A home mortgage refinance is a move that essentially replaces your current mortgage loan with a new one.
You might want to consider one if interest rates have dropped below your current rate, you want to pay off your loan sooner, or you’re interested in tapping the equity in your home to help pay for renovations, medical bills, or college tuition.
As with your current mortgage loan, you have lots of options when it comes to refinancing, and each one comes with its own pros and cons. Make sure you fully evaluate all your options — as well as the costs and long-term implications they come with — before deciding which route to take.
Option 1: A Rate and Term Refinance
This is the most common type of refinancing, and it can help you change the term of your loan (meaning how long you have to pay it off), the rate of the loan (how much you pay in interest), or both.
Rate refinances: These can be a good idea if market interest rates drop below the rate on your current loan. By refinancing to that lower rate (if your credit qualifies you for it), you could potentially save thousands in interest over the lifetime of your loan. It would also lower your monthly payment.
Rate refinances can also be a great idea if you currently have an adjustable-rate mortgage, and your fixed-rate period has ended. Refinancing into a fixed-rate loan can help protect you from sudden jumps in interest rates (and monthly payment).
Term refinances: You might want to change the term of your loan with your refinance, too. If your income has gone up since you initially took out the loan, refinancing to a short-term loan (say a 10-year one instead of a 30-year one) can help you pay it off sooner with larger monthly payments. In the event your income drops, you might want to refinance into a longer-term loan to help lower your payments and monthly costs.
Option 2: A Cash-out Refinance
Cash-out refinancing is also a popular option, particularly for homeowners who have been in their homes a while. With a cash-out refinance, you replace your existing mortgage loan with a higher-balance one. You then take the difference between the two loans in cash and can use it towards things like debt, home renovations, repairs, medical costs, tuition and more.
With cash-out refinancing, the total amount of cash you can take out depends on your credit, income, and how much equity you have in the home — meaning how much of the home you’ve paid off and actually own.
Option 3: FHA Streamline Refinance
If you have an FHA-insured mortgage loan, you can opt for what’s called an FHA Streamline Refinance — essentially a pared-down, simplified refinance process designed to help lower your payment or improve your loan terms. You might even be able to get the costs of your refinance rolled into your interest rate or loan balance, making the refinancing process technically “free” — at least up front.
Option 4: Cash-in Refinance
Cash-in refinances are rarer than your other options, but they can be beneficial to the right homeowner. With these types of loans, you actually pay more toward the home during your refinance — basically putting in an additional down payment of sorts.
This could help you in one of two ways:
- By lowering your balance and, subsequently, your monthly payment
- By helping you reach 20% equity in the home, allowing you to cancel private mortgage insurance (thus lowering your monthly payment even further).
A cash-in refinance can be a good idea if you’ve had a sudden windfall of cash and want to invest it safely or just lower your monthly housing costs.
Fixed-rate or Adjustable-Rate?
If you choose to refinance, you may be able to choose between a fixed-rate loan and adjustable-rate one. Make sure you’re clear on the differences between these and get a full breakdown of the costs of both options from your lender.
On an adjustable-rate loan, you’ll want to know:
- When the fixed-rate period expires (meaning when your rate and payment can start fluctuating)
- Any caps on the initial rate adjustment
- Any lifetime caps on rate increases
These can help you better evaluate the full costs of the loan before moving forward. In general, if you plan to stay put in the home for the long haul, a fixed-loan is going to be the safest option.
The Right Time to Refinance
The best time to refinance your mortgage depends on many factors — your income, your credit, the balance on your loan and, of course, your long-term financial goals. If you’re not sure if a refinance would work in your financial favor, reach out to an Embrace loan officer today. We’ll help you make the best decision for your household.