Refinancing a mortgage can be a great way to reduce monthly payments, lower interest rates, and access cash for home improvements or other expenses. However, with so many types of mortgage refinance options available, it can be overwhelming to determine which one is the right choice. From rate-and-term refinances to cash-out refinances, each option has its own benefits and drawbacks.
In this blog, we’ll explore the various types of mortgage refinance and help you make an informed decision on which one best suits your financial goals and needs.
9 Types Of Refinance Options
- Cash-Out Refinance: This type of refinance allows you to borrow against the equity you have in your home and receive cash. It may be used to pay off high-interest debt, finance home improvements, or other expenses. The new loan will have a higher balance and new terms, including interest rates and monthly payments.
- Cash-In Refinance: A cash-in refinance is the opposite of a cash-out refinance. Instead of borrowing against your equity, you pay cash to reduce your mortgage balance. This may result in a lower monthly payment, lower interest rate, or shorter loan term.
- Rate-and-Term Refinance: This type of refinance is used to change the interest rate or loan term on your existing mortgage. It is often used to lower monthly payments or shorten the loan term. This type of refinance does not provide cash-out.
- FHA Streamline Refinance: The FHA streamline refinance is a simplified process to refinance an existing FHA loan. It requires minimal documentation and does not require a new appraisal. It is designed to help borrowers lower their monthly payments and interest rates.
- VA Streamline Refinance: The VA streamline refinance, also known as the Interest Rate Reduction Refinance Loan (IRRRL), is similar to the FHA streamline refinance. It is designed to help veterans and their families refinance their existing VA loan to obtain lower interest rates or reduce monthly payments.
- USDA Streamline Refinance: This type of refinance is specifically for homeowners with existing USDA loans. The USDA streamline refinance is similar to the FHA and VA streamline refinance programs and is designed to lower monthly payments or interest rates.
- Reverse Mortgage: A reverse mortgage is a type of loan available to homeowners aged 62 or older. It allows them to borrow against the equity in their home and receive payments instead of making them. The loan is repaid when the borrower dies, sells the home, or moves out.
- No-Closing-Cost Refinance: This type of refinance allows you to refinance your mortgage without paying any upfront closing costs. The closing costs are rolled into the new loan balance or the interest rate is slightly higher to cover the costs.
- Short Refinance: This is a type of refinance for homeowners who owe more on their mortgage than their home is worth. The lender agrees to reduce the outstanding loan balance, and the borrower receives a new, lower-interest-rate loan. This type of refinance is rare and difficult to qualify for.
How Much Does It Cost To Refinance?
The cost of refinancing can vary depending on a variety of factors, including the lender, the type of loan, and the borrower’s credit score. Here are some common costs associated with refinancing:
- Application fee: This fee is charged by some lenders to cover the cost of processing your loan application.
- Credit report fee: Lenders will pull your credit report to assess your creditworthiness. The cost of this fee can vary depending on the lender.
- Appraisal fee: Lenders require an appraisal to determine the value of your home. This fee can range from a few hundred to a few thousand dollars.
- Title search and insurance: Before a lender can refinance your mortgage, they need to make sure there are no liens or claims against your property. This requires a title search, and lenders often require title insurance to protect against any issues that may arise.
- Origination fee: This fee is charged by the lender to cover the cost of processing your loan. It is usually a percentage of the loan amount.
- Prepayment penalty: Some loans come with a prepayment penalty if you pay off the loan before the end of the term. Check with your lender to see if this applies to your loan.
- Other fees: There may be other fees associated with refinancing, such as taxes, recording fees, and courier fees.
Which Type Of Mortgage Refinance Loan Is Right For You?
The type of mortgage refinance loan that’s right for you will depend on your financial situation, goals, and needs. Here are a few scenarios and which type of refinance loan may be a good fit:
- You want to lower your monthly payments: If you’re struggling to make your monthly mortgage payments and want to reduce them, a rate-and-term refinance or an FHA, VA, or USDA streamline refinance may be a good option. These types of refinance loans can help you secure a lower interest rate or longer loan term, resulting in lower monthly payments.
- You want to access your home equity: If you need cash for home improvements, debt consolidation, or other expenses, a cash-out refinance may be the right choice. This type of refinance loan allows you to borrow against your home equity and receive cash. Keep in mind that this will increase your loan balance and monthly payments.
- You have a high-interest rate: If you have a high-interest rate on your current mortgage, refinancing to a lower interest rate can save you thousands of dollars over the life of your loan. A rate-and-term refinance, streamline refinance, or a cash-in refinance may be a good option in this scenario.
- You have an existing government-backed loan: If you have an existing FHA, VA, or USDA loan, you may be eligible for a streamline refinance. These types of loans are designed to help borrowers refinance with minimal paperwork and lower costs.
- You have a short-term financial need: If you need to reduce your monthly mortgage payments in the short term, a no-closing-cost refinance may be an option. Keep in mind that this may result in a higher interest rate over the life of your loan.
What is the difference between a rate-and-term refinance and a cash-out refinance?
A rate-and-term refinance is used to lower your interest rate or extend the loan term, while a cash-out refinance allows you to borrow against your home equity and receive cash.
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