Types of Mortgage Refinance Loans

With multiple refinance options to consider, what’s the best way for you to refinance your mortgage?

Homeowners who have a mortgage loan can refinance, which means getting a new loan to repay the old one. Refinancing can be done for many reasons, such as lowering monthly mortgage payments, consolidating debt, and cashing out equity in the home.

For those who want to refinance their mortgage, there are many types of home loans to consider, including a cash-out refinance, a streamline refinance, and more. This guide will explain different options so you can understand which is best for you.

An Overview of Home Refinance Options

Because there are so many reasons to refinance your house, there are many kinds of refinance loans. The right type of loan depends on your goals for refinancing. Here are some of the most common loans to consider:

• Rate-and-term refinance: A rate-and-term refinance involves refinancing to a different (usually lower) mortgage interest rate and/or a different repayment term (such as switching from a 30-year to a 15-year loan).
• Cash out refinance: A cash out refinance lets you get a new loan for more than your current one and use the loan to take cash out of your house to accomplish other goals.
• Cash in refinance: A cash in refinance is when you get a new loan for less than you currently owe by paying extra towards your home to reduce the total balance.
• Streamline refinance: A streamline refinance allows you to refinance certain kinds of loans, usually government-backed ones, to a lower interest rate or different kind of mortgage (such as a fixed vs. adjustable mortgage) with minimal paperwork requirements.
• Reverse mortgage refinance: A reverse mortgage refinance pays off a reverse mortgage, which is used by homeowners 62 or older to tap into home equity and access funds up front while paying back the loan after the home is sold or after moving out Freedom Mortgage does not offer reverse mortgage refinance loans.

1. Rate-and-Term Refinance

You should pursue a rate-and-term refinance if you want to change your loan's interest rate or length of your loan term.

When should you refinance your home loan to change the rates or terms? If you can qualify for a lower interest rate on a new mortgage loan, a rate-and-term refinance may be right for you. Reducing your interest rate lowers your cost of borrowing. As long as you don't make your repayment timeline significantly longer, you'll save money on interest over time.

You can also change the timeline for repaying your loan. If you have a 30-year mortgage, you could refinance to a 15-year mortgage. While this usually makes monthly payments higher due to the shortened repayment timeline, it can also save you a lot of money in interest over time.

2. Cash Out Refinance

A cash out refinance allows you to take equity out of your home. You can do a conventional loan cash out refinance if your loan is not backed or guaranteed by the government.

You'll borrow more than your home is worth on your new loan and walk away from closing with a lump sum of cash. For example, if you owe $100,000 on your current mortgage, you could get a new loan for $150,000 and have the flexibility to use the extra $50,000 for home repairs or renovations, debt consolidation or other needs.

There are many reasons to get a cash out refinance, including paying down high-interest debt or making improvements on your home. The key is you must have enough equity in your home. Usually, your new cash out refinance loan cannot have a balance that's greater than around 80% to 90% of the market value of your home.

3. VA Cash Out Refinance

Like a conventional cash out refinance, a VA cash out refinance allows you to take equity out of your home. The big difference is that the loan is a VA loan, or one guaranteed by the Department of Veterans Affairs. You do not need to have a current VA loan to use this refinance.

You can qualify for a VA cash out refinance only if you qualify for a VA-backed certificate of eligibility, you're planning to live in the home after refinancing, and you meet the lender's standards for credit, income, and other financial details. Active-duty military members or eligible veterans qualify for these loans.

4. FHA Cash Out Refinance

An FHA cash out refinance is similar to a traditional cash out refinance, but you obtain an FHA loan as your new mortgage. This can be easier to qualify for than a conventional loan, as FHA loans are backed by the government and open to people with lower credit scores.

You do not need to have a current FHA loan to be eligible for an FHA cash out refinance. However, you do need to apply for your new loan with an FHA-approved lender. You also must get a home appraisal to show you have enough equity in your home to qualify, as you can only borrow up to 80% of what your home is worth.

The home also must be owner-occupied, or recently inherited, and it can't be a rental property. If you meet these qualifying requirements and refinance, you can use the lump sum you get back for what you need, including debt consolidation.

5. Cash In Refinance

A cash in refinance also allows you to replace your old home loan with a new one. The big difference is that you pay in a lump sum of cash, so your new loan balance is lower than the amount you owed before.

Cash in refinances can come with high closing costs, including the large lump sum payment that you are paying in. However, they can save you money over the long-term by reducing your principal balance and interest, shortening your loan repayment time, and/or eliminating private mortgage insurance.

You'll usually want to do a cash in refinance only if you can qualify for a new loan at a lower rate. You can also consider re-casting your existing mortgage instead, if your lender allows it. A mortgage recast allows you to pay a lump sum to your current home loan and have your lender recalculate your mortgage payments based on the new lower balance.

6. VA Streamline Refinance

A VA streamline refinance loan is called the VA Interest Rate Reduction Refinance Loan (IRRRL). It allows you to refinance more quickly, and with less documentation than a typical refinance. You may be eligible if you have a current VA Loan, you are using the home as your primary residence, and you are up to date on your mortgage payments.

You must have made at least six consecutive payments on your current loan and the due date of the first payment of the VA loan you are refinancing must be 210 days or more prior to the closing date of your new loan refinance. There also must be a net tangible benefit to refinancing, which means some type of clear financial benefit. Lastly, you also must meet your lender's credit and income requirements.

Usually, you will use a VA IRRRL loan to get a new loan with a lower rate or a lower monthly payment, or to change your adjustable-rate loan to a fixed-rate loan. While you cannot take cash out of your home using a VA streamline refinance, you may be able to qualify for this loan even if you owe more than the home is worth.

7. FHA Streamline Refinance

An FHA streamline refinance loan is an option if you currently have an FHA Loan and want to lower your rate, reduce your monthly payment, or change your loan type such as switching from an adjustable-rate mortgage to a fixed-rate loan.

FHA streamline refinance loans require less documentation than a traditional refinance loan. In some cases, you aren’t even required to get an appraisal on your home before refinancing. However, you can only receive a maximum of $500 at closing and you will pay closing costs and must pay mortgage insurance on the new loan.

8. USDA Streamline Refinance

If you have a USDA loan, a USDA streamline refinance allows you to get a new one to replace your existing one, often to get a better rate. They can be much easier to qualify for than a conventional refinance.

With a USDA streamline refinance, you can do a rate-and-term refinance up to the current value of your home, so you need very little equity. No appraisal or inspection is needed, and lenders offer more flexibility in approving you even with a lower credit score.

9. Reverse Mortgage Refinance

A reverse mortgage refinance allows you to pay off an existing reverse mortgage. You can use another reverse mortgage when you refinance, or you could get a traditional loan.

A reverse mortgage refinance can be useful if you want to take more money out of your home since its value has increased, or if you want to make a change, such as switching from an adjustable-rate loan to a fixed-rate loan. If you can qualify for a lower interest rate on your new loan, you may also want to do that to reduce your borrowing costs.

Freedom Mortgage does not offer reverse mortgages.

How to Choose a Home Refinance Loan

As you can see, there are many different types of home refinance loans to choose from. You also have the option to work with a variety of mortgage lenders to refinance. To find the right option for you, consider the following questions:

• Does the lender offer the type of refinance loan you need? If you want an FHA streamline refinance, for example, you must find a lender offering one.
• Can you meet the lender's qualifying requirements? You can get prequalified for a mortgage to find out if refinancing will be an option.
• What is the loan's interest rate? You'll want to compare rates to make sure your lender is making a competitive loan offer.
• What is the lender's maximum loan-to-value requirement? With many refinance loans, lenders cap the amount you can borrow at a certain percentage of the home's market value.

By considering these factors, you can find a refinance lender that's right for you. This is key to learning how to refinance a home loan.

FAQs on Home Refinance Loan Types

If you still want to know more, here are the answers to some common questions homeowners have about refinancing their home loans.

When Should You Refinance Your Home Loan?

You should consider a mortgage refinance if you want to:

• Access equity in your home
• Lower your loan interest rate
• Convert from a fixed to an adjustable-rate loan
• Change your loan repayment term

If you want or need to change your current mortgage loan, refinancing might be the right option for you.

What Are Your Options if You Refinance Your Home?

There are many types of home refinance loans, including a conventional loan, an FHA refinance, or a streamlined FHA, VA, or USDA Loan.

For some types of refinance loans, you may need a specific type of existing loan or must meet other qualifying requirements, such as being active-duty military. You will also need to meet income and credit requirements to qualify for a refinance loan.

A loan advisor can explain the options and help you find a refinance loan that makes sense for your situation.

How Much Does Refinancing a Mortgage Cost?

The cost of refinancing a mortgage varies but is usually around 2% to 5% (according to Fannie Mae) of your loan's value. Your lender will help you understand the costs before you refinance.

A Summary of Mortgage Refinance Options

Homebuyers have many mortgage refinance options available to them, so it's important to research to find the right one among the different types of refinance loans. Use our mortgage refinance calculator to help you see how much you could save by refinancing, and start the refinance process online with Freedom Mortgage today.