You want to refinance your mortgage but aren’t sure which options are most ideal. Regardless of your reason for wanting to refinance, there are several variations of mortgage refinance loans to choose from. This guide explores your options and provides tips on how to choose the right type of mortgage refinance to meet your goals.
Why People Refinance Their Mortgage
Refinancing can make sense for several reasons. Maybe you’re looking to secure a lower interest rate or monthly mortgage payment, change your loan term or pay your loan off faster. Or perhaps you want to switch from a fixed-rate to an adjustable-rate mortgage or remove a cosigner. There’s also a possibility that you’ve accumulated a sizable amount of equity and are looking to convert it into cash to be used however you see fit.
An Overview of the Mortgage Refinance Process
When you refinance your mortgage, you replace it with a new loan, often with different terms. Here’s a closer look at the process and what it entails:
- Determine why you want to refinance your mortgage and what outcome you expect.
- Review your financial situation and credit profile to confirm that they are up to par and put you in a position to qualify for favorable refinancing terms.
- Scope out lenders to find the best deals and get prequalified to secure loan quotes if possible.
- Compare loan quotes and run the numbers to make sure refinancing makes financial sense.
- Formally apply with the chosen lender and promptly submit any documentation needed to process your application.
- Wait for the lender to order the property appraisal, which is used to determine your home’s current value.
- Once the appraisal is complete, complete the underwriting process with the lender and receive the clearance to close the loan.
- Attend closing, remit closing costs (if you aren’t rolling them into the loan), and sign the loan agreement to seal the deal.
8 Types of Mortgage Refinance
Before shopping around with lenders for home loan refinancing, it’s worth understanding what options are available. That way, you can familiarize yourself with how they work and the pros and cons to ensure the loan you select is ideal.
1. Rate-and-Term Refinance
This loan is commonly used to adjust your home loan’s interest rate and/or term. You can go for a lower rate to lower interest costs over the loan term and possibly secure more affordable monthly mortgage payments. Extending the loan term also lowers your payments, but you could pay more interest over the life of the loan. But shortening means you’ll own your home outright sooner and steer clear of steep interest costs. Or you can use a rate-and-term refinance to switch from an ARM to a fixed-rate mortgage or vice-versa.
Pros:
- More affordable monthly mortgage payments
- Potentially lower interest rates and borrowing costs
- Accelerated mortgage payoff with a shorter-term
Cons:
- Upfront closing costs
- May reset the loan term
2. Cash-Out Refinance
You can convert a portion of your home equity into cash with a cash-out refinance. It involves replacing your current mortgage with a new one for a higher amount and different terms and receiving the difference in cash. The funds are yours to keep and use however you see fit. Many homeowners cover costly home renovations, big-ticket purchases, or consolidate high-interest debt.
Pros:
- Tap into your home equity
- Flexible use of funds
Cons:
- Increased principal balance
- Steeply monthly mortgage payments
3. Cash-In Refinance
Cash-in refinances are ideal if you have a lump sum of cash and want to leverage it to boost your equity. It involves securing a new mortgage to replace your current one and paying a large sum of cash to the lender to lower your outstanding mortgage balance (or the amount you borrow). You can potentially secure a lower interest rate and get smaller monthly mortgage payments.
Pros:
- More attractive interest rates
- Lower loan-to-value ratio and more equity
Cons:
- Requires a lump sum of cash
- Short-term benefits may be minimal
4. FHA Streamline Refinance
If you currently have an FHA-insured mortgage, you may be eligible for an FHA Streamline Refinance to lower your monthly mortgage payments. Or you can use it to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. The process is simple, requires minimal documentation, and has no appraisal requirement. Furthermore, there are no minimum credit score or income requirements.
Pros:
- Lower interest rates
- No minimum credit score guidelines
- Simple application process with minimal paperwork requirements
Cons:
- Funding fee
- Only accessible if you have an FHA loan
5. VA Streamline Refinance
The VA Streamline Refinance, also known as an Interest Rate Reduction Refinance Loan (IRRRL), is available to active-duty service members and veterans with existing VA-backed home loans. This refinance option can lower your interest rate or get you into a fixed-rate mortgage with minimal hassle and paperwork. This loan option generally doesn’t require an appraisal or credit underwriting.
Pros:
- Secure a more competitive interest rate
- No home appraisal requirement
Cons:
- Limited to VA loan holders
- Funding fee
6. USDA Streamlined Assist Refinance
A USDA Streamlined Assist Refinance is available for those with a USDA home loan. It also offers a simplified refinancing process to secure a lower rate. No appraisal is required, and the ability to roll in the closing costs can make it easier to get into a new mortgage with more affordable monthly payments.
Pros:
- Streamlined application process
- Minimal paperwork
Cons:
- Limited to USDA borrowers
- Closing costs (can be rolled into the mortgage)
7. No-Closing-Cost Refinance
If you’re concerned about closing costs, you may be able to refinance without doling out a wad of cash upfront. This type of refinance lets you add the closing costs to the principal balance or accept a higher interest rate in exchange for no added fees. Either way, a no-closing-cost refinance could be ideal if you don’t have the funds on hand to refinance your mortgage.
Pros:
- Avoid upfront closing costs
- Keep more cash on hand
Cons:
- Steeper interest rates
- More borrowing costs over the loan term
8. Short Refinance
A short refinance is an agreement with the lender to pay off your current mortgage for less than you owe, a solution typically designed for homeowners who are underwater on their mortgages. It can reduce your mortgage’s principal balance, but you’ll need approval from your lender. Your credit score could also be negatively impacted.
Pros:
- Lower the amount you owe
- Helps you get back on track with mortgage payments
Cons:
- Potential credit consequences
- Requires lender approval
How to Choose the Right Type of Refinance for You
Identifying the best mortgage refinance option can be challenging, but these tips will help simplify the process.
Assessing Your Situation and Needs
Start by reviewing the terms of your current mortgage. Look at your existing interest rate, the remaining loan term, and any prepayment penalties. Consider your financial goals—are you seeking a lower interest rate, or do you need to adjust the term of your mortgage loan for different monthly payment options? Also, take into account factors such as your credit score, home equity and how long you plan to stay in your home to decide if refinancing makes sense.
Comparing Different Types of Refinance
Evaluate each option carefully against your assessed needs. Compare the potential closing costs and how each choice could impact your monthly payments and total interest paid over the life of the loan.
Checking with Different Lenders
Research potential lenders to see who offers the best terms for the refinance option you’re considering. Rates can vary significantly from one lender to another, so it pays to shop around. Also, pay attention to fees and closing costs associated with refinancing. Some lenders may offer incentives or credits to offset these costs, so be sure to ask about any available specials or discounts.
Conclusion: Is Mortgage Refinance Right for You?
There’s no right or wrong answer to this question. It depends on your financial goals, specifically what you want to accomplish by refinancing your home loan.
If doing so lets you lower your monthly mortgage payment, tap into your home equity, change your loan type or get more favorable terms, refinancing could be worthwhile. But it’s worth running the numbers to ensure the benefits outweigh the costs.
It’s equally important to understand the breakeven point—the time it takes to recoup the refinancing costs through savings on your monthly payment. Refinancing might make sense if you plan to stay in your home long enough to pass the breakeven point. Otherwise, you may want to hold off.
