So you want to refinance your mortgage to save money on that monthly payment. Great! Now you just need to figure out which mortgage refinance product to use. There are plenty of choices out there. Which is the best? It will depend upon many factors, but we can provide some helpful tips to point you in the right direction in your situation.
We recommend a conventional home refinance for homeowners who have at least 15% equity and a credit score above 700. Most conventional loans out there are backed by Fannie Mae or Freddie Mac, and there are three different types:
- Rate and term: This is the basic refinance that will change the rate, the term or both. The size of the loan will be approximately the same. A typical rate and term refinance would be to reduce a 30 year mortgage from in an effort to reduce the interest rate by a percentage point. You may also decide to drop your term from 30 years to 15 at the same time so that you can pay off the loan faster. We advise that you look at several conventional loan providers. Don’t assume that your first mortgage lender will give you a better deal!
- Cash out refinance: This is where you increase your loan balance by 5% or more, and receive the borrowed amount as cash at closing. Many homeowners choose to do this so that they can fund a home renovation or a real estate investment. Make sure that you have a good, logical use for the money that is going to provide you with a return on investment!
- Cash in refinance: You bring cash at closing to reduce how much you have borrowed.
A conventional refinance is a great way for you as an FHA loan holder to cancel your MIP mortgage premium insurance. The downside with an FHA refinance is that you will still have to pay FHA mortgage insurance. You may have to pay a slightly higher rate with a conventional loan, but most home owners can save more than $100 per month when they get rid of mortgage insurance.
If you have an FHA mortgage, a very popular option to consider is an FHA streamline refinance. This type of refinance will not allow you to pull out cash; it is designed for those who want to reduce their rate or term, or both.
Consider an FHA refinance for these reasons:
- No credit check usually needed. FHA does not require your credit to be checked on an FHA Streamline Refinance. Your individual lender could require it; we recommend that you shop around if you don’t want to have your credit checked.
- No income documentation needed. You will not have to provide any financial documents for an FHA Streamline Refinance in most cases.
- No appraisal needed. FHA will use your old appraisal.
Remember, if you want to pull out cash, you cannot use FHA to refinance; you will need to do a conventional refinance. In that case, you would need to go through normal underwriting: credit check, income documentation etc.
For people who have an existing FHA mortgage and want to reduce their payment with minimum hassle, there is little better than an FHA Streamline Refinance. However, if you have 15% equity, you may want to consider instead refinancing out of FHA into a conventional mortgage so you can get rid of mortgage premium insurance.
Note that FHA loan rates are lower than conventional rates; this is because the mortgages are guaranteed against default by FHA. But if you have less than 20% equity, you have to pay for mortgage insurance.
If you are a veteran or active military, you can use the terrific VA Streamline Refinance program, which is very similar to the FHA Streamline Refinance program.
You do not need to have your income verified, and credit need not be checked. You also do not need a current appraisal.
Also, if you qualify for a VA loan, you can do a VA Cash Out Refinance. For a vet, this is a great way to get a low rate and the cash you need.
If you have bad credit and need to refinance your home loan, your options are more limited. One subprime mortgage option if you have a loan backed by Fannie or Freddie is the HARP program by the US government.
This program is for a homeowner who is ‘underwater’ on their mortgage, meaning you owe more than the home is worth. You do need to be current on your mortgage to take advantage of the Home Affordable Refinance Program.
You also do not need a home appraisal to qualify. Many HARP homeowners are able to save up to 30% when they refinance.
There are many exciting mortgage products available today that allow you to refinance your loan, save money, and possibly pull out cash if that is your aim.
Which type of refinance product to choose will depend upon your exact circumstances?