Refinance mortgages come in three varieties — rate-and-term, cash-out, and cash-in. The refinance type that is best for you will depend on your individual circumstance. With a refinance, the first loan is paid off, and a new loan is created. Refinancing can be a good way to convert a variable loan rate into a fixed rate, and/or obtain a lower interest rate. Refinancing is the process of obtaining a new mortgage in an effort to reduce monthly payments, lower your interest rates, take cash out of your home, or change mortgage companies.
Reasons To Refinance
When you refinance your mortgage, you are applying for a new loan. By refinancing, you are actually paying off the old loan by obtaining a new one Potential Reasons to Refinance Include:
- Obtain A Lower Monthly Mortgage Payment
- Reduce Interest Rate
- Remove Private Mortgage Insurance (PMI)
- Take Cash Out (from equity)
When Can I Refinance
Most banks and lenders will require borrowers to maintain their original mortgage for at least 12 months before they are able to refinance. Each lender may vary with their terms are requirements. Therefore, it is in the best interest of the borrower to check with the specific lender for all restrictions and details. Information typically needed to refinance:
- Your credit score and payment history
- Your income and employment history
- Your assets (stock, retirements and savings accounts)
- An appraisal to determine the current value of your home
Types of Refinances
Rate and Term Refinance
The rate and term refinance is 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. For example, you may refinance your adjustable-rate mortgage and opt for a 30-year fixed instead to take advantage of the stability.
Cash Out Refinance
If you are in need of cash, a cash-out refinance might be just the ticket.
It involves pulling out equity from your home, resulting in a higher loan balance. Ideally, you can pull out cash and snag a lower interest rate all at the same time.
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.
Cash In Refinance
There are times when you may want (or need) to bring in cash while refinancing, perhaps to keep the loan amount below a certain threshold or the loan-to-value below a certain limit.
A cash-in refinance allows you to do just that, resulting in a smaller loan amount with a reduced monthly payment.
Home Affordable Refinance (HARP)
This next refinance option was born out of the ongoing mortgage crisis.
The Home Affordable Refinance Program allows struggling borrowers to refinance up to 125% of the value of their home, helping “underwater” homeowners take advantage of the low interest rates on offer.
But the mortgage must be current, tied to a 1-4 unit owner-occupied home, and guaranteed by either Fannie Mae or Freddie Mac.
Lastly, a short refinance is a transaction in which your bank or mortgage lender agrees to pay off your existing mortgage and replace it with new a loan with a reduced balance, essentially helping you avoid foreclosure.
They aren’t easy to come by, but some lenders may be offering them as an alternative to a short sale, or worse, foreclosure.
Be sure to go over all your options with your loan officer or mortgage broker to ensure you end up with the right product.