Learn about your home refinancing options
Refinancing a home loan involves taking out a new mortgage to replace yours. Reasons for refinancing include getting a lower rate and payment, switching to a different loan program, dropping a name from a mortgage, or cashing in on home equity.
Your financial goals will help you determine which type of refinance is best for you. Refi options vary by loan program, purpose, and type of refinance. Here’s what you need to know before choosing.
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What are the two types of refinancing?
You have two main options when refinancing. You can opt for a cash-out refinance, which means you take some of the equity out of your home, or a no-cash refinance, which usually involves a new loan with a lower rate and a monthly payment.
In addition, there are various refinancing programs offered by government and private organizations. The type of refinance loan you choose will depend on your current loan type and your personal finances.
You and your loan officer will work together to decide on the best refinancing option for your situation. But if you want to do your research before you start the process, here’s a little more information on the top home mortgage refinance options for 2022.
Conventional Loan Refinance Options
A conventional mortgage is a loan that is not guaranteed by the government. These are issued by private banks and mortgage companies, and they generally comply with the lending rules set by Fannie Mae and Freddie Mac.
A conventional loan refinance typically requires a 620 credit score and some home equity.
Term rate refinancing
A rate and term refinance or a cashless refinance changes either the mortgage rate or the term of the loan, or both. This often results in a lower interest rate and monthly mortgage payment.
This is a simple refinance, so it does not include a cash-out option. You will need at least 3% equity for conventional rate and term refinancing.
Refinancing by collection
The main purpose of a cash refinance is to borrow money against the equity in your home. A conventional refinance can also lower your mortgage rate, although that is not the primary goal.
Cash refinancing involves borrowing more than your current mortgage balance and taking the difference in cash. You can use the money for any purpose; the most common reasons for a loan buy-out include home renovations, debt consolidation and the purchase of another property.
This type of refinance requires more than 20% equity to qualify, and you can usually borrow up to 80% of the value of your home. This number, minus the amount you currently owe on your home loan, determines the amount of cash back you can get.
High LTV refinance
In the past, Fannie Mae and Freddie Mac offered mortgage refinance options for underwater homeowners.
Thanks to rising land values, however, only 3% of owners are currently under water. And these special programs have been suspended because so few people need them.
Fortunately, you can still refinance even if you have a high loan-to-value (LTV) ratio. Many lenders only require a 3% equity interest in the home to refinance, which most homeowners will have even if they have only put down a small down payment.
FHA Loan Refinance Options
An FHA loan is a mortgage backed by the Federal Housing Administration. The FHA does not create loans; rather, it insures loans originated by banks, credit unions, and mortgage companies.
Qualifying for an FHA refinance requires a minimum credit score between 500 and 580. In addition, borrowers who refinance an FHA loan will be required to pay mortgage insurance premiums (MIPs).
If you have at least 20% equity in your home when you refinance, you can avoid private mortgage insurance by refinancing a conventional loan instead of an FHA loan.
FHA streamline refinancing
If you’re looking to change your rate and/or term without cash back, an FHA Streamline refi lets you refinance with less time and paperwork. These refis do not require another assessment, and lenders sometimes waive a credit check.
You must have made at least six payments on your current FHA mortgage to qualify. And your existing mortgage must be an FHA loan.
FHA cash-out refinancing
An FHA refinance involves refinancing your FHA mortgage loan and borrowing money against your principal. To qualify, you will need at least 20% equity and you can borrow up to 80% of the value of your home. This number, minus the amount you currently owe on your home loan, determines the amount of cash back you can get.
Unlike a Streamline refinance, this refi requires a credit score and check, and you’ll pay mortgage insurance regardless of your equity level.
Refinance the FHA into a conventional loan
You can also refinance from an FHA loan to a conventional loan. This is an option if you have a higher credit score (at least 620) and at least 20% equity. Switching to a conventional loan can eliminate FHA mortgage insurance, which is usually on the loan for life.
VA Loan Refinance Options
VA loans are backed by the US Department of Veterans Affairs. Banks, credit unions, and private lenders provide these loans to military personnel, veterans, and their surviving spouses.
VA Streamline Refinance (IRRRL)
A VA Interest Rate Reduction Refinance Loan (IRRRL) is another option for simple rate and term refinance. You can switch from a variable rate mortgage to a fixed rate mortgage, lower your interest rate and lower your payments. However, you cannot cash out your principal with a VA Streamline refinance.
There is no minimum credit score for this type of refinance, nor a maximum loan-to-value ratio. However, some lenders will require a credit check despite the VA’s guideline that they don’t have to.
The VA financing fee for an IRRRL loan is equal to 0.5% of the loan amount.
VA Cash Refinance
With the VA cash-out refinance option, you can change the rate and term of your VA loan while cashing in your principal. There is no minimum credit score for a VA cash-out refinance, but you may need a minimum of 10% equity.
VA cash-out refinances do not require mortgage insurance. However, there is a one-time finance charge which typically amounts to 3.6% of the loan amount.
Jumbo Loan Refinance Options
A jumbo loan is a mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac. Borrowers use these loans to finance high-end properties, and jumbo loans typically have higher credit scores and down payment requirements.
Refinancing of a jumbo rate and term loan
A rate and term jumbo refinance can lower your rate or change the terms of your mortgage. But since a jumbo loan is larger than an average mortgage, it’s a bit more difficult to refinance.
You will need a higher credit score (minimum of 680-700), a low debt-to-equity ratio, cash reserves, and often 10% or more equity.
Cash–out jumbo refinancing
A cash jumbo refinance also allows you to leverage the equity in your home. This type of refinancing also requires a higher credit rating and cash reserves. Lenders generally require more than 20% equity to qualify.
Refinance into conforming loan
There is also the option of refinancing a jumbo loan into a conventional (conforming) loan once you have paid off the loan balance.
The national conforming loan limit for 2022 is $ – from $548,250 in 2021. This change could put your jumbo mortgage within the conforming loan limit. And if so, refinancing a conventional loan could lower your interest rate and your monthly payments.
USDA Loan Refinance Options
A USDA loan is a mortgage guaranteed by the United States Department of Agriculture. To be eligible you will need a minimum credit score of 640 and you must own property in an eligible rural area.
USDA loans do not require a down payment, which means you can refinance through the USDA program if you have little or no equity in your home.
Streamlined USDA Refinance
USDA loans do not offer a withdrawal option. You can, however, get a Streamline refinance to change the rate and terms of your loan. You can refinance up to the full value of the property, sometimes without a new appraisal.
Your current USDA home loan must be at least one year old to qualify, and you must have made on-time payments within the past six months. You must also meet income and debt-to-income ratio requirements.
Refinance in conventional loan
One of the main advantages of a USDA loan is that this program does not require a down payment. The downside is that these loans charge an annual fee that works like mortgage insurance.
USDA Mortgage Insurance lasts for the life of the loan, regardless of your equity level. To remove the fee, you will need to refinance a USDA loan to a conventional loan once you have 20% or more equity.
How to Choose the Right Refinance Option for You
Refinancing is a great way to lower your interest rate and monthly payments, switch loan plans, or even switch from an adjustable rate mortgage to a fixed rate mortgage.
However, refinancing is not unique. It is therefore important to choose the right program.
The right refinance option will depend on your refinance goal, the amount of equity you have, and your current loan program. A simplified or rate and term refinance is ideal for a simple process, while a cash refinance allows you to leverage your capital.
Talk to a mortgage advisor. These experts can help you choose the best approach for your situation.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.