If you’re a homeowner looking to save money or access cash for home improvements, mortgage refinancing might be a smart financial move.
By taking out a new loan with better terms, you can potentially lower your interest rate and reduce your monthly payments. However, finding the best refinancing option for your needs requires careful consideration of several factors, such as your current mortgage type, future plans, and financial goals.
Here are 8 options for refinancing your mortgage:
1. Rate-and-Term Refinance
Rate-and-term refinancing is a simple method that enables you to modify the interest rate and terms of your current mortgage. Despite leaving the outstanding mortgage balance intact, you can potentially reduce your monthly payment by opting for an extended repayment period or a lower interest rate.
Alternatively, a rate-and-term refinance can be utilized to accelerate your mortgage payment with a shorter repayment term, which may increase your monthly payment but ultimately reduces your total interest expense.
This type of refinancing is recommended when interest rates have dropped since your initial mortgage closing or if you’re eligible for more attractive rates or terms due to improved creditworthiness.
2. Cash-Out Refinance
A cash-out refinance is a type of mortgage refinancing option that allows homeowners to access the equity they have built up in their home by borrowing more than what they owe on their current mortgage. Essentially, the homeowner refinances their existing mortgage with a new, larger loan, and receives the difference between the two amounts in cash.
For example, if you have a home valued at $300,000 and you currently owe $200,000 on your mortgage, a cash-out refinance would allow you to borrow more than $200,000 and receive the extra money as cash. The amount you can borrow depends on the amount of equity you have in your home and the lender’s requirements.
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.
3. Cash-In Refinance
A cash-in refinance is when a homeowner pays extra money toward their mortgage balance when refinancing. 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.
By doing this, they can reduce their loan amount and potentially qualify for better interest rates or terms. This option can help lower monthly payments, shorten the repayment period, and avoid private mortgage insurance. However, it requires a significant upfront investment and should be carefully considered before making a decision.
Cash-in refinancing is often the best option if you’re underwater on your mortgage or lack equity in your home. But you’ll likely need good credit.
4. FHA Streamline Refinance
If you have a current FHA-insured mortgage, you may be able to reduce your monthly payments through an FHA streamline refinance. You can also roll your closing costs into the loan, but the interest rate may be higher.
This option can help eliminate expensive mortgage insurance premiums and requires less paperwork than other refinancing options. The credit documentation and underwriting requirements for an FHA streamline refinance are less robust than other refinancing options. If you want to access your home equity, you can choose to do an FHA cash-out refinance instead.
5. VA Streamline Refinance
A VA streamline refinance (also known as an IRRRL) is available to homeowners who already have a home loan backed by the U.S. Department of Veteran Affairs. This option can lower your monthly mortgage payment by reducing your interest rate or changing your adjustable rate loan to a fixed rate. You may have to pay a one-time VA funding fee and closing fees, but you can include these costs in the new loan. Additionally, you can do a VA cash-out refinance if you want to access your home equity. 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. This option is designed to help borrowers lower their monthly mortgage payments by taking advantage of lower interest rates, without requiring a home appraisal or income verification. The USDA streamlined assist refinance is only available to borrowers who are current on their mortgage payments and have a history of on-time payments.
To receive a streamlined assist refinance, you’ll need to go through a USDA-approved lender.
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
If you’re a homeowner facing foreclosure due to missed mortgage payments, you may be able to take advantage of a short refinance. This option involves your lender replacing your current mortgage with a new, lower-balance loan, which can help reduce your monthly payments and allow you to keep your home. In addition, this process can help lenders avoid the expenses associated with a foreclosure or short sale.
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.
Source: Mortgage Refinancing Options