Carey Chesney8-minute read
UPDATED: July 25, 2023
For most of us, our monthly mortgage payment is the single largest bill we pay each month. It’s also the most important one. Sure, we can cancel a few video streaming services if money is tight, but not paying our mortgage is simply not an option.
This leaves many people wondering, “how can I get that payment lower?” In addition to being the largest amount, your monthly mortgage is likely the longest term loan you have as well. Thinking about paying something for 30 years can be, well, slightly discouraging. This may leave you wondering, “How can I pay my mortgage off sooner?”
The good news is there are a variety of ways to lower your monthly payment and/or pay your mortgage off sooner. Read on to learn about the types of refinance and how each one can help you meet your financial and homeownership goals.
Essentially, a mortgage refinance is when a lender replaces your current mortgage with a new one. This can take many different forms and can achieve many different results. Many times the goal of refinancing is to reduce your interest rate or move from an adjustable-rate mortgage to a fixed-rate mortgage. Or, you might simply be interested in shortening the your loan term.
There’s also the scenario in which you’d like to make some home improvements and want to pay for it by using some of your equity. No matter what your goals are, there’s probably a refinancing option that could work for you.
When you get started with the mortgage refinancing process, lenders look at your credit score, income, assets and debt to determine whether you meet the requirements to qualify. They do this to ensure you’ll make your payments on time and pay off your mortgage at the end of the term. Let’s take a deeper dive into the qualifications:
Credit score: The score needed to refinance will vary on what lender you choose and what type of refinance option you select. Your credit doesn’t need to be perfect, but the lender needs to see that you have a score indicating you will be able to pay back the loan.
Income: Lenders want to confirm that you have sufficient income in relation to your other expenses to make your monthly payments and will be able to afford your new payment.
Home equity: The difference between what you owe on your current mortgage and what your home is worth is considered your home equity. For example, if you owe $150,000 on your mortgage and your home is worth $250,000, that means you have $100,000 worth of equity in your home. The more you have, the more confident lenders will be when considering a refinance.
Once you qualify and the terms are set, your lender pays off your current mortgage with a new mortgage, and you start repayment on your new loan amount. Keep in mind that your monthly mortgage payment could change. Usually, you’ll enjoy lower monthly payments if you extend your loan term or interest rates are lower than you have on your current loan. Conversely, you’ll likely have higher monthly payments if you make your loan term shorter or when interest rates are higher than your original loan. Borrowers can work with their current lender or a new one when it comes to refinancing, so be sure to do your homework and shop around.
Depending on your needs as a homeowner, there are many different options to choose from when it comes to a mortgage refinance. Here are some options you might want to consider.
A conventional refinance means you are replacing your existing mortgage with a new conventional mortgage. Conventional refinancing is pretty fluid in terms of what you can do with it. For example, you can reduce your interest rate, shorten or lengthen your loan term or get rid of your mortgage insurance (if you have at least 20% equity in the home).
Keep in mind that your current mortgage doesn’t need to be a conventional loan to qualify for a conventional refinance. Even if you have an FHA loan, USDA loan, or any other type of mortgage, you can use a conventional refinance to lower your interest rate or accomplish a number of other financial goals.
A jumbo loan is a type of mortgage that exceeds conforming loan limits, which are determined by the Federal Housing Finance Agency (FHFA) .
Jumbo loans are for high value properties, so their amount is considerably more than a conventional loan. Because of this, they may have eligibility requirements. That said, jumbo loans can be used for mortgage refinancing just like conventional loans.
A cash-out refinance is a common option for people looking to make improvements to their home but don’t have the savings to pay cash for them. However, a cash-out refinance can be used for any expenses, like consolidating loan debt, traveling, or any other thing you like.
Cash-out refinance mortgage loans use the equity in your home to allow you to take out a bigger loan than your current mortgage. The difference between the two mortgages is the amount of cash you will have immediately at your disposal with a cash-out refinance.
This, of course, requires that you have some equity built up in your home. In most cases, you can borrow up to 80% of the equity of your home in the form of cash. So, if you had $100,000 worth of equity, you might be able to withdraw around $80,000.
For a mortgage refinance, most lenders want to see that you have at least 20% equity in your home, meaning your loan to value ratio (LTV) is at least 80%. That means if your home is worth $200,000 lenders will want to be sure that you owe no more than $160,000 on your current mortgage.
So, what do you do if you don’t have enough equity? A cash-in refinance might be a good option to explore. With this type of loan, you put in cash to bring your LTV up to 80%. Then you can qualify for a mortgage refinance.
A cash-in-refinance can be done even if your current home equity is already at 20%. This is attractive to homeowners looking to lower their monthly mortgage payments or reduce the term of their loan.
When most people think about home refinancing, they usually think about a rate and term refinance. Like all refinances, you replace your current mortgage with a new one and the interest, term and monthly payments all usually change.
Depending on your credit score, debt to income ratio, and the amount of equity in your home, you may be able to lower your interest rate considerably, resulting in a lower monthly payment. However, be aware that if you refinance when interest rates are high, you may not get a lower rate.
You can also change your term – extending it to lower your monthly payments or shortening it to pay your loan off faster.
Rate and term refinances can be done with conventional, VA, FHA and USDA loans. You can also switch in between these types of loans. For example, you can switch from an FHA loan to a conventional loan with a rate and term mortgage refinance.
A streamline refinance is a refinance of a government-backed loan that doesn't require an appraisal. This includes an FHA Streamline refinance, VA streamline refinance and USDA streamline refinance. Conventional mortgages cannot be refinanced using a streamline refinance.
Appraisals can often become a hurdle for homeowners looking to refinance. If the house doesn’t appraise for enough money, you may not have enough equity to refinance. The streamline refinance allows for easier qualification since no appraisal is needed.
This is a good option for homeowners who are worried that they don’t have enough equity or if their house might be worth less than they owe on it. If an appraisal is likely to muck things up and you have a government-backed loan, a streamline refinance might be a good option to consider.
Here’s a look at each of the government-backed loans and their specific qualifications for a streamline refinance.
FHA Streamline Refinance
VA Streamline Refinance
USDA Streamline Refinance
If you are at least 62 years old, you might be eligible to refinance into a reverse mortgage (also referred to as a home equity conversion mortgage). With this type of refinance, you can get cash for the existing equity in your home.
Seniors on a fixed income are often looking for ways to increase their monthly cash flow. With a reverse mortgage, you can pay off your existing mortgage and receive the remaining money in a lump sum payment, monthly payments or a line of credit. You won’t be required to make a monthly mortgage payment and when you sell your home or pass away, the loan is paid off and any excess equity goes back to you (or your heirs). You will have to continue to pay your homeowners insurance and property taxes and maintain the home.
If refinancing makes you think of thousands of dollars in closing costs and cringe, consider a no-closing cost refinance. Similar to a rate-and-term refinance, a no-closing cost refinance allows you to change the terms of your loan including interest rate, monthly payment and loan term, but without closing costs.
Make no mistake, the lender is still going to get their money. They just spread the closing costs over the term of the loan, so you pay monthly instead of upfront when the loan closes.
In addition to the streamline refinance government-backed mortgages mentioned above, in rare cases you can get a no appraisal refinance on a conventional mortgage. Again, this is rare, but check with your lender to see if they offer no-appraisal refinancing on non-government-backed loans.
If you’re coming up short on your mortgage payments or your home value drops and you owe more on your home than it’s worth your lender may consider a short refinance option. Keep in mind that this may not be an option for many borrowers and lenders will typically only do it if you’re certainly at risk for foreclosure and the eventual foreclosure is more expensive. This type of refinance will also negatively impact your credit.
There’s not one form of refinancing that works for everyone. Do your homework, consider the options we have outlined here and choose the right refinance method for your specific situation. Keep in mind that the right option may depend on what type of home loan you currently have, your financial situation and the lender you choose to work with.
The options for refinancing are plentiful and there’s likely one we covered here that might make sense for you. And while we have covered mostly primary home refinancing here, keep in mind there are refinancing options if you have a second home or investment property.
Ready to get started or get your questions answered? Apply for a mortgage refinance today!
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Homeowners can use a refinance to pay off high-interest debt. Learn about the pros and cons of refinancing your house to pay off debt and if it’s right for you.
Using a mortgage refinance to pay for home improvements can give you the additional funds you need. Learn how a refinance can act as a home improvement loan.