Home Mortgage Refinance: What Are My Options?

What is the Meaning of Refinance?

A home mortgage refinance is a move that essentially replaces your current mortgage loan with a new one.

If interest rates have dropped below your current rate, you want to pay off your loan sooner or tap the equity in your home to help pay for renovations, medical bills, college tuition, or high credit card debt.

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 payments).

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.

If your income drops, you might want to refinance into a longer-term loan to help lower your payments and monthly costs.

What are the pros and cons of rate and term refinances?

Pros

1. You can lower your monthly payments.
2. Your new loan will be fixed for the life of the loan, which means you’ll know your interest rate and how much you’ll pay each month.
3. You can refinance your mortgage and any home equity loans into a single repayment plan with a lower interest rate.
4. You may be able to get rid of private mortgage insurance if you have 20% equity or more in the property (this is not always possible).

Cons

1. If you have loans with lower interest rates than what’s available today, it may not make sense to refinance into another loan with such high rates depending on your refinance breakeven.
2. You have to pay closing costs when you get approved for a new loan, which can add up quickly depending on a variety of factors, including if you purchased points to reduce your rate.

Option 2: A Cash-out Refinance

Cash-out refinancing is also a popular option, particularly for homeowners who have been in their homes for 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 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 own.

What are the pros and cons of a cash-out refinance?

Pros

1. If your house has increased in value, you could benefit by pocketing some of the money for yourself or using it to pay off higher interest rate debt.
2. You can get rid of high-rate credit cards, car loans, and other personal loans with high-interest rates by using the money from the cash-out refinance to pay off those debts.
3. If you plan on moving in the next year or two, a cash-out refinance may allow you to buy more houses than if you had only taken out an amount equal to what was needed for repairs or upgrades on your current home.

Cons

1. Your monthly payment may increase if the principal amount increase significantly and/or there is a significant rate change.
2. To that end, the interest rate might be higher than what you currently pay on your mortgage. In other words, it could cost you more money.
3. You’ll need to pay closing costs, which can be as much as 3% or more of the purchase price.

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 to refinance rolled into your interest rate or loan balance, making the refinancing process technically “free” — at least up front.

What are the pros and cons of an FHA Streamline Refinance?

Pros

1. No appraisal is required, which means you can save money on the cost of the appraisal.
2. The borrower does not need to be current on his or her mortgage—the loan can be paid off in full as long as it has been open for at least three years and the borrower has made twelve months of payments on time.
3. There are no income or credit score requirements; however, you still have to meet FHA guidelines.

Cons

1. FHA Streamline Refinances only allow for a single lien on the home. This option isn’t available to you if there are other liens on the property.
2. The interest rate you get with this type of loan might not be as good as what you could get through another type of mortgage loan product.

Option 4: Cash-in Refinance

Cash-in refinances are rarer than your other options, but they can benefit the right homeowner.

With these types of loans, you pay more toward the home during your refinance — basically putting in an additional down payment.

This could help you in one of two ways:

1. By lowering your balance and, subsequently, your monthly payment
2. Helping you reach 20% home equity allows 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 cash windfall and want to invest it safely or just lower your monthly housing costs.

What are the pros and cons of a cash-in refinance?

Pros

1. A cash-in refinance is a great way to pay off your mortgage faster than the standard 30 years or extend the term of your mortgage if you need more time to pay it off.
2. You can potentially qualify for a lower rate if the principle of the mortgage is decreased. This is most applicable for jumbo loans, where an additional down payment will bring the loan amount below the Jumbo threshold.

Cons

1. The obvious con is the outlay of additional cash. If you anticipate a large expense in the future or have purchased a fixer-upper that will require additional investment, this may not be the best choice for you.

Fixed rate or Adjustable-Rate Mortgage Refinance?

If you choose to refinance, you may be able to choose between a fixed-rate loan and an 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 the following:

• 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.

Generally, a conventional fixed rate loan will be the safest option if you plan to stay in the home for the long haul.

Is This 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
• your long-term financial goals

If you’re unsure 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.