How to choose between the 6 types of mortgage refinance programs
- You must have a strong financial profile to qualify for a regular rate-and-term refinance.
- If you aren’t eligible, look into a cash-in, no-closing-cost, streamline, FMERR, or HIRO refinance.
- A cash-out refinance lets you borrow against the equity in your home to use cash for other purposes.
- See Insider’s picks for the best mortgage refinance lenders »
Refinancing your mortgage can be a great way to achieve financial goals. There are several types of refinances you can choose from, depending on your objective and the kind of you’re eligible for.
|Refinance type||Consider it if you …||You may qualify if you …|
|Rate-and-term||Want to do a regular refinance||Have a good financial profile|
|Cash-out||Need cash||Have equity in your home|
|Cash-in||Need to build equity to refinance||Can pay a lot of money at once|
|No-closing-cost||Can’t afford closing costs||Can make higher monthly payments|
|Streamline||Don’t want an appraisal||Have an FHA, VA, or USDA mortgage|
|FMERR or HIRO||Are underwater on your mortgage||Have a conventional mortgage|
Keep reading to learn more about each type of mortgage refinance.
1. Rate-and-term refinance
A rate-and-term refinance is probably what you think of as a “regular refinance.” You replace your original mortgage with a new one with different terms. Your interest rate and monthly payments will change, and you’ll probably refinance into a new term length.
Conventional, FHA, VA, and USDA mortgages are eligible for rate-and-term refinancing. You’ll need a certain credit score, debt-to-income ratio, and amount of equity in your home — but the exact requirements will depend on which type of mortgage you have.
You can do a rate-and-term refinance from an FHA mortgage into another FHA mortgage, for example. Or you may decide you want to switch from an FHA mortgage to a conventional mortgage.
2. Cash-out refinance
With a cash-out refinance, you’ll still replace your old mortgage with a new one that has different terms. But you’ll actually take out a loan larger than what you have left to pay on the home so you can receive the surplus in cash.
A cash-out refinance can be a good option if you’ve built equity in your home. Most lenders won’t let you receive more than 80% of your home’s value in cash, so you’ll keep at least 20% equity in the home.
Let’s say your home is valued at $200,000, and you have $100,000 left to pay on your initial mortgage. This means you have $100,000 in home equity, or 50% of the home value.
If you need to keep 20% of your equity in the home, then you’re eligible to take out 30% of the value in cash, or $60,000.
You would take out a loan of $160,000 — that’s $100,000 that you already owed on the home, and $60,000 in cash.
Conventional, FHA, and VA mortgages are eligible, but there’s no cash-out option for USDA mortgage refinancing. You can refinance from a USDA mortgage into a conventional mortgage to receive cash, though.
3. Cash-in refinance
When you apply to refinance your mortgage, most lenders want you to have at least 20% equity in your home. In other words, they want your loan-to-value ratio to be 80% or less.
What if you don’t have 20% equity in your home yet, but you still want to refinance to lock in a better mortgage rate or lower monthly payments? That’s where a cash-in refinance comes in.
With a cash-in refinance, you make a larger payment toward your principal to lower your LTV ratio. Let’s say an appraiser looks at your home and says its current value is $200,000. You still owe $190,000 on your mortgage. So your LTV ratio is 95%, meaning you have 5% equity in your home.
You can do a cash-in refinance and pay $30,000 all at once to lower your principal balance to $160,000. Now your LTV ratio is 80% and you have 20% equity in your home, so you’re eligible to refinance.
Cash-in refinances aren’t limited to homeowners who need help qualifying to refinance. You may decide to do a cash-in refinance just because you want lower monthly payments, or because lower LTV ratios often result in better rates.
4. No-closing-cost refinance
Maybe you aren’t prepared to pay thousands in closing costs when you refinance. A no-closing-cost refinance still lets you refinance into a new term with a new rate, just like a rate-and-term refinance. But you won’t pay a lump sum at closing.
You may not have to pay closing costs upfront, but you’ll still pay the money over time. The lender just finds a different way to charge you. There are two main ways you could end up paying closing costs: Roll the costs into your mortgage, or pay a higher interest rate.
5. Streamline refinance
With a streamline refinance, you can refinance your mortgage without going through an appraisal. In many cases, you won’t need to show your credit score, debt-to-income ratio, or proof of income, either.
Streamlining is a good option if your home has lost value, because the lower value won’t hurt your chances of being approved or receiving a good rate. It could also be useful if your finances aren’t as strong as you’d like, because you don’t need to show your credit score or debt.
You can streamline refinance government-backed home loans — including mortgages through the FHA, VA, or USDA — but not conventional mortgages. You’re refinancing from one type of mortgage into the same type again. For example, you’d refinance from an FHA loan into another FHA loan.
6. FMERR or HIRO refinance
Maybe you have a conventional mortgage, but you don’t have enough equity to qualify for a regular rate-and-term refinance. That’s where the Freddie Mac Enhanced Relief Refinance (FMERR) and Fannie Mae High LTV Refinance Option (HIRO) programs come in.
Both of these programs let you refinance if you have less than 3% equity in your home. You can even qualify if you’re underwater on your mortgage, meaning you owe more than your home is worth.
You can use the FMERR program if your original mortgage is backed by government-sponsored mortgage company Freddie Mac, and HIRO if it’s backed by Fannie Mae.
The type of mortgage refinance you choose will come down to which type of loan you have, your qualifications, and your financial goals.
Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews. She is also a Certified Educator in Personal Finance (CEPF). Over her four years of covering personal finance, she has written extensively about ways to save, invest, and navigate loans.
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