You own a house, and maybe you have a mortgage on it. You probably have a fixed interest rate and payment for 30 years, but, that doesn’t mean it should be ignored for 30 years. One of the most common misconceptions about refinancing is that the new interest rate must be 2% lower than the current loan rate? In some cases this is true, but there are plenty of other refinance benefits besides a 2% reduction in rate. Other reasons to consider a new mortgage include reduction or increase in term, home improvements, bill consolidation, divorce equitable distribution, or even cash out for down payment on another home.
Refinancing loan options could depend on your current mortgage loan type. For instance, Veteran homeowners with a VA home loan could benefit from a streamline refinance. Other loan types offer similar options, so let us explain these valuable options.
VA Home Loan Refinancing Options
VA loans may be the best mortgage loan type in America. Not only do VA home loans offer up to 100% financing on a primary residence purchase, but it also provides great refinancing tools. VA financing includes:
- No monthly mortgage insurance
- Up to 100% of appraised value
- Fixed and adjustable rates
- Flexible underwriting
- Available for single-family, townhomes, approved condos, modular, manufactured homes
VA Interest Rate Reduction Refinance Loan (VA IRRRL)
The Veteran’s Administration offers a streamline refinance for homeowners called a VA Interest Rate Reduction Refinance Loan or VA IRRRL. A primary requirement is that the current loan getting paid off must be a VA loan. After that, the loan may be used for removing an ex-spouse from the mortgage and title, lowering rate and payment, and it may even be used on a property that has been converted to a rental. A bonus for this refinance is it has a very streamlined process which includes no appraisal, closing costs may be financed, and a reduced funding fee.
VA Cash Out Refinance
As mentioned, each loan type has their own nuances, and VA is no different. A VA cash-out loan has several definitions, but the main thing to know is that any VA refinance that is not an IRRRL is considered a VA cash out refi. Obviously, one VA cash-out refinance type would be the borrower obtaining cash from the equity in the home. The cash may be used for a multitude of reasons like paying off bills, home improvements, paying off an ex-spouse, or funding a college education.
The other VA cash-out refinance doesn’t involve cash at all. VA may be used to refinance an existing construction, conventional, FHA, or USDA loans into a VA loan. Benefits of this option include potentially dropping monthly mortgage insurance or lending up to 100% of the appraised value. Therefore, if considering a refinance and at least one owner is a qualifying Veteran, VA refinancing could be a very beneficial option.
FHA Loan Refinance Options
Like VA, FHA offers several great refinance options for homeowners. FHA is known for flexible qualification standards, but it is a great loan for strong borrowers as well. Let’s dig into options for FHA refinancing.
FHA Streamline Refinance
If a homeowner has an FHA mortgage on their home, it could be possible to reduce the interest rate and payment with a streamline refinance. FHA provides different levels of streamline refinancing. It can be as lenient as no income qualifying, no credit review other than mortgage history, plus no appraisal required. For this refinance, the borrower must pay the closing costs and escrow set up unless the lender is providing a credit to help offset costs. Then, options go to full income verification, credit review, and possibly an appraisal. Your experienced FHA loan officer would explain each available option and help determine which fits best.
Regular FHA Refinance
Sometimes a homeowner may have a loan other than an FHA mortgage and is looking to refinance without cash out. FHA comes in handy when there is limited equity, lower credit scores, higher debt to income ratios, or maybe the home is a manufactured home. If a borrower has one or more of these challenges, FHA typically provides an advantage over other loan options.
FHA Cash Out Refinance
As with any other cash-out refinance, FHA allows homeowners to access the equity in the home. These funds may be used for a myriad of benefits. Although, FHA does have a couple of lending limits in these cases. First, FHA cash out loans are limited to 85% of the property’s appraised value. The appraised value is determined by an FHA approved appraiser, and the appraisal must be ordered by the lender, not the homeowner. Next, FHA has maximum loan limits which vary by county. Typically, these loan limits change annually, and your experienced FHA loan officer can help in determining if FHA is right for you.
USDA Streamline Refinance
A USDA refinance is only available to homeowners who currently have a USDA home loan. Additionally, USDA does not allow borrowers to receive more than $500 in cash out from the transaction, but the benefits of this refinance are great when rates and/or annual fees drop. Benefits include:
- No appraisal
- No equity requirement
- Debt ratios not calculated
- Mortgage and credit score only (no credit report!)
- Allows for financing closing costs, escrow set up, and funding fee
There are some requirements other than paying off an existing mortgage. These include no 30 day late payments on the mortgage for the preceding 12 months, must have a 12-month mortgage history, and minimum $50 per month savings. As in any streamline type refinance, these are most popular when mortgage interest rates drop. As mentioned before, clients who complete their annual mortgage review will know about these opportunities and can take advantage when possible.
Conventional Loan Refinance Offers Several Options
Finally, there are conventional loan refinances which meet Fannie Mae and Freddie Mac guidelines. Conventional loans provide both regular refinances which only pay off the existing mortgage plus a cash out version. There are right many advantages for a conventional refinance which include:
- Removing mortgage insurance when under 80%
- Up to 95% of appraised value for limited cash out refinance
- To 85% of appraised value for cash out refinance
- Paying off equitable distribution requirements
- Student loan underwriting flexibility
Regular Refinance/Rate & Term Refinance
Conventional loans typically are not as streamlined of a process as government loans with no income or credit verification. Although, they do often provide an easier refinance process. This is especially the case with well-qualified borrowers, plus an appraisal may be waived. Conventional rate and term refinance allow a maximum of $2000 or 2% (whichever is less) of the loan amount in cash back. Cash back includes actual cash in hand or paying off anything other than the first mortgage. Rate & term refinances are typically a better rate than a cash-out refinance, so if cash is not needed, it could be beneficial to stay in a regular refi. There are exceptions allowed for paying off items other than the first mortgage though.
- Combining a first and second mortgage (only when 2nd mortgage was used to purchase the home)
- Paying off student loans
- Paying off required equitable distribution
- Receiving $2000 or 2% of loan amount in cash back
- Financing closing costs, current property taxes, current insurance premiums due, and escrow set up
- Combine a rate/term refinance with a home equity line of credit for additional cash out
Conventional Cash Out Refinance
Sometimes just refinancing the current mortgage isn’t enough. There may be enough equity in the home to pay off debts which are a higher interest rates or payments. This option could increase a homeowner’s cash flow. Therefore, more cash flow could be used to fund college expenses, build savings, invest in retirement, or just get some breathing room. If you have watched HGTV at all, then you will see that home improvements are keeping your local Lowe’s and Home Depot very busy! Well, a cash-out refinance could fund these improvements. FYI, a conventional cash-out refinance allows up to 85% of the appraised value. Anyway, just as the other cash out loans, conventional loans will allow funds for about any reasonable purpose.
Is a Refinance in Your Future?
Hopefully, this article has provided some valuable insight on refinancing benefits, options, plus how they work. None of these reasons to refinance may apply to you now, but life happens. Things change for the good and bad, so keeping in touch with your OVM loan officer is paramount. Additionally, homeowners typically don’t keep up with upcoming product changes, enhancements, or current rates. So, reach out to your loan officer when questions come up. We’d love to hear how you’re doing, and we want to keep you an informed homeowner.