How to choose the right type of refinance loan

Which refinance loan is best for your situation?

When you decide to refinance, you might be surprised by the multiple types of refinance loans from which to choose.

Your best refinance option depends on factors such as:

• The type of loan you currently have
• Your home’s value compared to loan balance
• Whether you currently hold mortgage insurance

The good news is that with so many refi options available, you’re bound to find a new home loan that’s right for you.

Compare refinance loan options. Start here (Dec 12th, 2021)

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Types of refinance loans

Below are the minimum credit scores and maximum loan-to-value ratios for mainstream refinance programs. Note that these are only for refinancing a primary residence; vacation home and investment property refinance rules are different. 

A loan-to-value ratio (LTV) is the loan amount compared to the home’s value. 

As an example, a loan with an 85% LTV will often carry higher interest rates than one with a 75% LTV.

Type of Refinance	Minimum Credit Score	Maximum LTV
Conventional refinance loan, rate-and-term refinance, and cash-in refinance	620 to 670, depending on LTV	97% LTV on fixed-rate mortgages, and 95% LTV on adjustable-rate mortgages
Cash-out refinance	620 credit score	80% LTV
FHA Streamline Refinance	No credit check required*	No specific maximum
VA Streamline Refinance	No specific minimum*	No specific maximum
USDA Streamline Refinance	No specific minimum*	No specific maximum

*Technically, no credit check is required for most streamline refinances. But some mortgage lenders will pull a credit score and report anyway

Conventional refinancing

Conventional refinancing replaces your current home loan with a new conventional loan. Homeowners often opt for this type of mortgage refinancing because it allows them to access lower interest rates, shorten their loan terms, and achieve other financial goals like refinancing a second home.

You can refinance your existing mortgage into a conventional loan no matter what type of mortgage you have currently.

Conventional refinancing is also popular because it does not require mortgage insurance with 20% home equity. It’s a good option for those who have decent credit and equity in their homes.

Conventional refinance rates for December 12, 2021

Conventional 30-year fixed-rate loan	3.25% (3.25% APR)
Conventional 15-year fixed-rate loan	2.625% (2.679% APR)

 *Interest rates and annual percentage rates for sample purposes only. Your own rate will be different. See our rate assumptions and advertising disclosures here.

Get your lowest conventional refi rate. Start here (Dec 12th, 2021)

Rate-and-term refinance

Many times, borrowers use a rate-and-term refinance to change their loan term, mortgage rate, or both.

Rate-and-term refinancing helps homeowners save money on their mortgage loans with lower monthly payments, or paying less interest due to lower rates or shortened loan terms.

Here are a few rate-and-term refinancing scenarios:

• Refinancing a 30-year fixed-rate mortgage into a new 15-year fixed-rate mortgage
• Refinancing a 30-year fixed-rate mortgage at 5% interest into a new 30-year fixed-rate loan at 3%
• Refinancing a 30-year fixed-rate mortgage at 5% interest into a new 15-year fixed rate loan at 3% 

Many mortgage refinances are rate-and-term, especially in a falling-rate real estate market.

Check your rate-and-term refi rates. Start here (Dec 12th, 2021)

Cash-out refinance loans

A cash-out refinance allows homeowners to access their home’s equity and refinance their current mortgage simultaneously.

Your new home loan will be large enough to pay off your current loan. You’ll keep the leftover funds, as a lump sum of cash, to be used to achieve any number of financial goals.

Many borrowers use this cash out to fund college education, invest in real estate, or to pay down debt from credit cards or student loans. 

Here’s how a cash-out refinance works:

• Home value: $400,000
• Current mortgage balance: $200,000
• New refinance loan: $250,000
• Cash out at closing: $50,000 (less closing costs)

Cash-out refinancing options

Most mortgage lenders offer three main types of cash-out refinancing loans.

• Conventional loans: With this cash–out refinance option, you can borrow up to 80% of your home’s value. You’ll normally need a minimum credit score of 620
• FHA loans: FHA cash–out refinancing lets you borrow up to 80% of your home’s value. You typically need a credit score of at least 600 to qualify
• VA loans: VA cash–out refinancing allows you to borrow up to 100% of your home’s value. The credit scores required for this refinance option vary, but requirements are often more lenient than other loan programs. Note that all VA loan products are only available to veterans, Reserve and National Guard members, active–duty service members, and certain surviving spouses

Each loan program has its own rules and requirements, so talk to your lender about your options.

Additionally, if you’re uncertain whether or not a cash-out refinance is right for your financial situation, then consider a home equity line of credit (HELOC) or even a home equity loan.

Both refinancing alternatives allow homeowners to borrow against their home’s value, but without replacing their current mortgage.

Check your cash-out refi rates. Start here (Dec 12th, 2021)

Cash-in refinance

Cash-in refinancing is the opposite of cash-out refinancing. It allows homeowners to reduce their loan amount by paying a lump sum toward their mortgage when they refinance. A cash-in refinance can lead to a lower mortgage rate or a shorter loan term.

Note that lenders often lump cash-in refinancing with rate-and-term refinancing (so it may not be presented as a separate option). If you’re interested in this type of refinance, simply ask your loan officer about its policies for cashing-in when you apply. 

Many borrowers choose a cash-in mortgage refinance to get lower interest rates on a new home loan that are generally only available to lower loan-to-value ratios (LTV).

Homeowners may also use this refinance option to drop mortgage insurance premium (MIP) payments. When your existing mortgage loan gets to 80% LTV or lower, MIP payments are no longer required.

Although, this MIP rule doesn’t apply to FHA mortgages, which require MIP throughout the life of the loan. Still, a homeowner could refinance out of an FHA loan and into a conventional loan to remove mortgage insurance.

Verify your best cash-in refi rates. Start here (Dec 12th, 2021)

FHA Streamline Refinance

Current FHA loan holders might consider an FHA Streamline Refinance. It works much like other types of refinancing loans. Borrowers take out a new FHA mortgage to replace the existing one.

Refinancing from an existing FHA mortgage into a new FHA mortgage requires much less paperwork — no appraisal or income documentation is required.

Additionally, homeowners who refinance within the first three years of their existing mortgage may be eligible for a partial refund of the upfront mortgage insurance premiums (UFMIP) paid when closing on the original FHA loan.

Although, there are drawbacks to an FHA Streamline Refinance. You are not allowed to take cash out or shorten your loan term, and closing costs cannot be rolled into the loan balance.

FHA Streamline Refinance rates for December 12, 2021

Today’s average 30-year FHA rate is 2.75% (3.25% APR) according to our lender network. Keep in mind that FHA mortgage insurance fees add 0.85% in annual costs. This also applies to Streamline Refinances.

30-Year FHA Fixed Rate	2.75% (3.25% APR)
15-Year FHA Fixed Rate	2.625% (2.679% APR)

Interest rates are for example purposes only. Your own rate will vary. See our rate assumption here.

Verify your FHA Streamline Refi rates now. Start here (Dec 12th, 2021)

VA Streamline Refinance

A VA Streamline Refinance replaces an existing VA loan with a new one at a lower rate. 

The official name of this refinance option is VA Interest Rate Reduction Refinance Loan (IRRRL). However, it’s commonly referred to as a “streamline” loan because it requires no appraisal, and no verification of employment, income, or assets to qualify. 

As with any VA loan program, veterans, active-duty servicemembers, Reservists and National Guard members, and some surviving spouses are eligible.

Additionally, only current VA home loans are eligible, and homeowners must also meet underwriting requirements set by the Department of Veterans affairs.

Current guidelines include:

• Current payment history with no more than one 30-day late payment within the past year
• Your new rate and monthly payment for the IRRRL needs to be lower than the existing monthly mortgage payment. This rule does not apply when refinancing an adjustable-rate mortgage into a fixed-rate mortgage
• No cash out allowed
• Certify that you currently or previously occupied the home
• Previously used your VA loan eligibility on the home you intend to refinance. You may see this referred to as a VA-to-VA refinance

VA Streamline Refinance Rates for December 12, 2021

VA 30-year fixed-rate mortgage	2.5% (2.674% APR)
VA 15-year fixed-rate mortgage	2.375% (2.697% APR)
VA 5/1 adjustable-rate mortgage	2.5% (2.547%)

*Interest rates and annual percentage rates for sample purposes only. Average rates assume 0% down and a 740 credit score. See our full loan VA rate assumptions here.

Check your VA Streamline Refi rates. Start here (Dec 12th, 2021)

USDA Streamline Refinance

Homeowners with a USDA mortgage loan are eligible to use a USDA Streamline Refinance.

Similar to other government-backed mortgage loans, this refinance option requires less fees than standard underwriting. 

There is no appraisal required for homeowners who do not receive a subsidy. But your mortgage lender will need to check your credit score and verify income.

Current guidelines include:

• You must meet the USDA credit score requirements
• You can finance the principal, interest, closing costs, escrow fees, and upfront guarantee fee into the new loan balance
• Your existing USDA loan must be paid on time for 180 consecutive daysYou must have held the current mortgage for minimum of 12 months
• Your home must be your primary residence
• Your household income must fall within the USDA’s income limits

7 ways to get a better refinance rate

1. Increase your home’s equity

By increasing your home equity, you create a lower LTV. LTV is key to getting approved for a refinance — and getting a lower interest rate — because mortgage lenders consider loans with low LTVs less risky.

There are three ways to increase your loan-to-value ratio.

1. Pay down your mortgage
2. Make improvements
3. Wait for similar homes to sell in your neighborhood

According to Fannie Mae, cutting your mortgage from 71% LTV to 70% could drop your rate by 125 basis points (0.125%). That’s a savings of $8,000 over the life of a $300,000 loan. If your LTV is just above the five-percentage-point tier, consider paying down the loan just enough to get to the tier below.

Keep in mind, you may not know your home’s true market value until you either get an approved value via Desktop Underwriting or a traditional appraisal.

With home values rising quickly across the nation, there’s a good chance your home is worth significantly more now than when you bought it. So you may be eligible to refinance much sooner than you think. It’s worth checking with a lender if you’re unsure of your home’s current value. 

You can also make small improvements to increase your value, thereby lowering your LTV. Focus on bathrooms and the kitchen. These upgrades come with the most bang for the buck.

Lastly, stroll your neighborhood and look for homes that are on the market. A high-priced sale near you can increase your home’s value; appraisers base your home’s value on sales of similar homes in the area.

2. Improve your credit score

In general, borrowers with credit scores of 740 or higher will get the best interest rates from lenders. With a score less than 620, it can be difficult to get a lower rate or even qualify for a refinance.

What’s the best way to improve your credit score? Pay your bills on time, pay down credit card balances, delay major new purchases, and avoid applying for more credit. All these things can negatively affect your credit rating.

It’s also wise to order copies of your credit report from the big three credit reporting agencies – Experian, Equifax, and Transunion — to make sure they contain no mistakes.

You are entitled to one free credit report per year, per bureau.

3. Pay closing costs upfront

Closing costs can be substantial, often 2% of the loan amount or more.

Most applicants roll these costs into the new loan. While zero-closing-cost mortgages save out-of-pocket expenses, they can come with higher interest rates when your LTV moves tiers.

To keep rates to a minimum, pay the closing costs in cash if you can. This will also lower your monthly payments.

4. Pay points

Points are fees you pay the lender at closing in exchange for a lower interest rate. Just make sure that “discount points,” as they are known, come with a solid return on investment.

A point equals one percent of the mortgage amount – e.g., one point would equal $1,000 on a $100,000 mortgage loan.

The more points you pay upfront, the lower your interest rate, and the lower your monthly mortgage payment. Whether or not it makes sense to pay points depends on your current finances and the term of the loan.

Paying points at closing is best for long-term loans such as 30-year mortgages. You’ll benefit from those lower interest rates for a long time. But remember: that only applies if you keep the loan and home as long as it takes to recoup the cost.

If you like the idea of discount points, but do not want to bring a large sum of cash to closing, you can also roll the cost of points into the loan. Some homeowners find this scenario beneficial when it results in significantly lower monthly payments. 

5. Make mortgage lenders compete

As with any purchase, refinance consumers should comparison shop for the best deal.

This applies even if you have a personal relationship with a local banker or loan officer.

A mortgage is primarily a business transaction. It shouldn’t be personal. A friend or relative who “does loans” should understand that.

Even if your contact suggests he or she can give you a lower rate, it can’t hurt to see what other lenders offer.

Lenders compete for your business by sweetening their deals with lower rates and fees, plus better terms.

And, don’t prejudge a company just because it’s a banker or broker. If a bank isn’t presenting tempting offers, consider a mortgage broker, or vice versa. Brokers may obtain a wholesale interest rate for you, which can be cheaper than the rates offered by banks. On the other hand, many banks offer ultra-low rates in an effort to undercut brokers.

You can benefit when lenders fight for your business.

6. Look beyond APR

Two mortgages with the same annual percentage rate (APR) are often unequal.

For example, some mortgage rates are lower only because they include points you’ll have to pay upfront. Others may have an attractive APR, but cost more overall because of various lender fees and policies.

It’s possible for two mortgages to have the same APR but carry different interest rates.

Shopping by APR can be confusing, so it’s best to focus on the total cost of the loan, especially the interest rate and fees.

It’s also important to check out competing loans on the same day because rates change daily.

7. Know when to lock in the rate

Once you’ve found a new mortgage that meets your needs, consult with your lender to pick the best date to lock in low rates.

Loan processing times vary from 15 to 30 days, to more than 90 days. But many lenders will lock in the rates for just 30 to 45 days. Note that the rate-lock period also has a slight effect on the rate cost.

Avoid expensive lock extensions. An extension is needed when you don’t close the loan on time.

Ask your lender to determine the best day to lock the loan based on a conservative loan processing time frame. Otherwise, you may end up spending more money than you originally planned.

Today’s best refinance rates

Rates are low for all types of refinance loans.

Get quotes from multiple lenders without any obligation to proceed. Check today’s mortgage interest rates at the link below to get started.

Verify your new rate (Dec 12th, 2021)