The best refi program is different for everyone

If you, like millions of Americans, have a mortgage rate above current interest rates, you might be thinking about refinancing.

A mortgage refinance is a great way to lower your interest rate and monthly payments, pay off your loan faster, or achieve another goal — like cashing out your home equity.

But before you can do any of those things you need to answer one big question: which loan type will you use?

Here’s how to choose the best refinance program for your situation.

Find the best refinance loan for you. Start here (Nov 1st, 2021)


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Types of mortgage refinance programs: Which
one is best? 

There are plenty of mortgage refinance programs to choose from. But which one is best for you?

The answer depends on your current loan, your financial goals, and the amount of equity you’ve built in the home. 

For most people, the best
mortgage refinance is one of the following: 

  • Conventional refinance: Good for lowering your rate or loan term, canceling PMI/MIP mortgage insurance, or taking cash out
  • FHA streamline refinance: Good for current FHA loans, lets you refinance fast into a lower rate 
  • VA streamline refinance: Good for current VA loans, lets you refinance fast into a lower rate with no mortgage insurance required
  • USDA streamline refinance: Good for current USDA loans, offers a fast refinance into a lower rate with the option to roll closing costs into the loan

If you play your cards right,
you could not only drop your rate and lower monthly payments, but also have a
chance to cancel mortgage insurance, take cash out at closing, or refinance
without any closing costs. 

Verify your refinance eligibility. Start here (Nov 1st, 2021)

Compare refinance options

To figure out which refinance option you should use, you’ll have to answer a few questions.

  • What type is my current mortgage loan?
  • What’s my goal for refinancing (lower interest
    rate, pay off my loan early, cash-out, etc.)
  • Do I have at least 20 percent equity?
  • How long do I plan to stay in my home after refinancing?

Here’s a brief overview of how the main programs compare.  

Conventional vs. FHA refinance

The biggest benefit to a conventional loan is that you don’t pay
mortgage insurance if you have 20% equity in the home.

But not everyone can qualify.

You need good credit (at least a 620 score) and a solid employment history. FHA refinancing is often better for lower-credit borrowers.

Homeowners who originally chose an FHA loan — maybe because they had lower credit or wanted a low down payment — could be eligible to get rid of their mortgage insurance for good.

If you have at least 20 percent equity, you may be able to refinance to a conventional loan with no MIP and save big on your monthly payments.

A lender can estimate your home’s value and whether you have enough equity to get rid of MIP.

But even if you don’t, a refinance still might make sense, thanks to today’s rock-bottom rates. You’ll retain mortgage insurance if you have less than 20 percent equity, but your savings could still be significant.

Here’s a breakdown of FHA vs conventional mortgage insurance.

  • FHA refinance
    loans
    require two types of mortgage insurance: Upfront mortgage insurance
    premium (UFMIP) and an annual mortgage insurance premium
  • Conventional refinance
    loans
    charge ‘private mortgage insurance’ (PMI) annually — there is no
    upfront fee. But conventional PMI rates will be much higher if you have low
    credit, in which case an FHA refinance may be the better option

One reason a homeowner might refinance from a conventional loan to
an FHA loan is if they want to take cash out, but don’t have a high enough
credit score for a conventional cash-out refi.

The FHA cash-out loan typically allows credit scores starting at 600 (though some lenders might go as low as 580), while a conventional cash-out loan often requires a minimum credit score of 640-680.

If you currently have an FHA loan and your goal is simply to lower your rate and monthly payment, consider the FHA Streamline Refinance.

This low-doc refinance program is a faster way to refinance into a
lower rate without having to re-verify your income and employment or get a new home
appraisal.

In summary:

Reasons to choose an FHA refinance

  • Your credit
    is below 620-640
  • You don’t
    have 20% equity in the home
  • You have an
    FHA loan and don’t want to re-verify the home’s value
  • You have an
    FHA loan now and want to avoid proving current income
  • You need cash
    out but can’t qualify for a conventional loan

Reasons to choose a conventional refinance

  • You have 20%
    equity and good credit and want to get rid of mortgage insurance
  • You can prove
    current income and the home’s value
  • You want to
    take cash out

VA to conventional refinance

If you have an existing VA mortgage, there are few reasons to
refinance into a conventional mortgage.

VA loan rates tend to be significantly lower than conventional refinance rates. So you’re likely to see bigger savings with a VA-to-VA refinance than by refinancing your VA loan into a conventional one — even when you include the VA funding fee on your new loan.

VA loans also offer a Streamline Refinance option.

This is called the ‘Interest Rate Reduction Refinance Loan,’ or ‘IRRRL.’ It’s a low-doc program that lets veteran homeowners refinance from a current VA loan to a new one with less effort and faster closing times.

VA loans do not require ongoing mortgage insurance, so there’s no
motive to refinance into a conventional loan to get rid of PMI.   

Conventional to VA refinance

On the other hand, if you currently have a conventional mortgage but you’re eligible for VA financing, you might consider refinancing into a VA home loan if the rate is significantly better than what you’d get with conventional.

Keep in mind that you’ll pay a funding fee to switch, so make sure the VA loan is cost-effective.

A lender can typically check your eligibility for VA financing in just a few minutes, by requesting
a Certificate of Eligibility (COE) from the Department
of Veterans Affairs. You might qualify if
you or your spouse is a veteran or active-duty service
member.

By refinancing from a conventional loan to a VA one, you might be
able to get rid of PMI, lower your interest rate, and save on your monthly
payments.

Plus, any VA-eligible homeowner can use the VA cash-out loan to refinance up to 100 percent of their home’s value.

This is the only major refinance program that lets you cash-out ALL your home equity, and as long as you qualify for VA financing, you do not need a current VA home loan to apply.

In summary:

Reasons to choose a VA refinance

  • You have a VA
    loan and want to skip the appraisal and income verification
  • You want to
    get rid of your mortgage insurance
  • You don’t
    have 20% equity in your home
  • You need to
    cash out up to 100% of your home’s value

Reasons to choose a conventional refinance

  • You have 20%
    equity in the home and you don’t want to pay VA’s upfront funding fee

Compare VA vs. conventional refi options (Nov 1st, 2021)

FHA vs. VA refinance

FHA and VA loans both offer Streamline refinancing. This makes it easy to refinance from FHA-to-FHA or VA-to-VA for a lower interest rate.

Using a Streamline Refinance, you’re not required to submit
employment or income verification. And a home appraisal is not required — so
you might be able to refinance into a lower rate and payment even if you have
little, no, or negative equity.

If you currently have an FHA loan, but you’re eligible for a VA
mortgage, you might consider refinancing into a VA loan. You’re likely to get a
lower interest rate than you would with an FHA refinance, and you won’t have
upfront or continuing mortgage insurance fees.

Refinancing from an FHA loan to a VA loan can be done using the VA cash-out refinance.

Despite the name, you aren’t required to take cash out at closing. You can use this loan simply to refinance from a non-VA loan to a VA loan with a lower mortgage rate and payment.

In summary:

Reasons to choose a VA refinance

  • You have a VA loan currently and don’t want to provide an appraisal, income, or asset documentation
  • You want to get rid of FHA mortgage insurance
  • You want to cash out your home’s equity

Reasons to choose an FHA refinance

  • You have an
    FHA loan and would like a Streamline Refinance

Compare VA vs. FHA refinance options (Nov 1st, 2021)

USDA refinancing

For homeowners who have at least 20 percent equity, it might make
sense to refinance from a USDA loan to a conventional one. This could eliminate
your annual mortgage insurance and help you save even more on your mortgage
payments.

Or, if all you want is a lower interest rate and monthly payment,
you can apply for the USDA Streamlined Assist Refinance Loan.

Like the FHA and VA Streamline programs, this is a low-doc refi
that’s easier to apply and qualify for than other refinancing options.

Just note that USDA mortgages only come in a 30-year term. So a USDA
refinance will not help you pay off your mortgage faster.

If your goal is to pay off your home early, you may be better off
refinancing into a conventional or FHA loan that allows a 15-year loan term.

In summary:

Reasons to use a USDA refinance

  • You have a USDA loan currently and want a Streamline Refinance
    option

Reasons to use a conventional refinance

  • You have 20% equity and want to stop paying USDA’s mortgage
    insurance fees
  • You need a 15-year term

Check your USDA refinancing options (Nov 1st, 2021)

Jumbo refinancing

​If your
current mortgage is above conventional loan limits, you’ll likely need
to refinance into a non-conforming or ‘jumbo’ loan. 

Maybe
you originally bought a high-priced home with a large down payment, but now you want to
refinance and take cash-out. In some cases, the new larger loan balance could
push you into jumbo loan territory. 

The
only exception is for homeowners refinancing a large VA loan, as VA mortgages have no loan limits. 

It’s possible to find jumbo financing with very competitive mortgage rates. But, since these loans aren’t regulated by Fannie Mae and Freddie Mac, there tends to be a lot more variance between lenders. 

Jumbo
loans also tend to have higher credit score requirements than other refinance
loans. You’ll likely need a credit score above 680 or 700 to qualify.

If
you need a jumbo refinance loan, be extra thorough as you shop around and look
for rates.

You’re likely to see a larger spread between lenders and shopping carefully could net you a great deal.

In summary:

Reasons to get a jumbo refinance

  • You need to
    reduce your rate on a large loan
  • You want to
    take cash out of the home, pushing you into jumbo loan territory

Reasons to get a conventional refinance

Find out if you qualify for a jumbo refinance (Nov 1st, 2021)

No-closing-cost refinance options

Many lenders today offer no-closing-cost refinance loans.

Instead of
bringing a check to the closing table to pay for items such as your application
fee, title insurance, and credit report, you can get the lender to pay for these
costs. 

Closing costs can run between 2 to 5 percent of your loan amount depending on a host of factors, including where you live, your loan amount, and your home’s value.

In other words: Closing costs add up.  

For a slightly higher interest rate, many lenders will pay some or all of your closing costs.

If a lender pays part of your costs, such as the fees to originate your loan, and not third-party fees like title insurance, you’ll pay a lower rate. 

If you want to lower the
interest rate on your mortgage but you’re afraid you don’t have the money out
of pocket to close the loan, a no closing-cost mortgage may be worth looking
into. 

Cash-out refinance options

A cash-out refinance lets you
take out a new loan with a balance above what you currently own on your home.

The difference between your old
loan balance and your new one is the amount you can cash-out at closing.

Fannie Mae and Freddie Mac, as wells as FHA and VA, all have cash-out refinance programs.

Depending on
the type of program you choose, you can walk away from the closing table with
money for home improvements, beefing up your investment portfolio or buying
another property. 

There are no restrictions on
how you use the money. However, you’ll need to do a complete refinance
application, as the streamline programs aren’t available for cash-out
refinances. 

The amount of money you can
get with a cash-out refinance depends on the program.

  • FHA cash-out refinancing
    limits your new LTV to 80 percent
  • Conventional cash-out refinances also
    allow a max LTV of 80 percent
  • VA cash-out refinance loans
    allow up to 100 percent LTV

In today’s low-interest rate
environment, you could get a lower interest rate than what you currently have and walk
away from the closing table with cash. 

However, if you recently
refinanced your mortgage or purchased your home, you’ll probably need to wait
at least six months before you can refinance again.

Check your cash-out refinance eligibility. Start here (Nov 1st, 2021)

No appraisal refinance options

FHA, VA, and USDA Streamline Refinance programs don’t require a new appraisal.

Fortunately, Fannie Mae and
Freddie Mac are starting to follow suit and loosen their refinance requirements
— and their appraisal requirements. 

In many cases, lenders will
use an automated valuation to estimate your home’s value. It’s a less expensive
method to determine how much your home is worth. 

Additionally, Fannie Mae will sometimes grant an appraisal waiver. Although there is no guarantee you’ll qualify for a waiver, you’ll have a better chance if you just want to lower your interest rate and don’t plan to take cash out.

Freddie Mac features a similar waiver for some refinances. 

Find the best refinance rate

Getting a good deal isn’t
just about finding the right refinance program. You also want to lock in the lowest
refinance rate to maximize your savings. 

Find a few lenders that offer the refinance program you’re looking for, then compare their rates and see who can offer you the best deal on your mortgage refinance. 

Verify your new rate (Nov 1st, 2021)



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