The Four Main Home Mortgage Refinancing Options
There are four main options when it come to home mortgage refinancing to consider. These options can help to lower your monthly mortgage payments or put some cash in your pocket.
You could save money on interest, lower your monthly mortgage payment, or get cash for home improvements, just to name a few. Due to some stipulations and conditions with some mortgage refinancing options, it can be challenging to know which is right for you. This is a closer look at the four most common options of home mortgage refinancing and a great way to save some money as you through the process.
- Cash-Out Refinancing Option
With a cash-out refinance option, you replace your current mortgage with a new one that exceeds the amount you owe on your house. You receive the difference as cash. With most lenders, you can refinance for up to 80% of the Loan to Value of the property.
For example. If your home is worth $250,000 and you have a current mortgage balance of $150,000, meaning you have $100,000 in equity. By refinancing, you could take out a new mortgage for $200,000 and pocket the difference ($50,000) in cash.
Yes, you will now have a larger mortgage to pay off, but you will also have $50,000 in the bank. Many people use this type of refinancing option to pay for home improvement projects they could not otherwise afford.
For instance, if you use the money to remodel your kitchen, install new flooring and upgrade your air-conditioning system the value of your house should increase. Now your house that was valued at $250,000 before the work was done could be worth $325,000! That would give you an equity value of $125,000 ($325,000 – $200,000 = $125,000).
In an ideal scenario, you would be refinancing to a lower interest rate than what you had on your original mortgage, saving you money in the long run. However, interest rates on cash-out refinances tend to be higher than those for rate and term refinances. Cash-out refinancing options are still generally lower than a home equity line of credit (HELOC).
- Home Equity Loan Option
A home equity loan is similar to cash-out refinance programs in that you will receive cash that can be spent on whatever you choose. But, unlike a cash-out refinance option where you replace your mortgage with a new one, with a home equity loan, you take out a New Mortgage against the equity you have built up in your home. This means you will have a separate payment to make, and the term on home equity loans is typically 5-15 years.
There are certainly downsides to this type of refinance option. For one, you are losing the equity that you have built up in your home. So, unless your home has appreciated in value significantly since you bought it, you could essentially be starting over with the amount you owe on your mortgages. Also, because the loan is secured by your house itself, you risk foreclosure if you are unable to make the payments.
There are also upsides to this type of refinance option as well. For instance, you Home Equity loan will be completely separate from you existing mortgage. If you have a Really Low interest rate on your existing mortgage, you may not want to combine your Home Equity loan and you existing loan into one new Home Loan. With the loans being separate, you can pay off the Home Equity loan apart from you existing mortgage and still maintain your original mortgage and payments one it is paid off.
This means that it is vital for you to spend the money wisely and have a plan for repaying the loan. Financial experts recommend using this type of refinancing for things like home improvement projects, rather than paying down credit card debt. (See example under Cash-Out Refinancing Option above) After all, credit card debt is bad, but at least you will not lose your house if you are late on the payments.
- Rate and Term Refinancing Option
Rate and term is the most common type of refinance option. This type of refinancing option allows you to lower your interest rate and potentially shorten the life of the loan. With a rate and term refinance, you are simply replacing your existing mortgage with a new one that offers either a better rate or a shorter term. Opting for a new 30-year mortgage at a better rate means your monthly mortgage payment would go down. Or you could refinance to a 15-year term, and while your monthly payment might increase, you would pay your house off faster and save money in the long run.
Rate and term refinancing options are especially popular with people who have an adjustable rate mortgage (ARM) and want to secure a more favorable interest rate before theirs adjusts and climbs too high. People also tend to seek this kind of refinancing when interest rates drop to save money on their monthly mortgage payments.
- Streamline Refinance Option
This type of refinance option is only available to those who have Government-Backed Mortgages, like a FHA loan. As the name implies, streamline refinancing is a simplified process that requires far less paperwork than other types of refinancing. That is because lenders will not ask for a credit check, new home appraisal, or proof of income.
There are some requirements, however. Namely, you must be current on all your payments and have a credit score of 620 or higher. You also must wait at least 210 days from when you closed on your current mortgage. You are also required to have no more than one late mortgage payment within the last 12 months.
FHA streamline refinancing is not only great because you can lower your monthly payments, but also because there are no loan-to-value restrictions. This means you can refinance even if the value of your home has depreciated and you owe more than it is worth (commonly referred to as being “underwater” on your mortgage). In addition to lowering your interest rate, you can potentially reduce your mortgage insurance premium, saving even more money.
Unfortunately, with this type of refinance, you will have to pay Closing Costs. The closing Costs Cannot be rolled into the mortgage amount like other refinancing programs. Our mortgage specialists work with any type of refinance option and are honored to serve you.
