There are a variety of reasons to refinance your home, from lowering monthly payments to building your home’s equity. There are many loan options you can take advantage of when refinancing your home, so it is important to figure out what’s best for you.
Fixed Rate Refinance Loan
Fixed rate refinance loans are some of the most popular types of refinance mortgages. The interest rate remains the same for the life of the loan, and your monthly payment remains the same too. A fixed rate refinance loan allows you to borrow money for the long term, and having lower monthly payments lets you invest in other things. A fixed rate refinance makes sense for people who plan to stay in their home for several years.
A 30-year fixed rate refinance loan provides a lower monthly payment for the same amount than a mortgage with fewer years. You receive a fixed interest rate that makes it easier to set a budget. There’s no penalty for paying off the loan early, and your payments are predictable and affordable. You can pay off the loan sooner by making additional payments toward the principal balance.
While the interest rate for a 30-year loan remains the same, you will pay more in interest over the life of the loan than with a shorter-term loan.
Check out our Best Picks for Fixed Rate Refinance Loans
Adjustable Rate Mortgage (ARM) Refinance Loan
An Adjustable Rate Mortgage (ARM) refinance loan starts with a low fixed interest rate for 3, 5, 7, or 10 years, depending on the type selected. After the initial fixed period ends, the interest rate will adjust based on market conditions. You should refinance your ARM loan if you’re nearing the end of your initial fixed-rate period, and current mortgage rates are close to or better than what you’re already paying.
Another reason to refinance your ARM is to prevent an increase in your house payment, since ARM rates can rise after the initial fixed period, making your monthly mortgage payments higher. Refinancing to a 30-year fixed rate mortgage can provide you with steady monthly payments. If you’re planning on retiring soon, or if you’re changing jobs and taking a lower salary, you should refinance your ARM to a fixed-rate mortgage to prevent higher monthly payments
If you don’t plan to own your home for a long time and ARM rates are lower than what you currently have, refinancing to a new ARM loan can make sense. You can use these savings to save for a down payment on a new home.
No Cost Refinance Loan
A no cost refinance loan promises no fees or out-of-pocket expenses when you refinance your existing mortgage. A mortgage refinance usually results in out-of-pocket costs to cover things like lender fees and third-party services. A no cost version means you don’t pay these fees directly, but you might wind up with a higher mortgage rate as a result. It’s essentially a loan transaction in which the lender or broker pays settlement costs.
Rate and Term Refinance Loan
The rate and term refinance loan is the most common type of refinance, where the original loan is paid off and replaced with a fresh loan with a new rate and set of terms. The existing mortgage is effectively paid off by the opening of the new refinance loan, with the old loan balance transferred to the new loan.
For example, you may refinance your adjustable-rate mortgage and opt for a 30-year fixed instead to take advantage of the stability.
This type of refinance is perfect for those simply looking to lower their rate and/or change loan programs.
Cash Out Refinance Loan
If you’re in need of cash, you might consider a cash out refinance loan. It involves pulling out equity from your home, resulting in a higher loan balance. Ideally, you can pull out cash and get a lower interest rate at the same time.
You replace your existing home loan with a new one, but the loan balance will be larger thanks to the cash out portion, which is extracted from your available home equity. The cash can then be used for whatever purpose you choose.
Of course, you’ll be stuck with a larger loan amount, which will raise your monthly mortgage payment. However, you may be able to offset that rise with a lower interest rate on the new loan.
FHA Streamline Refinance Loan
A Federal Housing Authority (FHA) streamline refinance makes it easy to refinance your mortgage to a lower mortgage rate without the need for an appraisal. Because there is no credit scoring requirement and limited documentation requirements, most borrowers can qualify for an FHA streamline refinance easily, even if they don’t have adequate income, assets, or employment. Lenders are more willing to give less qualified borrowers better terms because the loan is insured by the FHA. Your refinance must result in a lower interest rate, or you must switch from an ARM to a fixed-rate mortgage, and no cash out is permitted. However, your existing mortgage must already be FHA insured, and you cannot be delinquent on your payments to qualify for a refinance loan.
VA Streamline Refinance Loan
Like the FHA, the VA also offers a streamlined refinanced loan called the interest rate reduction refinance loan. The same basic rules apply: your existing loan must be insured by the VA, your refinance must result in a lower interest rate, or you must switch from an ARM to a fixed-rate mortgage, and no cash out is permitted. The VA also does not require an appraisal or credit underwriting package, and you have the option of putting the refinance costs into the new loan or opting for a no cost refinance. Of course, VA refinance loans are only available to eligible military service members or veterans.
There are many reasons refinancing is a smart financial move, from lowering your mortgage payments to eliminating private mortgage insurance once you reach the minimum equity requirements. Each borrower’s goals and financial picture is unique, which means there isn’t one type of refinancing that makes sense for everyone. Remember to always do your research and compare different lenders before choosing the right option for you.