Types of Mortgage Refinance: Which Refinance Option is Best for You?

If you are considering a refinance, it is important to become familiar with the different types of refinancing options available and understand what type of refinancer you want to be. Are you interested in tapping into your home’s equity? Or is your goal to refinance to a lower rate and save money?

When it comes to tailoring your mortgage refinance to your needs, the various loan programs and options may seem endless. That is why we are here to help you determine your refinancing goals and break down the benefits of each type of refinance so you can be confident in your final choice.

What type of refinancer are you?

A change in lifestyle or financial plan is a normal part of homeownership. And as your needs change, refinancing offers you an option to update your mortgage to better fit your life. Everyone’s situation is unique, but it can be helpful to understand what type of refinancer you are.

First, ask yourself which refinance benefit is most important to you:

1. I am focused on finding a way to save more money each month.

2. I want to pay off my mortgage faster.

3. I have immediate home improvement projects to complete or high-interest debt to consolidate.

Now that you have your refinancing goals in mind, read on to discover what type of refinancer you are.

A) The monthly saver

If you picked answer A, then you are the monthly saver. You may already have a personal budget focusing on cutting down frivolous spending and are committed to maintaining good financial habits. Your ultimate refinancing goal is to reduce your monthly payments and increase your savings or daily cash flow.

You will probably be most interested in refinance options that get you a better (or fixed) interest rate, eliminate mortgage insurance, or more.

B) The long-term planner

Choosing answer B means you are the long-term planner. You may already have the next five or even ten years mapped out, and paying off your mortgage is essential to your plans. Rather than looking for short-term saving strategies, you are focused on your long-term financial goals.

You are most likely interested in paying off your mortgage faster. This may make refinancing to a shorter-term loan, like a 15-year fixed mortgage, more appealing despite the probability of higher monthly payments.

C) The task master

If your answer is C, that makes you the task master. You are someone who gets things done. Whether you have a few home improvement projects in mind, want to consolidate higher-interest debt, or have education expenses to cover, you are focused on accomplishing your goals.

You are more likely to consider a refinance option that will turn the equity in your home into cash you can use now for whatever endeavors you plan on conquering.

Common types of refinancing

Now that we have determined your refinancing goals, we can break down the most common refinance options and the type of refinancer who will most likely benefit from them.

Rate-and-term refinance

Also known as a no cash-out refinance, the rate-and-term refinance provides borrowers with the opportunity to change their current mortgage rate, its term, or both. (However, you will not receive any advanced funds.) In essence, you are replacing your existing mortgage with a new one that has better terms without changing the total principal balance. Other options include:

• Changing your loan type (for example, from an adjustable-rate to fixed-rate, or vice versa)

• Decreasing (or resetting) your loan term

• Reducing monthly payments

• Lowering your interest rate

Most often, borrowers who want to reduce their monthly payments are motivated to choose this type of refinance when there is a drop in market interest rates.

Best for the money-saver or long-term planner. 

Cash-out refinance

A cash-out refinance replaces your current mortgage with a larger home loan, based on the equity you have built, in order to receive a cash surplus. On top of the benefit of turning home equity into cash, this type of refinance also allows you to change your loan terms and possibly lower your interest rate.

However, it is important to note that the amount you are eligible to take out is also impacted by your creditworthiness, property type, and existing mortgage.

Best for the task master.

Streamline refinance

A streamline refinance is another option for borrowers who want to reduce their current interest rate quickly. There is less paperwork involved and most lenders do not require a credit check or home appraisal. Plus, other benefits such as:

• Faster loan processing timeline

• Lower closing costs

• Decreased monthly payments

However, your current mortgage must be an FHA, VA, or USDA loan in order to be eligible.

Best for the money-saver.

VA loan refinance options

If you are an eligible veteran or servicemember who currently has a VA loan, you have a couple refinance options to consider.

1. A VA rate-and-term refinance where you only change the rate and the length of the loan. You cannot get cash back.

2. A VA interest rate reduction refinancing loan (IRRRL) takes less paperwork than a traditional refinance. But, like the rate-and-term, you cannot get cash back.

3. A cash-out VA refinance loan can change your mortgage rate, term, and give you cash back. If you are looking to pay off high-interest debt or do home renovations, (or anything else), this type of refinance is the most well-rounded option.

Keep in mind that you may have a VA funding fee that can range from 0.5% to 3.3% of the VA loan amount.

How can you prepare before refinancing?

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 the up-front costs. It is also important to take stock of your current finances and ensure you are set up to receive the best possible terms and rate. Here are some ways you can prepare to refinance your mortgage:

1. Take time to improve your credit score.

2. Build up your savings or set aside funds for closing costs and fees.

3. Check your debt-to-income (DTI) ratio and confirm it meets your lender’s requirements.

Regardless of what type of refinancer you are, or if you already have a refinance option in mind, it is best to compare lenders and reach out to discuss all of the refinancing strategies that will work best for your needs.