For the past 25 years, declining interest rate refinancing has been an ideal way for homeowners to access the equity in their homes. As rates went down, homeowners were able to refinance to consolidate high interest credit cards, auto loans, and other debt—lowering monthly payments and improving their cashflow. Homeowners took advantage of cash out refi to make home improvements, cover education costs, etc. However, with rates on the rise, refinancing for a lower rate will likely take a backseat to these other types of beneficial refinance loans.
3 Home Mortgage Refi Loan Types
Mortgage Insurance Premium (MIP Loan) – Why pay for mortgage insurance you don’t need when you can refinance based on a new appraisal, lower your monthly payment, and improve your cashflow?
If you bought your home with an FHA loan, it’s likely that your downpayment was less than 20 percent of your home’s value. This means you’re likely paying a monthly mortgage insurance premium right now. Depending on how long you’ve been in your home, and with home valuations improving, you may have reached that 20 percent equity requirement and can now discontinue your MIP loan by refinancing.
Cash-out Refi vs. HELOC – Cash-out refinancing is an excellent alternative to a variable rate home equity line of credit (HELOC).
- Credit score requirements are 30% higher than they were a decade ago for a HELOC*
- Credit score requirements for a cash-out refi are generally more flexible
- A HELOC is a second separate loan and another monthly bill
- With a cash-out refi, you pay off your first mortgage
- A HELOC is an additional line of credit you need to budget for each month
- With a cash-out refi, you can choose to consolidate other loans at a lower interest rate and a single monthly payment
- Only interest is tax deductible on a HELOC—closing and annual fees are not
- With a cash-out refi, closing fees and interest are tax deductible
Shortening the Loan Term – Lastly, refinancing to a shorter loan term is a great way to get your home loan paid off faster. If you’re currently paying on a 30-year loan or an adjustable rate mortgage (ARM), refinancing to a 10 or 15-year fixed rate can save you on interest payments over the life of the loan—and have your mortgage paid off by the time your children reach college age, or just in time for retirement.
So, whether it’s eliminating an MIP loan, taking a cash out refi, consolidating debt, shortening your loan term, or a combination of these—even if rates are rising—borrowers can still benefit by refinancing.
*Fixed-rate HELOCs are available, but may require you to take an initial draw amount and additional fees.