Different Types of Mortgage Refinance Loans

When considering refinancing, it is 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 to learn the basics and beyond.

There are three main types of home loan refinance options:

1. Rate-And-Term: You only change the interest rate or the loan length in this type of refinance. You can not get cash back.

2. Cash-Out Refinance: If you want to pull money out of your home by using your equity, you will need a cash-out refinance.

3. Streamline Refinance: This type of refinance is only available for government-backed loans like Federal Housing Administration (FHA) and Veterans Affairs (VA) loans. There are no conventional streamline refinances. One of the most significant advantages of a streamline refinance 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 refinance could be your answer. The interest can be lower than conventional rates, especially if your credit score is 620 or below. But you will still have a monthly mortgage insurance premium (MIP).

Sometimes it is 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 are looking for a high loan-to-value (LTV) refinance option, the FHA offers a 95% cash-out refinance.

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 problems some new borrowers have regarding credit or available funds.

Once you are in your home for a year or so, you may be considering a refinancing to a conventional loan. If your credit has improved, especially if you have accrued 20% or more equity in your home, it is worth checking out.  With a conventional loan, you can get rid of the monthly MIP. Please note, if the loan-to-value (LTV) is over 80%, PMI may apply.

3 Types of VA Refinance Loans

If you are eligible for a VA mortgage, there are a few home loans to consider. These include:

1. VA rate-and-term where you only change the rate and the length of the loan. You can not get cashback.
2. VA streamline refinance, 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 not get cashback.
3. A cash-out VA refinance loan can change the rate, term, and give you cashback. If you are looking to pay off high-interest debt or do home renovations, this could be your best option.

Keep in mind that you may have a funding fee that can range from 1.25 to 3.3%  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, in addition to mortgage interest rates, you should also 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

When doing a cash-out refinance, you can use your funds for anything you choose, including paying off debts and student loans, getting some home improvements done, or investing in rental property.  

Ask your lender what they offer if you are looking for a Fannie Mae high loan-to-value refinance option. There are refinance 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 whether you can refinance a home equity loan into a mortgage? The answer—it is possible, though 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 is worth it.

Be aware that you will pay interest longer when you extend the length of a loan. That goes for second mortgages, Home Equity Lines of Credit (HELOC), credit cards, student loans or any type of loan. So do not just look at a lower payment and think it is a good deal when combining loans. Make sure you are considering how much total interest you will 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 would like to put down to reduce your loan's principal, for example, if you have sold another property or received an inheritance, you may consider a mortgage recast.

Tips for Refinancing

If you just want to shorten the term of your loan and the interest rate is not lower, it is probably not worth it. Instead of refinancing, you could potentially pay more towards the principal on your mortgage. That way, you will pay it down sooner without paying closing costs. However, be sure to check ith your lender to see if there might be any potential penalties for paying it down sooner than the agreed upon terms.

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 will remain in the home and if it will be long enough to recoup your costs. Here is 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 is the difference? That is how much you would be saving in interest every month with a new refinance.

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 not-for-profit.