There are lots of reasons to refinance your home — save money on interest, lower your monthly mortgage payment, or get cash for home improvements, just to name a few. But there are equally as many different types of refinancing options. With so many stipulations and conditions that vary, it can be hard to know which is right for you. Here’s a closer look at the four most common types of refinance options and what they could mean for you.
1. Cash-Out Refinance 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 property value.
So, what does this really look like? Let’s say 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.
The trade-off is that you’ll have a larger mortgage to pay in the end. But many people use this type of refinancing option to pay for home improvement projects they couldn’t otherwise afford.
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).
2. Home Equity Loan Option
Home equity loans are similar to cash-out refinance programs in that you’ll receive cash you can spend 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’ve built in your home. This means you’ll 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 as well. For one, you’re losing the equity that you’ve built up in your home. So unless your home has appreciated in value significantly since you bought it, you could essentially be starting over on your mortgage. Also, because the loan is secured by your house itself, you risk foreclosure if you are unable to make the payments.
All of this means it’s vital you 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. After all, credit card debt is bad, but at least you won’t lose your house if you’re late on payments.
3. Rate and Term Refinance 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 climbs too high. People also tend to jump on this kind of refinancing when interest rates drop to save some money.
4. 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’s because lenders won’t ask for a credit check, new home appraisal, or proof of income.
There are some requirements, however. Namely, you mush be current on all your payments and have a credit score of 620 or higher. You also have to 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’s 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. They cannot be rolled into the mortgage amount like other refinancing programs. But that’s where Homes for Heroes can help. When you register online, you’ll be automatically matched with a dedicated mortgage specialist who will help you save money with discounted services. Our mortgage specialists work with any type of refinance option and are eager to serve heroes.
Have you found the type of refinancing option that will work for you? Register with Homes for Heroes today and get started toward your savings goals.