Refinance Loan Types
Much like with a mortgage, there are several factors to consider when choosing a refinance loan, which can be confusing for homeowners just getting started with the process. To make things easier, here’s a quick breakdown of the three major refinance loan types -- knowing which one your goals fit into will make getting the right loan that much easier:
- Rate-and-Term Refinance: With this type of refinance, homeowners can change their interest rate, their loan term, or both. This can lead to lower monthly payments and lower costs overall.
- Cash-Out Refinance: Homeowners take out a loan for more than what they currently owe on their mortgage and keep the extra cash. This money can then be used for big life expenses, such as paying off debt or home renovations.
- Cash-In Refinance: In this case, homeowners put extra cash towards their mortgage payments in order to pay it down far enough to then qualify for a refinance with better terms, which can mean savings in the long run.
Other than these three major categories, there’s another distinction to consider when it comes to refinancing -- streamline loans and conventional loans. Streamline loans are backed by federal agencies, while conventional loans are backed by private lenders. If you currently have a streamline mortgage, which includes VA, FHA, and USDA loans, you’re likely eligible to qualify for another streamline loan when you refinance. As with a mortgage, these loans typically have less strict requirements and less associated paperwork. However, many homeowners with a streamline mortgage choose to refinance into a conventional loan for better terms -- which is the right choice will depend on the situation.
Choosing the best loan for your needs will come down to the type of mortgage you already have, your understanding of what you want from your refinance, and the result of comparing multiple offers from different lenders.
Compare the Best Refinance Options
Choosing a Term
Part of getting a loan is deciding what style of interest rate you want and how long you want your new loan to last. Here are your options:
- Fixed-Rate Loan: With this type of loan, your interest rate will remain constant for the duration of your loan term. While these loans tend to last longer and may cost more in the long run, they are more predictable and thus less risky than adjustable-rate loans.
- Adjustable-Rate Mortgage (ARM) Loan: An ARM offers homeowners a fixed interest rate for the first few years of the loan, after which point the rate will fluctuate to match the market rate. These loans tend to be shorter in length and can save you money, depending on how interest rates change -- but the potential for high interest rates after the initial fixed term is something every homeowner should keep in mind.
As already mentioned, fixed-rate loans tend to last longer than ARMs, and can cost more overall, but they are less of a risk as well. Which you should opt for will depend on your needs and what you can qualify for. At this stage, you’ll also have to choose the length of your loan term, which will again depend on what you want out of your refinance. These range between five and 30 years. To help make deciding easier, we’ve broken down the basics on the following terms:
A 30-year refinance is a fixed-rate mortgage refinance that comes with a term of 30 years, meaning you’ll have 30 years to pay off your new loan. While some may consider 30 years to be too long, this option generally means lower monthly payments than shorter-term loans, which can be hugely beneficial for many homeowners.
A 20-year refinance gives you 20 years to pay off your loan. Though not all lenders offer this as an option, a 20-year loan allows you lower monthly payments than most 15-year terms, while allowing you to pay off your loan more quickly and for less interest than 30-year terms.
A 15-year refinance will give you 15 years to pay off your loan. Half the length of a 30-year term, this usually comes with higher monthly payments but a much faster payoff. For homeowners confident in their ability to keep up with higher payments, this can lead to less interest paid over time.
5/1 or 7/1 ARM
For homeowners opting for an ARM refinance, you’ll have to choose between a few term lengths, with the most common being 5/1 and 7/1. For a 5/1 ARM refinance, you’ll have five years of payments with a constant interest rate, after which you’ll be subject to paying variable rates. Likewise, with a 7/1 ARM your constant rate will last for seven years before fluctuating rates kick in.
The term you end up going with for your refinance will depend on your current financial situation, your refinance goals, and the current going rates in the refinance market. When it comes to refinancing, there is no one-size-fits-all option. By keeping your own needs in mind, staying on top of the current refinance market, and using helpful resources including our site, getting a loan that works for you should be no problem.