Today’s low mortgage rates have created an interest in refinancing. Doing so to an existing home loan could potentially reduce your current interest rate by as much as 1 percent. That could mean saving a significant amount of money.
Research is key to knowing whether or not a refinance loan is the right fit for your current financial situation. What better way to start than by identifying the different types available to borrowers.
How many are there? Most people are familiar with the basic rate and term and cash-out refinance loans. Some may also have heard about the Home Affordable Refinance Program® (HARP®). This article will discuss these specific loan types, along with two others that many may not be aware of.
Rate and Term Refinance
This type of refinance loan is what lenders commonly offer. It works by paying off an existing home loan, replacing it with a new one with its own rate and set of terms. For example, an adjustable rate mortgage can be refinanced. It can be replaced with a fixed mortgage that’s good for 30 years. A borrower with this plan can expect to pay the same amount monthly for the life of the loan.
Rate and term refinance can be further categorized based on the loan term.
15-year refinance loans
This is a popular option for homeowners who have already paid off part of their mortgage. They usually don’t want to restart the clock on a current loan term so they get this option. Generally, this loan offers a low-interest rate but with higher monthly payments.
30-year refinance loans
This is a good choice for homeowners desiring to lock in a fixed rate on their mortgage, but don’t want to pay more every month.
This loan type requires the borrower to shell out money for closing costs. Bringing in cash allows one to refinance a home loan while avoiding a higher interest rate and paying extra for mortgage insurance. Opting to do cash-in refinance also keeps the loan-to-valueamount between a certain threshold.
Individuals who are in need of cash are typically offered a cash-out refinance. This loan type pulls out equity from the home. This leaves a higher loan balance but the borrower gets lower interest rates at the same time. A longer loan term is a downside to this option.
Short refinance is ideal for those who want to avoid a foreclosure . The bank or mortgage lender pays for the existing mortgage. This is then replaced with a new loan that has a reduced balance. Of all loan types, this is the most difficult to come by.
Home Affordable Refinance (HARP®)
Under the Home Affordable Refinance Program®, borrowers can refinance the value of their homes by up to 125%. To take advantage of HARP® low-interest rates, the mortgage must be current and guaranteed by either Fannie Mae or Freddie Mac.
In addition to HARP®, some states offer to refinance loans to help “underwater” homeowners avoid foreclosure.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.