If you're thinking about refinancing your mortgage, you may not know there are many different refinancing options. Here are five common types of mortgage refinances to consider. The right one for you will depend on your goals for the new loan.
1. Cash-Out Refinance
A cash-out refinance replaces your current mortgage with a larger loan—and you receive the difference in cash to spend however you want. You can use a cash-out refinance to consolidate high-interest debt, pay for home renovations and many other purposes.
How much you can borrow from your lender depends on how much equity your home has. (To figure out your home's equity, take your home's current market value and subtract how much you still owe on your house.)
Usually you can borrow up to 80% of your home's value in a cash-out refinance, which includes both your equity and the amount of cash you'll pocket.
Pros and Cons of a Cash-Out Refinance
A cash-out refinance can provide some much-needed extra cash without taking on a new payment, but there are pros and cons to consider before deciding if this option is right for you.
| Cash-Out Refinance | |
|---|---|
| Pros | Cons |
| Use the extra money for a variety of purposes, including home improvements, college tuition or debt payoff. | Your new loan balance and monthly payment will be higher, and you'll likely make payments longer than you would have with your original mortgage. |
| You could increase the value of your home if you use the money on home renovations. | Many cash-out refinances require you to pay closing costs. Expect to pay an additional 2% to 6% of your loan amount upfront. |
| You may be able to deduct the interest you pay on your loan from your taxes, if you use the loan proceeds to substantially improve your home. | You're securing this new, larger loan with your home as collateral. If you can't afford to make payments, your home could be at risk. |
2. Cash-In Refinance
As you might expect, a cash-in refinance is the reverse of a cash-out refinance. You'll put extra cash into the mortgage, similar to a down payment, paying a lump sum to your lender.
If your current mortgage is an adjustable-rate mortgage (ARM) and you want to lock in a different interest rate, you may choose a cash-in refinance. Additionally, if you have a little extra from a windfall in exchange for permanently decreasing your mortgage payments, this refinance may be right for you.
Pros and Cons of a Cash-in Refinance
Because a cash-in refinance means paying down a lump sum in exchange for lower payments long-term, it's important to consider the pros and cons of this option.
| Cash-In Refinance | |
|---|---|
| Pros | Cons |
| You'll reduce the principal balance on your mortgage, so you'll owe less on your house. | Cash-in refinances can be expensive due to the money you have to pay upfront. On top of that, you will have to pay closing costs—typically between 3% and 6% of your principal. |
| You may be able to secure a lower interest rate, or a fixed interest rate if you're refinancing an ARM. | You may be unable to secure a lower interest rate than you already have. |
| If you reduce your monthly payments or create less debt, you may improve your cash flow or have extra money to put toward savings. | If you can't really spare the money you put away, that could upset your cash flow. |
3. Rate-and-Term Refinance
This is where you are changing the interest rate and loan terms and nothing else. In other words, you aren't getting cash from the refinance—and you're not putting cash into your home.
If you buy a house with a higher interest rate than you'd like and rates come down, you could opt for a rate-and-term refinance to secure that lower interest rate. Or, if you have 20 years left on a 30-year fixed mortgage but you can qualify for a 15-year fixed mortgage with an affordable payment, you might choose this option. In either scenario, you'll likely see significant savings over the life of the loan.
A good credit score—particularly one that has improved significantly since you took out the original mortgage—can help you score better terms on the new loan.
Pros and Cons of a Rate-and-Term Refinance
A rate-and-term finance can help you save money, but could be a risky move. Consider the pros and cons.
| Rate-and-Term Refinance | |
|---|---|
| Pros | Cons |
| It can lower your monthly payments, interest rate and/or time spent paying off your mortgage, which could save you thousands of dollars over the life of the loan. | You may not be able to secure a lower interest rate if you refinance when rates are on the rise. |
| It could allow you to remove private mortgage insurance (PMI) from your loan. | You may not receive better rates and terms if your credit score is low. |
| You may replace an ARM with a fixed-rate mortgage that has a set interest rate and monthly payments. | You will likely have to pay closing costs of 2% to 5% or more. |
4. No-Closing-Costs Refinance
This type of refinancing is paired up with another form of refinancing, like a rate-and-term refinance, cash-out refinance or cash-in refinance.
A no-closing-cost refinance is simply a way of achieving a refinancing without having to come up with the cash for the closing costs. Your lender may pay the closing costs upfront, but charge you a higher interest rate in exchange. Or, the closing costs may be rolled into the principal on your loan, making your payments higher.
Pros and Cons of a No-Closing-Costs Refinance
Choosing a no-closing-costs refinance can seem attractive at first, but there are benefits and drawbacks to carefully consider.
| No-Closing-Costs Refinance | |
|---|---|
| Pros | Cons |
| You can refinance your home without spending a lot of money upfront. | You may have higher monthly payments due to incorporating the closing costs into the loan. |
| It's a way to refinance without upsetting your cash flow. This is helpful if you're refinancing to be able to afford a remodeling project, for example. | You may pay more over the life of the loan due to the closing costs being wrapped up in the loan. |
| If you're planning to move or refinance again in a few years, it may be worth taking on a temporarily higher monthly payment. | Your lender may impose a prepayment penalty to discourage you from refinancing again in the future. |
5. Streamline Refinance
If you have a government-backed mortgage from the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) or the Veterans Administration (VA), you may be able to qualify for a streamline refinance.
As the name suggests, a streamlined refinance process provides an easier experience than refinancing a conventional mortgage. Unlike all the other types of refinancing, in which you usually need to pay for an appraiser to take a look at your home and determine its value, you probably won't have to do that with a streamline refinance. You may also not need to have your income verified or do a full credit check.
Pros and Cons of a Streamline Refinance
Although choosing a streamline refinance is only available to those with government-backed mortgages, it's still important to consider all the pros and cons before proceeding.
| Streamline Refinance | |
|---|---|
| Pros | Cons |
| Generally, streamline refinances are cheaper than most other refinances, and easier, with less paperwork. | You will only qualify if your refinance offers a "net tangible benefit," such as at least a 5% reduction in your monthly payment or converting an ARM to a fixed-rate mortgage. |
| You probably won't need to have your home appraised. | You may not be able to do certain things available with other types of refinances, like pull cash out for home improvements. |
| Depending on the type of mortgage you are refinancing, you may not need a credit check. | Your credit may still be checked if your lender won't allow a non-credit-qualifying refinance. |
The Bottom Line
Refinancing can be overwhelming, especially if it's been awhile since you bought your home. However, it pays to do the math and determine if refinancing makes financial sense for you.
Regardless of what type of refinance you choose, ensuring your credit is solid is an important part of qualifying. Be sure to check your credit score and examine your credit report to see where you're at, and make any necessary adjustments to put you in a better place before applying for a refinance.