March 11, 2022
When considering refinancing, it’s good to be familiar with the different types of home refinance loans available. That way, you can decide which is the right refinance loan for you. There are various loan programs and options within each. Read on the learn the basics and beyond.
There are three main types of home loan refinance options. They are:
- Rate-And-Term — You only change the interest rate or the loan length in this type of refi. You can’t get cashback.
- Cash-Out Refinance Options — If you want to pull money out of your home by using your equity, you’ll need a cash-out refi.
- Streamline Refinance — Government-backed loans like FHA and VA only offer this type of refi — there are no conventional streamline refinances. One of the most significant advantages of a streamline is the limited documentation requirement compared to a regular refinance.
FHA Refinance Options
If you currently have an FHA loan and want a lower rate, an FHA streamline could be your answer. The interest can be lower than conventional rates, especially if your credit is 620 or below. But you’ll still have a monthly mortgage insurance premium (MIP).
Sometimes it’s worth doing a streamline if the rate is at least 1% lower than what you currently have. But if your credit score is 650 and above, you might consider getting a conventional loan.
If you’re looking for a high LTV refinance option, the FHA offers a 95% cash-out refi.
Refinance FHA to Conventional
Many first-time homebuyers can purchase a home with an FHA loan. These loans have more lenient credit guidelines and only require 3.5% down. Because of that, government-backed mortgages help solve the challenges some new borrowers have regarding credit or available funds.
Once you’re in your home for a year or so, you may be considering refinancing to a conventional. If your credit has improved, especially if you’ve accrued 20% or more equity in your home, it’s worth checking out. With a conventional loan, you can get rid of the monthly MIP. Please note, if LTV is over 80%, PMI may apply.
3 Types of VA Refinance Loans
If you’re eligible for a VA mortgage, there are a few home loans to consider. These include:
- VA rate-and-term where you only change the rate and the length of the loan. You can’t get cashback.
- VA – streamline also known as an Interest Rate Reduction Refinancing Loan (IRRRL). This refinance takes less paperwork than a traditional refinance. But like the rate-and-term, you can’t get cashback.
- A cash-out VA refinance loan can change the rate, term, and give you cashback. If you’re looking to pay off high-interest debt or do home renovations, or anything else, this could be your best option.
Keep in mind that you may have a funding fee that can range from % to 3.6% of the loan amount with a VA loan. VA.gov has a funding fee rate chart.
Refinance VA Loan to Conventional
If the VA funding fees make your costs too high, consider some different refinance options, such as refinancing to a conventional loan. When comparing your choices, besides the interest rate, you also have to compare lender fees.
Conventional Loan Refinance Options
If you have an FHA, VA, or conventional, you can refinance into a conventional loan. Like with other programs, you can change the interest rate, change the loan length, and get cash back. Besides comparing mortgage interest rates, compare lender fees. That way, you can select the best deal.
Conventional Cash-Out Refinance
Ask your lender what they offer if you’re looking for a Fannie Mae high loan-to-value refinance option. There are FNMA refi programs that go up to 97% LTV for limited cash-out. How much you can get on a conventional cash-out refinance will depend on the number of units and occupancy.
Refinance 1st and 2nd Mortgage into One Loan
Are you wondering — Can you refinance a home equity loan into a mortgage? The answer – it’s possible. It depends on a few things, including how much equity you have and the age of the second mortgage.
When you refinance two mortgages into one loan, you can reduce your overall payments. But you have to see if it’s worth it.
Be aware that you’ll pay interest longer when you extend the length of a loan. That goes for second mortgages, HELOCs, credit cards, student loans — anything. So don’t just look at a lower payment and think it’s a good deal when combining loans. Make sure you’re considering how much total interest you’ll end up paying.
Consider a Mortgage Recast
Do you have a great interest rate on your mortgage but want to pay down the principal substantially? If you have a large sum of money you’d like to put down to reduce your loan's principal, for example, if you’ve sold another property or received an inheritance, consider a mortgage recast.
Tips for Refinancing
If you just want to shorten the term of your loan and the interest rate isn’t lower, it’s probably not worth it. Instead of refinancing, just pay more on the principal on your mortgage. That way, you’ll pay it down sooner without paying closing costs.
Generally, refinancing is worth it if your new interest rate is 1% lower than your current rate. But you have to keep in mind how long you’ll remain in the home and if it will be long enough to recoup your costs. Here’s another way to compare your current loan to a new one.
- How much of your current payment is going towards interest?
- How much of your new payment will go towards interest?
- What’s the difference? That’s how much you’d be saving in interest every month with a new refi.
The best mortgage refinancing options for you depend on your situation. Always check with a credit union first when comparing rates. Often credit unions offer lower rates than banks and mortgage brokers since they are non-profit.