Key takeaways
- There are several types of mortgage refinance options, including rate-and-term and cash-out refinancing. The most common, rate-and-term, involves replacing your current mortgage with a new loan with a different interest rate, loan term or both.
- Some types of mortgages offer the option of a streamline refinance, which doesn’t require in-depth underwriting or an appraisal.
- The best refinance option for you depends on your goals. If you simply want to get a lower rate, a rate-and-term or streamline refinance could work well for you.
Refinancing your mortgage — and choosing which type of refinance to do — is a major decision. Here’s a guide to the many ways you can refinance your mortgage, and tips to decide which is best for you.
Types of mortgage refinance
There are many mortgage refinancing options, including:
- Rate-and-term refinance: Rate-and-term is a refinance option that swaps your current mortgage for a new loan with a new interest rate, repayment term or both.
- Cash-out refinance: In a cash-out refinance, you’ll switch to a new, bigger loan that taps your home’s equity for additional cash. You can use these funds for any purpose.
- Cash-in refinance: A cash-in refinance involves making a lump-sum payment when you refinance to a new mortgage, bringing down the balance on the new loan.
- Streamline refinance: Available with an FHA, VA or USDA loan, a streamline refinance provides a faster route to a new mortgage, with less paperwork and underwriting.
- No-closing cost refinance: A no-closing cost refinance is any type of refinance that doesn’t require you to pay closing costs on closing day. Instead, you’ll bundle these fees into the new loan.
- Short refinance: Similar to the short sale of a home, this is an option for underwater mortgages. In this case, the lender might agree to refinance the loan to match the home’s current market value instead of what the borrower originally owed.
- Reverse mortgage: A reverse mortgage isn’t a refinance in the traditional sense. It allows homeowners aged 62 and older (sometimes 55 and older) to turn their equity into tax-free income.
Rate-and-term refinance
Rate-and-term refinancing is the most common type of refinancing. This process replaces your existing mortgage with a new mortgage that has a different interest rate, a different loan term (the length of time you have to repay) or both.
A rate-and-term refinance is best for homeowners who want to lower their interest rate. This is only possible when prevailing market rates are lower than your current rate. If you can refinance to a lower rate, you could save significantly on your monthly payment, as well as on the total interest you’ll pay. Plug the numbers into our refinance calculator and see what impact a drop in rates could have on your payments.
In addition, if you want to pay off your mortgage faster and reduce the total amount of interest, you can do a rate-and-term refinance into a shorter loan. This doesn’t change the amount you owe, however, so your monthly payments might be higher.
Who is a rate-and-term refinance best for?
A rate-and-term refinance is best for borrowers who want a lower interest rate or to pay less in interest overall, or borrowers who want to pay off their mortgage sooner.
Cash-out refinance
A cash-out refinance allows you to turn your home equity into cash. You’ll refinance your mortgage the same way you would with a rate-and-term refi, only to a bigger loan amount based on how much equity you plan to tap.
Typically, you can take out no more than 80 percent of your home’s value. You’ll receive the difference between the loan amount and your outstanding mortgage in cash, which you can use for any purpose. For example, if your home is currently worth $380,000 and you still owe $120,000 on your mortgage, your maximum cash-out would be $184,000 (less closing costs).
A cash-out refinance is best for borrowers who need a substantial amount of money and, ideally, can refinance to a lower interest rate. Many homeowners use cash-out funds to do renovations, while other borrowers use the money to consolidate more expensive debt. While you can use the cash for any purpose, it’s best to put it toward furthering your financial goals, rather than a vacation, wedding or other discretionary expense.
Learn more: Current cash out refinance rates
Who is a cash-out refinance best for?
A cash-out refinance is best for borrowers who want to take out a large sum at a relatively lower interest rate, or borrowers who want to consolidate higher-interest debt.
Cash-in refinance
With a cash-in refinance, you’ll make a lump-sum payment to lower your mortgage balance. This new, lower balance is then refinanced to a new mortgage at a different interest rate, term or both.
A cash-in refinance is best for homeowners who want to reduce the outstanding principal on their mortgage. This lowers your loan-to-value (LTV) ratio, helping you qualify for a lower interest rate. With a reduced LTV ratio, you might also be able to eliminate private mortgage insurance (PMI).
Who is a cash-in refinance best for?
A cash-in refinance is best for borrowers who want a lower overall loan balance and have the extra funds to put toward the lump sum, such as an inheritance or other windfall.
Streamline refinance
Streamline refinances are an efficient way to get a lower rate on an FHA, VA or USDA mortgage because they involve relatively little paperwork and don’t require a credit check or appraisal. The result: potentially faster turnaround times and lower closing costs. These programs are called:
- FHA streamline refinance
- VA Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA streamline refinance
- USDA Streamlined and Streamlined-Assist
Who is a streamline refinance best for?
A streamline refinance is best for borrowers with lower credit scores, or who want to bypass an appraisal and other steps in the underwriting process and save on closing costs.
No-closing cost refinance
In a no-closing cost refinance, you won’t pay closing costs upfront. Instead, you’ll finance these fees with the loan (and pay interest on the larger loan amount), pay a higher interest rate or both.
A no-closing cost refinance can be tempting since it eliminates the need for you to have cash ready at closing. However, depending on how long you plan to stay in the home, that convenience can cost you significantly more in the long run. Our refinance breakeven calculator can help you run the math on different scenarios.
Who is a no-closing cost refinance best for?
A no-closing cost refinance is best for borrowers who qualify for a lower interest rate, but don’t have the cash to pay closing costs upfront.
Short refinance
A short refinance is an option for borrowers who owe more on their mortgages than what their home is worth — a situation known as “underwater.” In this process, your lender agrees to refinance your current mortgage to a new, smaller loan that aligns with the current value of your home. For the lender, accepting this loss might be more cost-effective than foreclosure proceedings.
Who is a short refinance best for?
A short refinance is best for borrowers with an underwater mortgage who want to stay in their home and need more affordable loan payments.
Reverse mortgage
With a reverse mortgage, homeowners aged 62 or older (or 55 and older, depending on lender) who have paid off their mortgage or have substantial equity receive tax-free income based on their home’s equity. These funds can be used for a variety of purposes, such as supplementing retirement income, paying for home repairs or covering medical expenses.
You won’t need to repay the money until you die or sell or move out of the home, but you’ll need to continue paying for homeowners insurance and property taxes.
Who is a reverse mortgage best for?
A reverse mortgage is best for older homeowners in need of additional income and who have a plan to repay the funds.
How to choose the right mortgage refinance option
Each type of mortgage refinancing has benefits and drawbacks, and one method might be able to help you achieve your goals better than another. When weighing your options, consider:
- Your existing mortgage payment, interest rate and loan term
- Your financial situation, including your credit score, LTV ratio and DTI ratio
- Your financial goals and how they apply to refinancing
- How much equity you have in your home
- How long you plan to stay in the home
- Whether you can afford refinance closing costs
FAQ
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