The Optimal Refinance Package Varies for Each Individual.
If like millions of Americans, your mortgage rate is higher than current interest rates, you may be considering refinancing.
Refinancing your mortgage is an excellent method to reduce your interest rate and monthly payments, pay off your loan faster, or accomplish another objective, such as cashing out your home equity.
But before you can accomplish any of those things, you must address one important question: what form of loan will you use?
Here is how to select the most suitable refinancing package for your circumstances.
Which Type of Mortgage Refinancing Program Is the Best?
There are several mortgage refinancing schemes available. But which is the best option for you?
The answer relies on your present mortgage, financial objectives, and the home equity you’ve built up.
The optimal mortgage refinancing for the majority of homeowners is one of the following:
Conventional refinancing is useful for reducing your interest rate or loan term, eliminating PMI/MIP mortgage insurance, or withdrawing cash.
FHA streamline refinance: Allows you to quickly refinance an existing FHA loan at a lower interest rate.
VA streamline refinancing: Allows you to refinance quickly at a cheaper rate with no mortgage insurance for existing VA loans.
USDA streamline refinance: Appropriate for current USDA loans, it provides a quick refinance into a reduced rate with the opportunity to fund closing fees.
If you play your cards correctly, you may reduce your interest rate and monthly payments, eliminate mortgage insurance, withdraw cash at closing, or refinance without incurring closing expenses.
Compare Refinancing Options
You must answer a few questions to determine which refinancing option you should pursue.
- What form of mortgage loan do I currently have?
- What is my objective in refinancing? (lower interest rate, pay off my loan early, cash out, etc.)
- Do I have a minimum of 20% equity?
- How long do I intend to reside in the house following the refinancing?
Refinancing Options: Conventional vs. FHA
If you have 20% equity in your house, you do not have to pay mortgage insurance on a traditional loan.
However, only some qualify.
You must have excellent credit (at least a score of 620) and a lengthy job history. FHA refinancing is often preferable for customers with poor credit.
Homeowners who initially selected an FHA loan — maybe because they had less-than-perfect credit or desired a modest down payment — may be entitled to cancel their mortgage insurance.
If you have at least 20% equity in your home, you may be eligible to refinance to a conventional loan without MIP and significantly reduce your monthly payments.
A lender can determine the worth of your house and if you have sufficient equity to eliminate MIP.
Refinancing may make sense even if you don’t, due to today’s historically low-interest rates. You’ll maintain mortgage insurance if you have less than 20 percent equity, but your savings might still be considerable.
Compare FHA mortgage insurance to conventional mortgage insurance.
- Two forms of mortgage insurance are required for FHA refinancing loans: an upfront mortgage insurance payment (UFMIP) and an annual mortgage insurance premium.
- On conventional refinancing loans, there is no upfront premium for ‘private mortgage insurance’ (PMI). But if you have poor credit, standard PMI rates would be substantially higher; therefore, an FHA refinancing may be a better alternative.
A homeowner may refinance from a conventional loan to an FHA loan if they desire a cash-out refinance but need a higher credit score for a traditional cash-out refinance.
The minimum credit score for an FHA cash-out loan usually is 600, though some lenders may go as low as 580, whereas a conventional cash-out loan typically requires a score between 640 and 680.
Consider the FHA Streamline Refinance if you already have an FHA loan and want to reduce your interest rate and monthly payment.
This program is a quicker option to refinance into a lower rate without re-verifying your income and employment or obtaining a new house assessment.
In summation:
Motives for Selecting an FHA Refinance
- Your credit score falls below 680
- You have an FHA loan and wish to keep the property’s valuation private.
- You currently have an FHA loan and wish to refrain from demonstrating current income.
- You require cash but are ineligible for a conventional loan.
Motives for selecting a conventional refinancing
- You have 20% equity and excellent credit and wish to cancel your mortgage insurance.
- You can demonstrate your current income and house worth.
- You wish to withdraw cash.
VA to Conventional Refinance
There are a few reasons to convert an existing VA mortgage into a conventional mortgage.
Conventional refinancing rates are often much higher than VA loan rates. Therefore, you will likely realize greater savings with a VA-to-VA refinance than with a conventional refinance, even if you include the VA funding charge on your new loan.
There is also a Streamline Refinance option for VA loans.
This type of loan is known as the “Interest Rate Reduction Refinance Loan” or “IRRRL.” It is a low-documentation program that allows veteran homeowners to refinance from an existing VA loan to a new one with less work and a quicker closure.
VA loans do not require continuous mortgage insurance; thus, refinancing into a conventional loan to eliminate PMI is unnecessary.
Conventional to VA Refinancing
Alternatively, suppose you have a conventional mortgage but are qualified for VA financing. You should explore refinancing into a VA home loan if the rate is much better than what you’d receive with a conventional.
Keep in mind that switching will incur a financing charge, so ensure that the VA loan is cost-effective.
By getting a Certificate of Eligibility (COE) from the Department of Veterans Affairs, a lender may determine your eligibility for VA financing within a few minutes. You may qualify if you or your spouse is a veteran or active-duty military member.
Refinancing from a conventional loan to a VA loan might eliminate PMI, reduce your interest rate, and reduce your monthly payments.
Plus, any homeowner qualified for a VA loan can use the VA cash-out loan to refinance up to the full value of their house.
This is the only major refinance program that allows you to cash out ALL of your home equity, and as long as you are eligible for VA financing, you do not need an existing VA mortgage to apply.
In summation:
Motives to Select a VA Refinancing
- You want to bypass the appraisal and income verification on your VA loan.
- You desire to eliminate your mortgage insurance.
- You need to withdraw up to 100% of the value of your house since you do not have 20% equity.
Motives for selecting a conventional refinancing
- You have 20% equity in the home and wish to wait to pay the VA’s financing fee.
FHA vs. VA Refinancing
Both FHA and VA loans are eligible for Streamline refinancing. This makes it simple to refinance from FHA-to-FHA or VA-to-VA to obtain a reduced interest rate.
With a Streamline Refinance, employment and income verification are optional. And a house appraisal is unnecessary, so even if you have little, no, or negative equity, you can refinance into a cheaper rate and payment.
Consider refinancing into a VA loan if you have an FHA loan but are qualified for a VA mortgage. You are likely to receive a cheaper interest rate than with an FHA refinance, and there will be no upfront or ongoing mortgage insurance premiums.
Using the VA cash-out refinance, it is possible to convert an FHA loan into a VA loan.
Contrary to the name, you are not compelled to withdraw cash at closure. This loan can be used to refinance a non-VA loan into a VA loan with a lower interest rate and monthly payment.
In summation:
Motives to Select a VA Refinancing
- You presently have a VA loan and wish to submit something other than an appraisal, income, or asset paperwork.
- You desire to eliminate FHA mortgage insurance.
- You desire to withdraw your home’s equity
Motives for Selecting an FHA Refinancing
- You have an FHA loan and wish to refinance using Streamline.
USDA Refinancing
For homeowners with at least 20 percent equity, refinancing from a USDA loan to a conventional loan may make sense. This might remove your annual mortgage insurance and further reduce your mortgage payments.
You may also apply for the USDA Streamlined Assist Refinance Loan if you only want a reduced interest rate and monthly payment.
Similar to the FHA and VA Streamline programs, this is a low-document refinance that is easier to apply for and qualify for than other choices.
Note that USDA mortgages are only available with a 30-year duration. Therefore, you will need more than USDA refinancing to assist you in paying down your mortgage.
If you want to pay off your mortgage faster, you may be better suited to refinancing into a conventional or FHA loan with a 15-year repayment period.
In summation:
Motives for Using a USDA Refinancing
- You presently have a USDA loan and desire a Streamline Refinance option.
Motives for Utilizing a Traditional Refinancing
- You wish to cease paying USDA’s mortgage insurance payments since you have 20% equity.
- You must have a 15-year term.
Jumbo Refinancing
If your current mortgage exceeds conforming loan restrictions, you will likely need to refinance into a non-conforming or “jumbo” loan.
Perhaps you first purchased an expensive property with a sizable down payment, but you now wish to refinance and take cash out. In some instances, the increased loan sum might push you into the region of jumbo loans.
The lone exception is homeowners refinancing a big VA loan, as there are no lending restrictions for VA mortgages.
It is feasible to obtain jumbo mortgage financing with highly competitive interest rates. However, since Fannie Mae and Freddie Mac do not govern these loans, there is typically a great deal of variation between lenders.
In addition, jumbo loans often have greater minimum credit score requirements than ordinary refinancing loans. You will likely require a credit score of 680 or 700 or higher to qualify.
If you require a jumbo refinancing loan, be more diligent when comparing rates.
There is likely a greater disparity across lenders, so that comparison shopping might provide substantial savings.
In summation:
Motives for Obtaining a Jumbo Refinancing
- You must cut the interest rate on your substantial debt.
- You wish to withdraw cash from the property, putting you in the region of jumbo loans.
Motives for Obtaining a Conventional Refinancing
- Your refinancing loan amount will be less than $647,200, or your county’s maximum loan amount.
No-Cost Refinancing Alternatives
Numerous lenders provide no-cost refinancing loans today.
You can have the lender pay your application fee, title insurance, and credit report rather than bring a check to the closing table.
Closing expenses can range from 2 to 5 percent of your loan amount, depending on various criteria, such as your location, loan size, and house value.
In other words, closing expenses accumulate.
Many lenders may cover some or all of your closing expenses for a higher interest rate.
If a lender covers a portion of your expenditures, such as loan origination fees, but not third-party fees, such as title insurance, you will pay a lower interest rate.
If you want to cut your mortgage’s interest rate but are concerned that you won’t have enough cash to finish the transaction, consider a mortgage with no closing costs.
Options for Cash-Out Refinancing
A cash-out refinancing allows you to obtain a new loan with a sum greater than what you already owe on your house.
The difference between your previous and new loan balances is the amount that can be cashed out at closing.
Fannie Mae, Freddie Mac, the FHA, and the VA provide cash-out refinancing options.
Depending on the type of program you select, you might leave the closing table with funds for home upgrades, investment portfolio growth, or purchasing another property.
There are no constraints on how the money may be utilized. However, you will need to submit a comprehensive refinance application, as cash-out refinances are not eligible for expedited programs.
The amount of money available through cash-out refinancing varies per program.
- FHA cash-out refinancing restricts the increased LTV to 80%.
- Additionally, conventional cash-out refinances permit a maximum LTV of 80%.
- VA cash-out refinancing loans permit a maximum LTV of 100 percent.
In the present context of low-interest rates, you may obtain a lower interest rate than you currently have and leave the closing table with cash.
If you have refinanced your mortgage or acquired a property, you will likely have to wait at least six months before refinancing again.
No Appraisal Refinancing Alternatives
The FHA, VA, and USDA Streamline Refinance programs do not need a new assessment.
Fortunately, Fannie Mae and Freddie Mac are beginning to relax their refinance restrictions and appraisal standards.
In many instances, lenders will evaluate the worth of your house using an automated system. It is a less expensive approach for determining the value of your home.
Additionally, Fannie Mae will occasionally waive the appraisal requirement. Although there is no assurance that you would qualify for a waiver, you will have a higher chance if you only wish to reduce your interest rate and have no intention of taking cash out.
Freddie Mac offers a similar exemption for certain refinances.
Locate the Best Refinancing Rate
More than finding the correct refinancing program is required for a decent bargain. In addition, you should lock in the lowest possible refinancing rate to optimize your savings.
Find a few lenders that provide the desired refinance program, then compare their rates to see who can offer you the best mortgage refinance deal.
