Learn about your home refinance options
Refinancing a home loan involves getting a new mortgage to replace your existing one. Reasons for refinancing include getting a lower rate and payment, switching to a different loan program, removing a name from a mortgage, or cashing out home equity.
Your financial goals will help determine what type of refinance suits you best. Refi options vary depending on the loan program, the purpose, and the type of refinance. Here’s what you should know before you choose.
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What are the two types of refinance?
You have two main options when you refinance. You can opt for a cash–out refinance, meaning you withdraw some of your home equity, or a no–cash–out refinance, which usually involves a new loan with a lower rate and monthly payment. (A no–cash–out refinance is also known as a ‘rate–and–term refinance.’)
In addition, there are various refinance programs offered by government and private agencies. 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 refinance option for your situation. But if you want to do your research before starting the process, here’s a little more information about the main home refinance options for 2022.
Conventional loan refinance options
A conventional mortgage is a loan that’s not backed by the government. These are issued by private banks and mortgage companies, and they typically conform to the lending rules set by Fannie Mae and Freddie Mac.
A rate–and–term refinance or ‘no–cash–out’ refinance changes either the mortgage rate, the loan term, or both. This often results in a lower interest rate and monthly mortgage payment.
This is a simple refinance, so it doesn’t include a cash–out option. You’ll need at least 3% equity for a conventional rate–and–term refinance.
The main purpose of a cash–out refinance is to borrow cash from your home equity. A conventional cash–out refinance can also lower your mortgage rate, although that’s not the primary goal.
Cash–out refinancing involves borrowing more than your current mortgage balance and taking the difference in cash. You can use the money for any purpose; popular reasons for a cash–out refi include home improvements, debt consolidation, and buying another property.
This type of refinance requires more than 20% equity to qualify, and you can usually borrow up to 80% of your home’s value. This number, minus the amount you currently owe on your home loan, determines how much cash back you can get.
High LTV refinance
In the past, Fannie Mae and Freddie Mac offered mortgage relief refinance options for underwater homeowners.
Thanks to rising property values, though, just 3% of homeowners are currently underwater. And these special programs have been put on hold since so few people need them.
Luckily, you can still refinance even if you have a high loan–to–value ratio (LTV). Many lenders require only a 3% equity stake in the home to refinance, which most homeowners will have even if they only made a small down payment.
FHA loan refinance options
An FHA loan is a mortgage that’s backed by the Federal Housing Administration. The FHA doesn’t create loans; rather, it insures loans created 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 into an FHA loan will be required to pay mortgage insurance premiums (MIP).
If you have at least 20% home equity when you refinance, you can avoid private mortgage insurance by refinancing into a conventional loan instead of an FHA loan.
FHA Streamline Refinance
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 don’t require another appraisal, and lenders will 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 refinance
An FHA cash–out refinance involves refinancing your FHA mortgage and borrowing cash from your equity. To qualify, you’ll need at least 20% equity, and you can borrow up to 80% of your home’s value. This number, minus the amount you currently owe on your home loan, determines how much cash back you can get.
Unlike a Streamline Refinance, this refi requires an appraisal and a credit check, and you’ll pay mortgage insurance regardless of your equity level.
Refinance FHA to 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 typically on the loan for life.
VA loan refinance options
VA loans are backed by the U.S. Department of Veterans Affairs. Banks, credit unions, and private lenders issue these loans to service members, veterans, and their surviving spouses.
VA Streamline Refinance (IRRRL)
A VA Interest Rate Reduction Refinance Loan (IRRRL) is another option for a simple rate–and–term refinance. You can switch from an adjustable–rate mortgage to a fixed–rate mortgage, reduce your interest rate, and lower your payment. However, you cannot cash out your equity with a VA Streamline Refinance.
There’s 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 which states they don’t have to.
The VA funding fee for an IRRRL loan is equal to 0.5% of the loan amount.
VA cash–out refinance
With the VA cash–out refinance option, you can change the rate and term of your VA loan while cashing out your equity. There’s no minimum credit score for a VA cash–out refinance, but you may need a minimum of 10% equity.
VA cash–out refinances don’t require mortgage insurance. However, there is a one–time funding fee which is typically 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 score and down payment requirements.
Keep in mind that because jumbo loans are not regulated by a central agency, banks and lenders get to set their own lending rules. That means the requirements for a jumbo refinance will vary from one lender to the next.
Rate–term jumbo loan refinance
A rate–and–term jumbo refinance can lower your rate or change your mortgage terms. But since a jumbo loan is bigger than the average mortgage, these are a little harder to refinance.
You’ll need a higher credit score (minimum 680 to 700), a low debt–to–income ratio, cash reserves, and often 10% or more equity.
Cash–out jumbo refinance
A cash–out jumbo refinance also lets you leverage the equity in your home. This type of refinance requires a higher credit score and cash reserves, too. Lenders generally require more than 20% equity to qualify.
Refinance to a conforming loan
There’s also the option of refinancing from a jumbo loan to a conventional (conforming) loan once you’ve paid down the loan balance.
The national conforming loan limit for 2022 is $ – up from $548,250 in 2021. This change could put your jumbo mortgage within the conforming loan limit. And if so, refinancing to a conventional loan might lower your interest rate and monthly payment.
USDA loan refinance options
A USDA loan is a mortgage backed by the U.S. Department of Agriculture. To be eligible, you’ll need a minimum 640 credit score and you must own a property in an eligible rural area.
USDA loans don’t require a down payment, meaning you could refinance via the USDA program if you have little to no home equity.
USDA Streamline Refinance
USDA loans don’t offer a cash–out option. You can, however, get a Streamline Refinance to change your loan’s rate and terms. 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 a year old to qualify, and you must have made on–time payments for the past six months. You also need to meet income and debt–to–income requirements.
Refinance to a conventional loan
One main advantage of a USDA loan is that this program doesn’t require a down payment. The downside is that these loans do charge an annual fee which functions like mortgage insurance.
USDA mortgage insurance lasts the life of the loan regardless of your equity level. To remove the fee, you’ll need to refinance from 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 an excellent way to lower your interest rate and monthly payment, change loan programs, or even switch from an adjustable–rate mortgage to a fixed–rate mortgage.
However, refinancing isn’t one–size–fits–all. So it’s important to choose the right program.
The right refinance option will depend on your purpose for refinancing, the amount of equity you have, and your current loan program. A Streamline or rate–and–term refinance is great for a straightforward process, whereas a cash–out refinance lets you tap your equity.
Speak with a mortgage consultant. These experts can help you decide the best approach depending on your circumstances.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement 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, or affiliates.