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Types of Mortgage Refinances

refinancing a mortgage

There are several different options when it comes to refinancing a mortgage. Borrowers can choose from a cash-out refinance, a cash-in refinance, a rate-and-term refinance, streamlined refinances, a reverse mortgage, a no-closing-cost refinance, and a short refinance.

Cash-Out Refinance

A cash-out refinance is a common way for homeowners to tap into their home’s equity to pay for things like home improvements, unexpected medical bills, debt consolidation, or a child’s college tuition. When refinancing their mortgage with a cash-out option, the homeowner will take out a loan for a larger amount than they currently owe, and once the original mortgage is paid off they’ll receive the remaining amount in a lump-sum cash payout. The money is then for the homeowners to do with what they please. The homeowner will then have a new mortgage payment that includes the amount owed on the loan and the amount taken out of the home’s equity in cash.

Depending on the amount of equity taken out of the home, the borrower may end up with a larger mortgage payment than they had previously, so it’s important for them to carefully check their budget to make sure this is an expense they can take on. Defaulting on a cash-out refinance could result in the borrower losing their home, so they will want to do careful research before signing the paperwork. Homeowners can compare a cash-out refinance vs. A home equity loan to determine the best way to tap into their equity.

Cash-In Refinance

When a homeowner chooses a cash-in refinance, they will put down a lump sum of money at closing, similar to a down payment when first purchasing a home. This can help lower the total loan amount, which can in turn mean lower monthly payments. Putting a lump sum of cash into the home during a refinance can help homeowners whose mortgage amount is higher than their home’s current value; in industry terms, this means they are underwater on their mortgage.

Rate-and-Term Refinance

A rate-and-term refinance is designed for borrowers looking to reduce their monthly payments or choose a shorter mortgage term. It’s common for homeowners to refinance their mortgage this way when current interest rates are lower than the interest rate the homeowner is presently paying on their mortgage. Interest rates fluctuate over time for many reasons, and when they are low, lenders tend to see an increase in borrowers refinancing their loans.

Homeowners may also choose this type of refinancing if they want to change from a 30-year loan term to a 15-year one. A shorter loan term means less overall interest paid by the time the loan matures, which could save homeowners thousands of dollars over time. This may be an option for a homeowner whose income has increased since taking out the initial loan since they can now afford to make larger monthly payments on their mortgage. On the flip side, a homeowner could refinance from a 15-year mortgage to a 30-year mortgage in order to lower their monthly payments if they’re facing financial hardship.

FHA Streamline Refinance

Homeowners who currently have a mortgage loan from the FHA can opt for an FHA Streamline refinance, which can get them a lower interest rate on their loan; this translates into lower monthly payments. There are some rules around this type of refinance, including homeowners not being able to add more than 12 years to their loan term when refinancing.

There are two main types of FHA Streamline refinances: Credit-qualifying and non-credit-qualifying. A credit-qualifying FHA Streamline refinance requires the borrower to provide proof of income to the lender, and the lender to perform a credit check. This type of refinance is common for homeowners who want to remove a borrower from their mortgage following a major life change such as a divorce. For a non-credit-qualifying FHA Streamline refinance, the lender will still check the borrower’s credit but won’t consider as many factors. In this type of refinance, the borrower typically won’t need to provide proof of income, either. FHA Streamline refinances generally don’t require the homeowner to get an appraisal since the loan amount is based on what the homeowner owes rather than the current market value of the home.

VA Streamline Refinance

Active-duty military members and veterans who have VA loans can choose a VA Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA Streamline refinance. The VA will offer this type of refinancing only if it will provide a financial benefit to the borrower, such as a lower interest rate or lower monthly payment. Borrowers who want to refinance because they don’t like their current lender or because they want to cash out some of their equity will need to choose a different type of mortgage to refinance.

USDA Streamline Refinance

The USDA offers home loans to borrowers in rural and some suburban areas. Homeowners who have a USDA loan can choose to refinance using a USDA Streamline. This type of refinancing allows homeowners to refinance at a lower interest rate or longer term in order to decrease their monthly payments. Unlike other types of mortgage refinances, a USDA Streamline doesn’t require borrowers to have a certain amount of home equity or to get an appraisal or inspection, which can save money.

There are two types of USDA Streamline refinances Standard and Streamline-Assist. For a Standard USDA Streamline refinance, homeowners must provide proof of income, have a USDA-qualifying debt-to-income (DTI) ratio, and must have made payments on time for the last 6 months. A Streamline-Assist refinance removes the DTI ratio requirement and the credit check from the process, but the new monthly mortgage payment must be at least $50 less than the original payment in order for the homeowner to qualify.

Reverse Mortgage

Homeowners may not consider a reverse mortgage a type of refinancing, but it technically is. This type of refinancing is generally available to homeowners over the age of 62 who have a certain amount of home equity. With a reverse mortgage, the lender will make payments to the homeowner, either in a lump sum or via monthly installments, that don’t need to be repaid until the home is sold. During the term of a reverse mortgage, the homeowner must maintain the home and continue paying taxes and insurance, but there is no mortgage payment for the homeowner to make.

Zero-Closing-Cost Refinance

Closing costs can be high, and many homeowners may not be able to afford to pay them during a mortgage refinance. For those homeowners, a no-closing-cost refinance may be the best option. Instead of the homeowner paying closing costs when the refinance is finalized, the costs will be replaced by a higher interest rate or simply rolled into the total loan balance.

Short Refinance

Homeowners who are having trouble making mortgage payments and are at risk of defaulting on their loan may be able to take advantage of a short refinance. This type of refinancing replaces the current loan with a new one that has a lower balance, which results in lower payments for the homeowner. Since the lender can lose a lot of money if the property goes into foreclosure, a short refinance can help reduce the lender’s losses. However, the lender must approve this type of refinancing, and it may have a detrimental effect on the borrower’s credit score.

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