Types of Refinance: Which One is Right for You?

Blog posted On April 19, 2018

Homeowners choose to refinance their mortgage for a number of reasons.  Homeowners may refinance if they have the opportunity to secure a better interest rate or need to change the repayment terms of the loan.  Cash out refinances allow homeowners to pull cash out of their loan, by raising the total loan value.  Cash in refinances enable homeowners to pay down the loan principal and lower their monthly payments.  Renovation refinances can be used to finance a home’s needed repairs or remodels through the monthly mortgage payment. 

If you are a homeowner considering a refinance, it is best to consult a mortgage professional and evaluate your goals to determine what type of refinance is best for you.

Rate and Term Refinance

The most common type of refinance is known as a “rate and term refinance” or a refinance to get a lower interest rate or change the terms of the original loan.  Rate and term refinances have been very popular in recent years because of historically low mortgage rates.  Even as rates start to trend upward, average mortgage rates still stand significantly lower than they were ten-to-fifteen years ago.  Homeowners may also refinance into a different type of loan.  For example, a first-time home buyer who used an FHA Loan might benefit from switching to a conventional mortgage loan after they have had several years to build their credit and improve their financial profile. 

Cash Out Refinance

Some homeowners may choose a cash out refinance to raise the balance of their mortgage loan to pay for other expenses.  Not to be confused with a Home Equity Line of Credit (HELOC), a cash out refinance involves originating a new mortgage for a larger value than the original loan.  In the case of a cash out refinance, the monthly mortgage payment will increase to cover the cost of the larger loan.  For a HELOC, the lender issues an agreed amount of money using the borrower’s equity in the home as collateral. 

Cash In Refinance

A cash in refinance allows the borrower to lower their loan-to-value amount by making a payment toward the loan principal to potentially lower the monthly mortgage payment.  A cash in refinance is a great option for a borrower who has the funds available through a bonus, inheritance, or other source. 

Renovation Refinance

When a home is in need of repair or remodel, renovation financing may be a better option than taking out a personal loan or using a credit card.  With home prices on the rise, many homeowners are choosing to stay in their homes longer and complete repairs or remodels through renovation financing, rather than shopping for a new, more expensive home that fits their needs.  With a renovation refinance, the cost of the renovation is financed into the cost of the existing mortgage, and then into one convenient monthly payment. 

Considering a mortgage refinance?  The best place to start is a trusted mortgage professional to determine which type of refinance is best-suited to your financial needs.

Sources: MarketWatch, MarketWatch, Zillow