Types of Refinancing: What’s Available and How to Make a Choice
There are many types of refinancing choices. This article will describe the best options and help you make the right decision.
At some point, either in the near future, or decades from now, you may need to refinance your mortgage. The decision to refinance, by itself, can be difficult. By you also need to consider the different types of refinancing options.
Refinancing is simply the act of replacing your current mortgage with a new one. That’s the simplified explanation, and the differences can obviously vary. But whether or not to refinance can be a tough choice; it costs money to refinance a mortgage, so you need to weigh the potential benefits against the costs.
While every situation is different, people usually refinance when they have:
- A high interest rate
- Many years left on the mortgage
If you have decided to refinance, you can choose the option that best fits your needs!
Types of Refinancing and How to Select the Best One for Your Needs
The most common type of refinancing, which is sometimes referred to as “rate-and-term” refinancing, is a type of mortgage refinancing that essentially changes the interest rate, the terms of the loan, or both.
In most cases, this form of refinancing is driven by a drop in interest rates across the country. People can often save thousands or dollars over the life of their loan if they refinance. They can also save on their monthly payments or speed up the completion of a loan.
When Should You Use Rate-and-Term Refinancing?
In most cases, people with high interest rates on their mortgages are motivated to refinance. If you took out a loan when interest was high, or if you were forced into a high interest rate because of personal circumstances (poor credit which has been improved, for example), you may be able to save by refinancing into a lower interest rate.
The other possibility is extending the length of the loan, which results in lower monthly payments. If you have a 15-year mortgage but are struggling with payments, you may be able to refinance into a 30-year mortgage for better financial flexibility.
The process for securing a mortgage can be complex, often involving lots of steps, verifications, and documentations. This takes time, and as the cliche goes, time is money; this is why there are fees involved in the mortgage process. To make the process faster and therefore more affordable, the FHA has created the FHA Streamline refinancing option, which eliminates many of the steps involved in securing a new mortgage.
The process for this loan only involves limited borrower credit documentation and underwriting, and although there are still costs involved, the final price is usually less.
When Should You Use FHA Streamline?
To use this option, the first requirement is that your existing home loan be an FHA mortgage. If you have a different type, you won’t be eligible. The refinance must result in a documented benefit to the borrower, which can very depending on the loan. So if you are struggling with high interest rate on your FHA loan and want to restructure the mortgage quickly, FHA Streamline may be right for you.
This is a type of refinancing that replaces your current mortgage with a new loan that is higher than the amount you already owe. For example, if you owe $250,000 on your mortgage, you could take out a cash-out refinance for $300,000 (assuming you qualify, of course.) In this case, you would use $250,000 of the new loan to pay off the old, then pocket $50,000 to use as you see fit.
When Should You Use Cash-Out Refinancing?
To use cash-out refinancing, you need to have a significant amount of equity, usually at least 25%, although it can be higher depending on the lender you are working with.
Cash-out refinancing can be a useful option in a variety of situations. In most cases, people use these loans to gain money that can be used for home repairs and remodeling. If you need a new roof, or simply want to update your old-fashioned kitchen, a cash-out refinance presents a way to use money that is essentially locked into your home.
People may also use the proceeds of a cash-our refi to diversify their investment portfolio, or to consolidate and payoff high-interest loans, such as credit cards. It can also be used for large expenses, such as college tuition.
A short refinance, which is offered by your lender, is an option that could help you get out from underneath a mortgage that is sinking your finances. Basically, the lender agrees to a short refinance to help you avoid defaulting on the loan, and it acts basically as a combination of a short sale and a refinance.
The lender agrees to pay off the existing mortgage and replace it with a new mortgage, which will be based on the current market value of the property. So if you have a mortgage for $400,000, but the property is only worth $325,000, the lender agrees to refinance for the $325,00. The lender benefits from establishing a loan that you can actually afford to repay (something is better than nothing), while you are left with a mortgage that doesn’t dominate your monthly finances.
When Should You a Short Refinance?
When you are nearing default but are still current on the mortgage, it may be time to seek a short refinance. This option can help you find relief from a potentially crippling mortgage, and lenders are often motivated to help because, as we’ve said before, they would rather have something than nothing.
Refinancing Can Help You Enjoy a Lower Monthly Payment
Is refinancing in your future? Have interest rates significantly declined since you took out a mortgage? Contact our team and explore your options for refinancing today!