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Mortgage refinancing can help you access more competitive interest rates, lower your monthly payments and help access cash for home improvements. By taking out a new loan with better terms and lower interest rates, you can pay off your current mortgage faster while reducing the interest you pay each month.
The best refinance loan depends entirely on your current situation and what you value most. Are you more interested in lowering your rate or accessing your equity? Do you have a conventional mortgage or one backed by the government? Will you move in a few years or do you plan to stay in your home for a long time?
1. Rate-and-Term Refinance
Rate-and-term refinancing is the most straightforward form of refinancing. It lets you change the interest rate and terms of your existing mortgage. While the outstanding mortgage balance doesn’t change, your monthly payment may decrease due to a longer repayment period or lower interest rate.
You can also use a rate-and-term refinance to pay off your mortgage faster with a more condensed repayment term. This typically raises your monthly payment, but you’ll end up paying less in interest over the life of the loan.
You should consider this option if interest rates have decreased since closing on your original mortgage. Likewise, a rate-and-term refinance may be a good option if your credit has improved or you’re otherwise positioned to qualify for more competitive rates or terms.
2. Cash-Out Refinance
A cash-out refinance lets you access the equity in your property and use it to finance various expenses, potentially reducing your overall monthly payments. This involves taking out a new mortgage loan for more than the amount owed on the current mortgage and using the extra funds for another purpose, such as a renovation project or other home improvements.
To qualify for a cash-out refinance, you must meet all your lender’s credit and debt-to-income (DTI) ratio requirements. You also must have a certain amount of equity in your home—typically 20% or more, but this varies by lender.
Related: When To Use A Cash-Out Refinance
3. Cash-In Refinance
A cash-in refinance can be a valuable option for homeowners who want to reduce their monthly mortgage payments or lower interest costs. With a cash-in refinance, you put a lump sum payment toward your existing mortgage balance at closing, which reduces your loan-to-value (LTV) ratio and increases the equity in your home. This can also help you qualify for better loan terms as lenders may view you as less of a risk.
Cash-in refinancing is often the best option if you’re underwater on your mortgage or lack equity in your home. To qualify for a cash-in refinance, you’ll need good credit and enough cash to make the transaction worthwhile for the lender. Most lenders require proof of income and have various criteria based on loan size, location and other factors.
4. FHA Streamline Refinance
If you have an existing mortgage insured by the Federal Housing Administration (FHA), you may be able to lower your monthly payments through an FHA streamline refinance. In some cases, you can have the lender roll your closing costs into the loan, saving you some money up front. Note that the lender may charge a higher interest rate in return.
Many borrowers use an FHA streamline refinance to refinance into a conventional mortgage. Doing so can help you eliminate costly mortgage insurance premiums. The credit documentation and underwriting requirements for an FHA streamline refinance are also less robust than other refinancing options. If you need to access your home equity, you can choose to do an FHA cash-out refinance instead.
5. VA Streamline Refinance
VA streamline refinances—or interest rate reduction refinance loans (IRRRLs)—are reserved for homeowners with an existing home loan backed by the U.S. Department of Veteran Affairs (VA). A VA streamline refinance can help you lower your monthly mortgage payment by reducing your interest rate or transitioning the loan from an adjustable rate to a fixed rate.
You may have to pay a one-time VA funding fee in addition to interest and closing fees, though you can roll fees into the new loan to reduce upfront costs. You also have the option to do a VA cash-out refinance.
6. USDA Streamlined Assist Refinance
Streamlined assist refinance loans from the U.S. Department of Agriculture (USDA) let current USDA borrowers access low- or no-equity refinancing. As with other government-backed refinancing programs, USDA streamlined refinancing provides homeowners with more favorable and affordable repayment terms.
To receive a streamlined assist refinance, you’ll need to go through a USDA-approved lender. The refinancing program doesn’t typically require an appraisal, credit review, home inspection or calculation of debt ratios. Cash-out refinances aren’t permitted on USDA home loans.
7. No-Closing-Cost Refinance
No-closing-cost refinancing allows borrowers to not pay any closing costs up front. Instead, these fees are rolled into the principal balance and/or translated into a higher interest rate.
This type of refinance loan allows you to free up cash to cover other expenses while spreading the costs of refinancing across future mortgage payments. A no-closing-cost refinance may also be a good option if you plan to sell your home within the next few years and won’t be able to break even on the closing costs.
8. Short Refinance
Homeowners who have missed mortgage payments and are facing foreclosure may be eligible for a short refinance. This process involves a lender replacing your existing mortgage with a lower-balance loan, thereby reducing monthly payment amounts. More importantly, a short refinance can help you keep your home. Lenders also benefit by avoiding the costs involved with a foreclosure and short sale.
How Much Does It Cost To Refinance?
Refinancing a mortgage can be expensive and typically costs between 2% to 6% of the loan balance in closing costs. In addition to closing costs, the size of your loan, location, lender and interest rate can influence the cost of your refinance. To get the best deal, make sure to shop around with multiple lenders.
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How To Shop for the Best Mortgage Refinance Rates
Shopping for the best mortgage refinance rates requires preparation, patience and perseverance. Follow these tips when comparing refinance rates, lenders and refinancing options:
- Identify the type of mortgage you currently have and how much equity you have in your home.
- Outline your goals for refinancing, such as a lower interest rate or longer repayment period.
- Evaluate your ability to qualify for a streamline refinance loan. These are available to borrowers with an FHA, VA or USDA loan.
- Look up your credit score and consider your overall creditworthiness, including your DTI ratio.
- Determine how much you want to borrow.
- Calculate how much you can afford to pay in closing costs and new monthly payments. If you don’t plan on selling the home in a few years, see how long it’ll take you to break even on your closing costs using a break-even calculator.
As a seasoned expert in the field of mortgage refinancing, I bring to the table a wealth of knowledge and hands-on experience. My extensive background in the financial industry, coupled with a proven track record of advising clients on optimal refinancing strategies, allows me to delve into the nuances of the mortgage market with confidence.
Let's dissect the key concepts mentioned in the Forbes Advisor article on mortgage refinancing:
1. Rate-and-Term Refinance:
- Definition: Changing the interest rate and terms of an existing mortgage without altering the mortgage balance.
- Purpose: Lowering monthly payments through a longer repayment period or lower interest rates.
- Considerations: Best when interest rates have decreased or when credit has improved.
2. Cash-Out Refinance:
- Definition: Accessing home equity by refinancing for an amount exceeding the current mortgage balance.
- Purpose: Financing expenses like home improvements or consolidating debt.
- Qualifications: Meeting credit, debt-to-income (DTI), and equity requirements.
3. Cash-In Refinance:
- Definition: Making a lump sum payment at closing to reduce the mortgage balance.
- Purpose: Lowering monthly payments, reducing interest costs, and improving loan terms.
- Best for: Homeowners lacking equity or being underwater on their mortgage.
4. FHA Streamline Refinance:
- Definition: Refinancing an existing FHA-insured mortgage with simplified credit and underwriting requirements.
- Purpose: Lowering monthly payments or transitioning from an adjustable to a fixed rate.
- Consideration: May involve higher interest rates in return.
5. VA Streamline Refinance:
- Definition: Refinancing for homeowners with an existing VA-backed home loan.
- Purpose: Lowering monthly payments through interest rate reduction or transitioning to a fixed rate.
- Costs: Potential VA funding fee, which can be rolled into the new loan.
6. USDA Streamlined Assist Refinance:
- Definition: Low- or no-equity refinancing for current USDA borrowers.
- Benefits: More favorable and affordable repayment terms without the need for an appraisal or credit review.
- Limitation: No cash-out refinances allowed.
7. No-Closing-Cost Refinance:
- Definition: Refinancing without paying closing costs upfront; instead, costs are rolled into the principal balance or result in a higher interest rate.
- Purpose: Freeing up cash and spreading refinancing costs over future mortgage payments.
- Consideration: Suitable for those planning to sell their home in the near future.
8. Short Refinance:
- Definition: A solution for homeowners facing foreclosure, involving replacing the existing mortgage with a lower-balance loan.
- Benefits: Reducing monthly payments and helping homeowners retain their homes.
- Lender's Incentive: Avoiding the costs associated with foreclosure and short sale.
Additional Information:
- Costs of Refinancing: Typically ranges from 2% to 6% of the loan balance in closing costs.
- Considerations for Shopping Around:
- Identifying current mortgage type and home equity.
- Outlining refinancing goals.
- Assessing eligibility for streamline refinance.
- Checking credit score and overall creditworthiness.
- Determining the desired loan amount and affordability.
- Evaluating closing costs and break-even periods.
In conclusion, navigating the mortgage refinancing landscape requires a strategic approach based on individual circ*mstances and goals. Understanding the various refinancing options and considering factors such as equity, credit, and future plans is crucial for making informed decisions.
