Living a quality lifestyle remains the priority of everyone, on the contrary, refinance loans are a great way of achieving such financial goals depending on which types of refinance loans program you qualified for.
That’s the reason I made this article to show and explain the different types of refinance loans.
Understanding what type of refinance loan is best for you and their terms should be your first concern. So to start, an explanation of the term “REFINANCE“, “LOAN“, and “REFINANCE LOAN” have been laid down below.
Meaning of Refinance Loans
What is Refinancing?
Refinancing is the act of applying for a new loan (either from the same lender or a different one) to pay off your old outstanding (old) loans with the money received, and begin making payments on your new loan with a new interest rate and agreed on terms of payment, ideally at a lower interest rate.
Most borrowers choose to refinance to lower their interest and shorten their payment term or take advantage of turning some of the equity they have earned on their home into cash.
What is Loan?
A loan is the act of borrowing money (or other material things) from one or more individuals, organizations, or other entities to other individuals, organizations to pay back with interest or based on the agreed terms. In other words, the borrower incurs debt to himself by loaning.
What is Refinance Loans?
A Refinance loan is an act of paying off an existing loan with a new one (loan) that offers better interest rates or lower monthly payments. Decisions like this are most likely to happen when another lender is offering lower interest rates.
Of course, no one enjoys life on a loan, no matter the rate. So, when there are opportunities or best offers from other lenders, borrowers do not hesitate to refinance their existing loans.
Sometimes, circumstances of life present the option to refinance but figuring out what type of loan to refinance into is also an important step, so below are the different types of refinance loans.
The Different Types of Refinance Loans
Rate and term refinance
Rate-and-term refinance is the most common type of refinance loan also known as a “no cash-out refinance”, often known to carry lower interest rates. A loan refinance allows the borrower to change the interest rate, the term, or both the rate and the term of an existing mortgage without advancing any new money.
The benefits of Rate-and-term refinancing:
- It allows the borrower to secure a lower interest rate and a more favorable term on the mortgage—while the principal balance remains the same.
- This option of refinancing loan could also lower monthly payments or potentially modify it for a new schedule to pay off the mortgage more quickly.
Unlike rate and term refinance, a cash-out refinance allows you to replace your existing mortgage with a new home loan for more than you owe on your house and give you more cash in exchange which you can use to solve other issues like paying off other debts or remodelling your home, etc.
The benefit of Cash-Out Refinance:
Homeowners take advantage of the benefit of cash-out refinancing. It will be a good idea to cash out home refinance (for example) especially when you’ve built up enough equity in your home. The following are reasons or benefits of cashing out;
- You get extra cash depending on the equity of your home. Use the extra money at your own will. You’ll be at no obligation on what to do with the money because it’s totally yours. But we advise you get a good loan advisor to give you a profitable advice on how to utilize the money.
- Paying of debt using a cash-out refinance can also improve your credit score.
- You may also get the privilege to consolidate your debt.
- By refinancing, you’re taking on a new loan. And, while you may be able to get cash out from this transaction, you may also be able to shorten your loan term or get a lower rate. That means you may be able to lower your monthly payment or even pay less over the life of your loan.
A cash-in refinance is an act of paying largely toward your principal to lower your LTV (Loan-To-Value) ratio. For example, when proceeding to refinance your mortgage, many lenders will request at least 20% equity in your home to qualify.
I got a good example from BusinessInsider Blog, now see the sample Math that best explains the meaning of Cash-in refinancing;
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 (Loan-To-Value) 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 (Loan-To-Value) ratio is 80% and you have 20% equity in your home, so you’re eligible to refinance.
The benefit of Cash-In Refinance:
- Cash-in refinances helps homeowners to qualify to refinance.
- It also helps to lower monthly payments, or because lower LTV ratios often result in better rates.
Refinancing loans is an excellent opportunity of achieving great, but the frustrating part of it is most times Closing-cost refinance. Some of the common closing costs seen when you refinance include Loan Origination fees, Appraisal Fees, Title Fees, VA Funding fees, Mortgage Insurance, Credit Report fees, and Discount Points (Learn More About these Closing-cost refinance Fees here) In some cases huge fees awaiting you.
But just as the name suggests, a no-closing-cost refinance is a refinance that gives you the opportunity not to pay closing costs when you get a new loan.
In spite of the no-Closing-cost refinance, it doesn’t mean the lenders footed the bill for free. They (the lenders) move those fees into your principal or exchange them for a higher interest rate. So you see, the no-Closing-cost refinance isn’t excluded, rather you indirectly pay them in a constructive way, also the fee wouldn’t be as high as it would have-if the Closing-cost refinance fee was a sure term to agree on.
The benefit of no-closing-cost refinance:
- It offers you (the borrower) an advantage of getting a new mortgage without paying any cash upfront.
The FHA Streamline Refinance is another mortgage refinance product that allows you to refinance your mortgage with less time, hassle and paperwork, and without showing your credit score, debt-to-income ratio, or proof of income, in some cases. Streamline refinance also have the tendency of lowering your interest rate and reducing the monthly payment.
Benefits of Streamline refinance:
- You won’t be needing an appraisal.
- Being currently unemployed or underemployed won’t prevent you from refinancing with an FHA Streamline.
- FHA Streamline mortgages always offer low rates as other FHA mortgage loans
- The process is easier and faster because of less documentation.
- There won’t be a prepayment penalty.
Home Affordable Refinance Program (HARP)
This is was established on May 31, 2009, by the Government to ensure that Homeowners whose home has lost value will still have the opportunity of refinancing their loans. How this works is; you’ll be given the opportunity to refinance by permitting the transfer of existing mortgage insurance to your newly refinanced loan.
In a nutshell, the HARP refinance program is best for you if your current home value is less than the mounting loan you owe.
The benefits of HARP refinancing:
- You pay a lower interest rate on the loan and a lower monthly payment.
- Conversion to a fixed-rate mortgage from an adjustable-rate loan.
- A shorter loan repayment term (for example, 15 years instead of 30 years).
Home Equity Line Of Credit (HELOC)
The home equity line of credit is a second mortgage program that allows you (homeowners) to borrow money against the equity you have in their home and receive that money as a line of credit, to use the funds for a variety of purposes, including home improvements, education and the consolidation of high-interest credit card debt.
In other words, it is like using your home as collateral. And that is the reason you can use the money for any purpose because the credit line is secured by a dwelling, the interest charged on what you borrow is lower than what you would pay on an unsecured credit card.
The catch, of course, is that the house secures the HELOC, so when you default, the lender can foreclose on your home.
The benefits of HELOC refinance:
- HELOC funds for a variety of purposes.
If you’re a homeowner within the age bracket of 62 and older and have paid off your mortgage, this package is for you. The reverse mortgage gives you the opportunity to borrow part of your home’s equity as tax-free income.
The benefits of Reverse Mortgage:
- Reverse mortgages helps secure your retirement.
- You are tax free.
- You’re protected if the balance exceeds your home’s value.
There are still more loan options you can select from based on your qualifications. What we have only listed above is the tip of the iceberg. So it is necessary to study the different types of refinance loans and make a good decision through the support of mortgage professionals – they can go further to break all those options into pieces to enable you to know which will be best for you.
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