As of August 31, mortgage rates on most 30-year fixed-rate loans were at 3.82%. Around this time 10 years ago, they stood at 6.57%. This difference in rates pretty much explains why homeowners want to take out refinance mortgages and save a chunk of what could have gone to their mortgage payments.
It is in refinancing that borrowers like you are able to pay off your old loan and replace it with something better. In order to do that, you can look into the many types of refinance mortgages to reach that goal.We can help you find a lender.
The Many Types of Refinance Mortgages
Before delving further into what refinance mortgages do, it’s worthwhile to talk about purchase mortgages first.
They are used to finance the purchase of homes. It’s a given that you can’t refinance if you don’t have a purchase mortgage or any other existing mortgage for that matter.
By refinancing, you give your home another line of financing at the best possible terms per your qualifications. Let’s look into the many types of refinance loans.
1. Rate and Term Refinance
The most basic type of refinance with no cash involved. You pay off your old loan and get a new one with a new set of terms and rate.
You can use a rate-and-term refinance to move into another type of mortgage, say a fixed-rate mortgage from an adjustable-rate mortgage for stability purposes. Or, you can try to refinance into a new adjustable-rate mortgage.
Under a rate-and-term refinance, you can also lower your current mortgage rate to reduce your monthly payments. But be careful in choosing your mortgage term.
If you choose to lengthen your current term, then you’ll make lower monthly payments. Opt for a shorter-term loan and you’ll make higher monthly payments and a faster payoff date to balance things out.
2. Cash-out Refinance
Cash-out refinancing allows you to take out a new loan and take away cash. As to how much you can borrow including the cash would depend on the applicable mortgage’s loan-to-value ratios.
There are myriad reasons to pull cash out of your home equity. It can be for debt consolidation, home improvement costs, and other personal endeavors. What’s important is you get cash out and get a lower rate, too.
Another variant of a cash-out refinance is a limited cash-out refinance. Fannie Mae and Freddie Mac offer this type of cash-out refinancing.
Fannie Mae’s LCOR, for example, allows for the payoff of the existing mortgage and a cash back that is 2% or $2,000, whichever is lower.Let’s help you find a lender. Right this way.
3. Streamline Refinance
This is offered by government-backed mortgages, FHA loans, VA loans, and USDA loans. Each streamline refinance is done with less paperwork and expense on the part of the borrower.
It’s because there is no credit check involved, no appraisal required, no income analysis performed. With fewer than usual paperwork and verification waived or none, closing costs are lower and processing time faster.
To do a streamline refinance, your mortgage must be backed by any of the above government agencies. It must also be current with no history of delinquent for the most recent 6 to 12 months since the refinance application.
The streamline refinance must result in a net tangible benefit to the borrower, usually centering on how much he/she is able to save every month.
4. Short Refinance
A short refinance is more like a debt negotiation between a borrower and his/her lender. Here, the lender agrees to pay off your loan at a discount and replace it with a mortgage with a lower balance and rate for a reduced monthly payment.
Why the lender agrees to this arrangement? It’s a better option than a short sale or foreclosure where the lender sustains a greater loss.
Short refinances are harder to come by now than during the housing collapse when most home values depreciated. The FHA previously had a short refinance program allowing non-FHA loan borrowers with negative equity positions to refinance into its insured mortgages.
Little to no equity as in the case of above negative equity mortgages is a hindrance to refinancing in most cases. But that’s possible under Home Affordable Refinance Program® or HARP®.
This program is for conventional loans owned by either Fannie Mae or Freddie Mac. It allows homeowners who are current on their mortgages and yet have loan-to-value ratios greater than 80% to refinance to (i) lower their rate, (ii) shorten their mortgage term, or (iii) switch to a fixed-rate mortgage.
HARP® promises $2,400 in savings in the first year of the refinance. The program has been extended through 2018.
Find out how you can save when you refinance. Click to See the Latest Mortgage Rates»