Types Of Mortgage Refinance: Which Option Is Right For You?

Refinancing a mortgage loan can be a crucial financial lifeline for many homeowners. Whether you’re looking to lower your monthly mortgage payment or pull from your home’s equity to fund a renovation project, applying for a refinance can help you achieve your personal goals without breaking the bank.

That said, it can sometimes be difficult to know which type of refinancing would best suit your individual needs. To decide between the primary types of refinance options, you should consider your current type of loan, your home’s value, your current loan balance and whether you pay mortgage insurance.

Let’s go over some of the most common types of mortgage refinance loans pursued by homeowners, their key features and how to decide which one is the ideal choice for you.

There are several mortgage refinance options, but here are nine options commonly used by homeowners today:

1. Cash-Out Refinance

A cash-out refinance is a type of refinancing option in which the borrower takes out a new home loan on their property for a larger sum than what they owe on their original mortgage loan. They then receive the difference between those two loan amounts in cash.

This does not add an additional monthly payment. The larger loan replaces the borrower’s current mortgage, and the monthly payment amount will be different under the new agreement. If you’re doing a cash-out refinance, it’s important to review the terms in full to have a complete understanding of how this type of mortgage refinance will affect your budget.

2. Cash-In Refinance

Unlike a cash-out refinance, a cash-in refinance involves the borrower putting a large sum of money into the refinancing process rather than taking it out.

By paying down a significant portion of your mortgage balance, you’ll reduce your loan-to-value ratio (LTV) and increase the amount of equity you have in your home, which could result in lower monthly payments or a lower interest rate. This refinancing option tends to be best for individuals with underwater mortgages or homeowners who don’t yet have a substantial amount of home equity to access.

3. Rate And Term Refinance

A rate and term refinance allows borrowers to change the interest rate and loan terms of an existing mortgage. This tends to be a beneficial option when refinance rates are lower, and a borrower can pursue more favorable terms with their lender.

The size of the mortgage loan remains the same. But depending on the changes made to the loan, you could potentially end up with lower monthly mortgage payments or pay down your mortgage faster than you’d originally planned.

4. FHA Streamline Refinance

An FHA Streamline Refinance can be a great option for homeowners with Federal Housing Administration (FHA) loans looking to lower their monthly payments and avoid a repeat of the FHA appraisal process. If you currently have a conventional loan, you won’t be able to switch to an FHA mortgage with this type of refinance.

Depending on the circumstances surrounding your FHA refinancing, you can choose between a credit qualifying streamline – where the lender checks your credit score and debt-to-income ratio (DTI) – or a non-credit qualifying streamline for your FHA loan.

5. VA Streamline Refinance

A VA Streamline Refinance (also referred to as VA IRRRL) is an option available to military veterans and active service members with Department of Veterans Affairs (VA) loans.

This type of streamline refinance allows VA loan borrowers to potentially lower their monthly payments and interest rates, shorten or lengthen their loan term or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. They also pay a lower VA funding fee. If you’re a veteran, service member or surviving spouse of a veteran with a VA loan, you can likely get a VA IRRRL – you’ll just need to provide proof of residence to your lender to qualify.

6. USDA Streamline Refinance

A USDA Streamline Refinance allows borrowers of U.S. Department of Agriculture (USDA) loans with little equity in their homes to potentially lower their interest rate and change their loan term while avoiding additional home appraisals or inspections on their property.

Depending on your specific qualifications – including whether the mortgaged property is your primary residence, the age and number of payments made on your original loan, your DTI ratio and your credit score – you can choose between a USDA Standard Streamline or a USDA Streamline-Assist Refinance.

Rocket Mortgage® doesn’t offer USDA loans at this time.

7. Reverse Mortgage

A reverse mortgage is technically a type of refinancing option for borrowers over the age of 62 with sufficient equity in their homes. Borrowers who switch to a reverse mortgage don't have to make payments on their loan while they’re alive. In fact, if you were to refinance with a reverse mortgage, you’d receive funds stemming from your home equity to be used for whatever you see fit. You could use the money to fund home improvements or consolidate credit card debt.

However, it’s important to note that you’d still be expected to pay certain fees related to homeownership and your mortgage over the loan’s term. Once you sell your home or die, your loan balance will be due to your lender. The balance will either be paid through the proceeds from the sale of the home or through payments made by your heirs after a standard refinance.

Rocket Mortgage doesn’t offer reverse mortgages at this time.

8. No-Closing-Cost Refinance

With a no-closing-cost refinance, the borrower doesn’t have to pay closing costs upfront. Instead, the closing costs are covered with a higher interest rate on the loan, or they are rolled into the principal loan balance.

This type of refinance is especially beneficial for those who only plan to live in their home for a few years or need access to the funds they would typically use for closing costs to pay for expenses in other areas of their lives.

9. Short Refinance

A short refinance can be a great option for borrowers who have defaulted on their mortgage loan payments and are at risk of foreclosure.

With this type of refinance, your lender replaces your existing mortgage for a loan with a reduced balance. The monthly payments are lowered to a level you can realistically afford. You, as the homeowner, keep your property, and your lender loses less money than if the home had been foreclosed or gone through a short sale.

It’s important to note that this could hurt your credit depending on the circumstances surrounding the refinance. Your lender also has to approve a short refinance.

The cost to refinance often depends on the type of loan and the method of refinancing you choose for the loan. For many of the refinancing options discussed above, you’ll need to pay a number of closing costs that average around 3% – 6% of your loan balance.

Additionally, there may be specific fees tied to your chosen refinancing option that don’t apply to other types of refinances, like a VA funding fee. Before locking in your decision, review all your options carefully and assess what each one would entail for your finances.

When deciding among the different types of refinancing options, there are several factors you ought to take into consideration, including:

• The type of mortgage loan you have
• The type of borrower you are (for example, a veteran with a VA loan)
• The financial goals you hope to achieve by refinancing
• The amount of equity you have in your home
• Your credit score
• Your DTI ratio
• Your LTV ratio
• Your overall financial standing (your ability to afford closing costs, pay off additional debt, etc.)

If you’re still not sure which type of refinance would best fit your needs, talk to your lender about what potential terms for different refinance options would look like and ask for other mortgage refinance tips.

Learn more about the different types of home refinance options with the answers to these frequently asked questions.

Can you lose your house with a reverse mortgage?

When refinancing with a reverse mortgage, you could lose your home if:

• You don’t live in the home or use it as a primary residence.
• You move out of the home or sell it.
• You are away from the home for more than 6 months or 12 consecutive months.
• You die and no spouse is listed on the home loan.
• You stop paying your property taxes and homeowners insurance.
• You don’t maintain the home according to FHA requirements.

How do I find a reputable refinance lender?

Finding a mortgage lender to help with your refinance is crucial to the refinancing process. It’s important to do your research and shop around for a lender that best fits your needs. Don’t be afraid to negotiate and find the best lender that can make the refinancing process easy and painless. We would love to earn your business at Rocket Mortgage.

Can you get cash back on a USDA Streamline Refinance?

USDA Streamline Refinance loans do not allow any cash-out opportunities for the borrower. Cash may be received from the borrower’s own funds from final adjustments at closing.

Are there closing costs on a rate and term type of refinance?

Yes, borrowers could end up paying about 3% – 6% in closing costs for this type of refinance.

Can I sell my house after a cash-out refinance?

You can sell your house right after refinancing unless there is an owner-occupancy clause in your mortgage contract that requires you to occupy the home for a certain number of months before you can sell or rent it. To check for this clause, read through the loan documents you’ve received.

Ultimately, the benefits of your refinance should outweigh the costs. You should be closer to achieving your personal goals without putting yourself at greater risk of being unable to pay off your loan in the long term.

Are you ready to refinance your current home loan? Get started online today with Rocket Mortgage.