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.
Types of Refinancing Loans
Rate-and-Term Refinance Loans
The rate-and-term refinance loan is the most popular refinancing loan. It is used to pay off the original mortgage, which is then replaced with a new loan.
Fixed-Rate Refinance Mortgage Loans
A fixed-rate mortgage loan sets a monthly payment during the time of the loan. The monthly principal and interest payment are typically higher than a long-term loan. It also protects from increasing interest rates.
Adjustable-Rate Refinance Mortgage Loans
An adjustable-rate refinance mortgage loan has a fixed interest rate for about 5-7 years. After that period, its rate adjusts based on the conditions of the market. This loan often includes an interest rate cap, limiting how high your interest rate can increase. It gives you some flexibility, especially if you are planning to refinance again in a few years.
Cash-Out Refinance Loans
A cash-out refinance loan works best if you’re in need for some extra cash. It is only used when homes are worth more than what is owed on the existing mortgage. This type of loan replaces your mortgage by paying it off. It then refinances the current mortgage and allows you to keep the difference of the two mortgages in cash.
Cash-In Refinance Loans
In a cash-in refinance loan, you bring in cash to lower the mortgage balance and future interest payment. By using a cash-in refinance loan, you improve your loan-to-value (LTV) ratio. This makes it easier for future approval. Cash-in refinance loan also allows you to reach the 20% equity threshold, saving thousands of future dollars on insurance payments.
Home Affordable Refinance Program (HARP)
This refinance loan is sponsored the US Department of Housing and Urban Development (HUD). It is intended to assist low-income homeowners in refinancing their home. While there are requirements to become eligible for HARP, the program allows those who qualify to refinance up to 125% of the value of their home. Read our article about HARP.