4 Different types to check out
Most homeowners will, at one point or another, refinance their mortgage. The goal may be to lower the monthly payment, save on interest in the long run, or even access some equity you already have in the home. It is really important to know what goals you are trying to achieve by refinancing because they will determine what type of mortgage refinance loan you apply for. The following are four of the most common types of refinance loans.
A rate-and-term mortgage refinance is the most straightforward option. This is really no different from a traditional mortgage. You are offered the loan at a certain interest rate for a certain term—usually 15 or 30 years. A rate-and-term mortgage refinance is a good choice when your primary goal is a lower interest rate or a lower monthly payment and you don't need to access any equity.
If your goal is to access some of your home's equity, then you'll want to consider a cash-out mortgage refinance. Basically, you will be taking out a new mortgage for more than you owe on your current mortgage. You'll be given the remainder of the equity in cash.
Here's an example. Assume you own a home worth $200,000. You have $100,000 in equity, and you still owe $100,000. You can apply for a cash-out mortgage refinance in which you take out a $150,000 loan and pocket the $50,000 in equity. Of course, you'll end up with higher monthly payments, a longer term, or both—but you'll have that equity cash on hand to spend on remodeling your home, going back to school, or whatever else you need.
This is essentially the opposite of a cash-out refinance. Instead of taking equity out of your home, you contribute a large sum towards your equity, and then you take out a new mortgage for the remainder. A cash-in refinance can be a good choice if you have cash on hand, want to lower your monthly payment, or want to shorten your loan term.
Say, for example, you still owe $150,000 on your current mortgage. You have $100,000 that came your way via an inheritance or some other windfall. You can apply that $100,000 to your equity and then refinance to a mortgage for $50,000. If you take out another 30-year mortgage, your payments will then be significantly lower. Or, you can take out a shorter, 5- or 10-year mortgage and take solace in the fact that you'll own your home outright a lot sooner.
What if you are underwater in your mortgage? In other words, you owe more on your mortgage than the home is currently worth. In a situation like this, you will not qualify for other types of mortgage refinance loans. However, you can apply for a HIRO mortgage refinance.
HIRO stands for "high LTV refinance option." This is a government program that allows homeowners to refinance with a mortgage totaling up to 125% of the home's value. It used to be known as HARP, so if you see information about a HARP refinance, you can assume that's essentially the same thing.
Whether you are thinking of refinancing your mortgage in the next few months or a few years, it is important to know what your options are. Talk to a loan counselor about your goals and about the various mortgage refinance options above. They can help you select the option that is right for your financial needs and future.