- You must have a strong financial profile to qualify for a regular rate-and-term refinance.
- If you aren’t eligible, look into a cash-in, no-closing-cost, streamline, FMERR, or HIRO refinance.
- A cash-out refinance lets you borrow against the equity in your home to use cash for other purposes.
- See Insider’s picks for the best mortgage refinance lenders »
Keep reading to learn more about each type of mortgage refinance.
1. Rate-and-term refinance
A rate-and-term refinance is probably what you think of as a “regular refinance.” You replace your original mortgage with a new one with different terms. Your interest rate and monthly payments will change, and you’ll probably refinance into a new term length.
Conventional, FHA, VA, and USDA mortgages are eligible for rate-and-term refinancing. You’ll need a certain credit score, debt-to-income ratio, and amount of equity in your home — but the exact requirements will depend on which type of mortgage you have.
You can do a rate-and-term refinance from an FHA mortgage into another FHA mortgage, for example. Or you may decide you want to switch from an FHA mortgage to a conventional mortgage.
With a cash-out refinance, you’ll still replace your old mortgage with a new one that has different terms. But you’ll actually take out a loan larger than what you have left to pay on the home so you can receive the surplus in cash.
A cash-out refinance can be a good option if you’ve built equity in your home. Most lenders won’t let you receive more than 80% of your home’s value in cash, so you’ll keep at least 20% equity in the home.
Let’s say your home is valued at $200,000, and you have $100,000 left to pay on your initial mortgage. This means you have $100,000 in home equity, or 50% of the home value.
If you need to keep 20% of your equity in the home, then you’re eligible to take out 30% of the value in cash, or $60,000.
You would take out a loan of $160,000 — that’s $100,000 that you already owed on the home, and $60,000 in cash.
Conventional, FHA, and VA mortgages are eligible, but there’s no cash-out option for USDA mortgage refinancing. You can refinance from a USDA mortgage into a conventional mortgage to receive cash, though.
What if you don’t have 20% equity in your home yet, but you still want to refinance to lock in a better mortgage rate or lower monthly payments? That’s where a cash-in refinance comes in.
With a cash-in refinance, you make a larger payment toward your principal to lower your LTV ratio. Let’s say an appraiser looks at your home and says its current value is $200,000. You still owe $190,000 on your mortgage. So your LTV ratio is 95%, meaning you have 5% equity in your home.
You can do a cash-in refinance and pay $30,000 all at once to lower your principal balance to $160,000. Now your LTV ratio is 80% and you have 20% equity in your home, so you’re eligible to refinance.
Cash-in refinances aren’t limited to homeowners who need help qualifying to refinance. You may decide to do a cash-in refinance just because you want lower monthly payments, or because lower LTV ratios often result in better rates.
Maybe you aren’t prepared to pay thousands in closing costs when you refinance. A no-closing-cost refinance still lets you refinance into a new term with a new rate, just like a rate-and-term refinance. But you won’t pay a lump sum at closing.
You may not have to pay closing costs upfront, but you’ll still pay the money over time. The lender just finds a different way to charge you. There are two main ways you could end up paying closing costs: Roll the costs into your mortgage, or pay a higher interest rate.
With a streamline refinance, you can refinance your mortgage without going through an appraisal. In many cases, you won’t need to show your credit score, debt-to-income ratio, or proof of income, either.
Streamlining is a good option if your home has lost value, because the lower value won’t hurt your chances of being approved or receiving a good rate. It could also be useful if your finances aren’t as strong as you’d like, because you don’t need to show your credit score or…