are three types of refinancing: rate and term, cash-out and streamlined. A “rate-and-term” is any home refinance loan that isn’t a cash-out or streamlined refinance. It’s a general term for refinancing because you’re typically changing your mortgage rate and term. The other types we list above — cash-in refinancing and no-closing-cost refinancing — are considered subtypes of rate-and-term refinancing.
TIP: You may be able to choose between a fixed-rate and an adjustable rate mortgage (ARM) when you refinance. You can read here about when it’s a good time for an ARM refinance.
6. Conventional refinance
Conventional mortgages typically have the lowest rates but the most stringent requirements. This generally means you need a credit score of at least 620 and a debt-to-income ratio of 45% or better.
Refinancing to a conventional mortgage from an FHA loan or VA loan is advantageous in that it can allow you to remove the mortgage insurance products required for those loans, so you can keep that money in your pocket or pay it towards your loan principal.
7. FHA refinance
Compared to conventional mortgages, Federal Housing Administration (FHA) requirements are much more flexible. No matter your current mortgage, as long as you meet the FHA qualifications, you can refinance to an FHA loan, including an FHA cash-out refinance. If you already have an FHA mortgage, you could do an FHA streamline refinance and take advantage of the expedited process and smaller closing fees.
8. VA refinance
If you’re eligible for a home loan from the Department of Veteran Affairs (VA), you can take advantage of a “regular” VA refinance, a VA cash-out refinance or, if your current mortgage is already a VA home loan, you could do a VA streamline refinance, which is called a VA interest rate reduction refinance loan (IRRRL).
While the VA offers special loans for people who want to purchase and renovate homes, it doesn’t offer refinance loans for the same purpose. Consider a VA cash-out refinance if you’d like to refinance your VA mortgage so you can remodel.
9. USDA refinance
The U.S. Department of Agriculture (USDA) backs mortgages for rural homeowners who may have difficulty meeting conventional mortgage requirements. USDA mortgage 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 finance eligible closing costs into the refinance loan.
10. Reverse mortgage
A reverse mortgage is available only for homeowners over 62 years old and with more than 50% equity. It allows you to stay in your home and provides a monthly payment. You can read about the three types of reverse mortgages here. The only type backed by the U.S. government is called a home equity conversion mortgage (HECM), which is available via the FHA.
How to choose the right mortgage refinance for you?
The mortgage refinance that gets you what you want for the lowest cost is the right option. When you start shopping around online, look at the advertised rates and the qualification requirements. Apply to several lenders and see what they offer. It is possible to refinance with bad credit.
It does not hurt your credit score to apply to several lenders any more than it does to apply to one, as long as you do all 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.
When you receive your offers, don’t look only at the rates, but also at the total costs of refinancing. For example, if you receive a streamlined refinance offer, consider the lower closing costs compared to the cost of any required PMI.