7 Types of Refinance Loans

Homeowners refinance their mortgages for a variety of reasons, such as securing a lower interest rate, shortening the loan term, or tapping into their home equity for cash. In fact, a survey found that 59% of homeowners with a mortgage who haven’t moved in the past year have refinanced their current home loan. If you're considering refinancing, here's a guide to common types of refinance loans and what might work best for you. Rate-and-Term Refinance A rate-and-term refinance is the most common type of refinancing. In this case, your original loan is replaced by a new mortgage with different terms and possibly a new interest rate. Homeowners often pursue this option to lower their interest rate or monthly payment. It can also help you switch from a 30-year loan to a shorter 15- or 20-year loan, or eliminate private mortgage insurance (PMI). If you have an adjustable-rate mortgage (ARM), this refinance allows you to switch to a fixed-rate mortgage for more predictable payments. Consider this option if: Interest rates are lower than your current rate, or you want to remove PMI or pay off your loan faster. Eligibility: Conventional fixed-rate, adjustable-rate, VA, FHA, and USDA loans qualify. Private money loans, construction-to-permanent loans, and seller-financed loans may also qualify. Requirements: Typically, a minimum credit score of 620 and proof of sufficient income are required, though specific criteria may vary by lender. Cash-Out Refinance A cash-out refinance lets you take out a new mortgage for more than your current loan balance, allowing you to access some of your home’s equity as cash. This option results in a higher principal balance but offers a way to fund large expenses, such as home improvements, debt consolidation, education costs, or even the purchase of an investment property. Consider this option if: You need cash for significant expenses and prefer a lower interest rate than what you’d get from a credit card or personal loan. Eligibility: Available for conventional, VA, FHA, and USDA loans, though USDA loans must be refinanced into a different loan type. Requirements: Typically, a credit score of 620 or higher and a debt-to-income ratio below 50%. You’ll also need enough home equity to maintain an acceptable loan-to-value (LTV) ratio. Streamline Refinance Streamline refinances are designed for government-backed loans such as FHA, VA, or USDA loans. This option simplifies the refinancing process by reducing paperwork and eliminating the need for a home appraisal. Streamline refinances come in two types: credit-qualifying and non-credit-qualifying, with the latter often not requiring a credit check. Consider this option if: You want a quicker, simpler way to improve your interest rate while staying with your current loan program. Eligibility: Available for homeowners with existing FHA, VA, or USDA loans. Requirements: You must have a government-backed mortgage and a good payment history. Cash-In Refinance A cash-in refinance is the reverse of a cash-out refinance, where you pay down your mortgage with a lump sum to reduce your loan balance. This option can help you lower your monthly payments, get a better interest rate, or eliminate PMI. Consider this option if: You have extra cash on hand and want to reduce your mortgage balance, lower your payments, or get rid of PMI. Eligibility: Typically available for conventional loans, though they are less common than other refinancing options. Requirements: Generally, you don’t need 20% equity to qualify, but criteria may vary by lender. No-Closing Cost Refinance Closing costs can be a hurdle for many homeowners considering refinancing. A no-closing cost refinance offsets these costs by incorporating them into the loan in exchange for a slightly higher interest rate. This option is often suitable for homeowners planning to move or refinance again in the near future. Consider this option if: You don’t have the funds for closing costs or expect to move within a few years. Eligibility: Most conventional, FHA, and VA loans offer no-closing cost options. Requirements: Typically, you’ll need a credit score of at least 620, along with proof of income. Short Refinance A short refinance is an option for homeowners who are underwater on their mortgage, meaning they owe more than the home is worth. With this refinance, your lender agrees to pay off your existing mortgage and replace it with a new loan at a reduced balance. While rare and lender participation is voluntary, this option can help avoid foreclosure. Consider this option if: You're underwater on your mortgage and at risk of foreclosure. Eligibility: Available for non-FHA loans, though it depends on your lender’s willingness to offer this option. Requirements: You must be current on your payments, and lenders typically require a credit score of at least 500. Fannie Mae High LTV Refinance Option (HIRO) The High LTV Refinance Option (HIRO) is designed for homeowners with a Fannie Mae-backed mortgage who want to refinance but lack sufficient equity. It’s ideal for those who may owe more than their home is worth and want to benefit from lower interest rates. Consider this option if: You have little equity but want to take advantage of lower rates. Eligibility: Available for conventional loans backed by Fannie Mae. Requirements: You must have lived in your home for at least 15 months, be current on your payments, and have closed on or after October 1, 2017. How Much Does It Cost to Refinance? Closing costs on a refinance typically range from 2% to 6% of the loan amount. These costs include loan origination fees, appraisal fees, title fees, and credit report fees. Some types of loans, like VA refinances, also have additional fees such as a funding fee. You can often roll these closing costs into your new mortgage, reducing the need for upfront cash at closing, as long as your loan-to-value ratio allows. Which Refinance Option is Best for You? Choosing the right refinance option depends on your financial situation, current mortgage, and long-term goals. Take into account your equity, loan type, and eligibility criteria before deciding on the best path forward. Once you're ready, compare rates and reach out to lenders to discuss which option works best for your needs.