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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. There are many reasons can be a smart financial move, such as lowering your mortgage payments and eliminating private mortgage insurance. Each borrower’s goals and is unique, which means there isn’t one that makes sense for everyone. Deciding to refinance is a major decision. We will guide you through the many refinance options that are available to help you determine which is best for you.
Mortgage refinance options
Rate-and-term refinance
Rate-and-term refinancing is when you replace your existing mortgage with a new mortgage that has a different interest rate, a different loan term (the length of your mortgage) or both. Rate-and-term refinance to a lower rate
For borrowers with strong credit scores (a minimum of 700, but the higher the better) and low loan-to-value ratios (LTV), this is an excellent time to shop around for low interest rates. More lenders are advertising rates in the low 3s and even 2s, but they’re also raising minimum requirements. You can . Before you apply for a refinance, check your credit score and LTV (use ). An ideal scenario for conventional refinancing is a FICO score above 700 and an LTV below 60 percent. Borrowers can qualify for refinancing with LTVs of 80 percent or lower. Anything more than 80 percent and kicks in. Rate-and-term refinance to a different loan term
You also can change the term of your mortgage. If you want to pay off your mortgage faster (and reduce the total amount of interest you pay), you can refinance into a shorter loan. Of course, this doesn’t change the amount you owe, which means your monthly payments will be higher. Let’s say you only have 10 years left on your existing 30-year mortgage. You can refinance into another 30-year fixed-rate mortgage with a lower interest rate. This will reduce your monthly payments, but you will pay more in total interest because you’re resetting your loan. To maximize your total savings, you should lower your interest rate and shorten the term of your mortgage. Here are three scenarios that show what happens when you reduce the rate on a $300,000 loan to 5.5 percent with a 30-year, 15-year and 10-year fixed-rate mortgage. Monthly payment $1,703 $2,451 $3,255 Total interest paid $313,415 $141,250 $90,726 Total cost of the loan $613,415 $441,250 $390,726 If your goal is to reduce interest on the life of the loan, then the 10-year fixed-rate option is the best one. Keep in mind that you might get a better interest rate on a shorter loan, which would help ease those monthly payments and further trim your total interest debt. Cash-out refinance
A allows borrowers to tap equity in their home while (preferably) also lowering their mortgage interest rate. Borrowers refinance their mortgage (the same way you would with a rate-and-term refinance) and get a check for the amount they borrow at closing. The new balance is higher because it reflects the borrowed amount, plus any closing costs you roll into the loan. Typically, lenders cap the amount you can borrow at 80 percent of the equity you have in your home, which would leave 20 percent tied up in the house. For example, if your home is currently appraised at $300,000 and you owe $100,000, you can get up to $140,000 in cash out, which would leave the minimum 20 percent equity left in your home. A may make sense for borrowers who want to make home improvements or need emergency funds with a relatively low interest rate. After all, mortgage money is the most favorable debt available to most consumers. However, experts advise against tapping your equity for lifestyle purchases, such as vacations or entertainment, and to think twice before tapping home equity to pay down credit card balances. If you don’t address the issues that led you to run up the credit card debt in the first place, you’re likely to repeat the pattern of overspending. Borrowers with higher credit scores and more equity might stand a better chance of qualifying for this type of refinance. Cash-in refinance
With a cash-in refinance, you make a lump-sum payment instead of taking cash out of your equity. A cash-in refinance can be an option if your LTV ratio isn’t where lenders typically require it for a refinance, or if you simply want to refinance to a smaller loan. Aside from cutting down your debt load, cash-in refinances have some advantages. Bringing money to the table will lower your LTV ratio, helping you qualify for a lower interest rate and lower monthly payments. With a reduced LTV ratio, you might also be able to eliminate PMI. Of course, all of this is in exchange for a sizable lump sum upfront. If paying that lump sum would empty your savings or mean turning down other potentially more lucrative financial opportunities, a cash-in refinance might not be the best use of your funds. Streamline refinance
Streamline refinances are an efficient way to get a lower rate on an FHA, VA or USDA mortgage because they involve relatively little paperwork and don’t require a credit check or appraisal. The result is potentially faster turnaround times and lower closing costs. For an , you must already have an FHA loan in good standing, and the refinance must result in a “tangible benefit” to the borrower, such as a lower rate. The , called an Interest Rate Reduction Refinance Loan (IRRRL), and the USDA streamline programs have similar respective requirements. No-closing-cost refinance
In a , you don’t pay closing costs for the refinance upfront. Instead, you finance these fees with the loan (and pay interest on the larger loan amount), or pay a higher interest rate. A no-closing-cost refinance can be tempting since it eliminates the need for you to have cash ready at closing, but depending on how long you plan to stay in the home, that convenience can cost you significantly more in the long run. Use Bankrate’s to weigh different scenarios. Short refinance
In a short refinance, a mortgage lender offers a distressed borrower a new loan in an amount that’s lower than the original balance, and might choose to forgive the difference. For the lender, accepting lower payments might be more cost-effective than foreclosure proceedings. For the borrower, a short refinance helps avoid foreclosure, but can harm their credit. Reverse mortgage
With a , homeowners aged 62 or older who have substantial equity in their home or paid off their mortgage in full can withdraw equity as income and don’t need to repay it until they leave the home. Unlike a regular mortgage, the lender makes payments to the homeowner. This income is tax-free, but accrues interest. Reverse mortgages offer a steady stream of cash for a variety of purposes, such as supplementing retirement income, paying for home repairs or covering medical expenses. The amount varies depending on a number of factors, including the age of the youngest borrower or eligible non-borrowing spouse, the home’s value, the HECM borrowing limit and current interest rates.
How to choose the best type of refinance
Consider your existing mortgage payment, rate and term, along with your goals and timeline, to determine which type of mortgage refinance is right for you. You’ll also need to think about closing costs and whether you’re prepared to pay them upfront or over time in a no-closing-cost loan. If you qualify for a lower interest rate, plan to stay in your home for a long time and can afford the closing costs, for example, you might come out ahead with a rate-and-term refinance. Alternatively, a cash-out refinance might fit your needs better if you’re looking for a way to pay for a large expense, such as home improvements, at a relatively low rate. SHARE: Ruben Çağınalp is an associate writer for Bankrate, focusing on mortgage topics. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers. Related Articles