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Refinancing your mortgage can help you achieve a variety of goals. Depending on what type of refinance you opt for, you could lower your interest rate or monthly mortgage payment, pay off your loan faster, receive cash, change your loan type, or even get rid of mortgage insurance.
Are you considering refinancing your mortgage loan? Here are the seven types of refinance options to choose from — and what each one can do for you.
Read more: Is it time to refinance your mortgage? 5 ways to prepare.
In this article:
1. Rate-and-term refinance
You’d use a rate-and-term refinance to change your rate, term length, or loan type. They’re what you might think of as a “regular” refinance. These are usually a good option if refinance rates are lower than the rate on your existing mortgage (that’s likely not the case with today’s nearly 7% rates) or if you want to choose a shorter or longer loan term.
For instance, if you needed a lower payment, you might refinance your current loan into a new 30-year one. This would spread your payments out over more months and lower your monthly payments. (Refinancing into a shorter-term loan, like a 15-year one, would do the opposite — raising your payment but helping you pay off your loan sooner.)
You also might consider a rate-and-term refinance if you want to change loan types. If you have an adjustable-rate mortgage, for example, you may use this type of refinance to replace that with a fixed-rate mortgage, which has a set interest rate and payment for life. You could also refinance from an FHA loan — which comes with FHA mortgage insurance premiums — into another loan that doesn’t.
Dig deeper: Is now a good time to refinance your mortgage?
2. Cash-out refinance
You’d use a cash-out refinance if you want to tap your home equity. With this option, you’ll take out a larger loan amount, use it to pay off your current mortgage, and get the difference in cash. You can then use the money however you’d like (though most use it for home improvements or consolidating debts). You can get a cash-out refinance with most loan types, including FHA and conventional.
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3. Streamline refinance
Streamline refinances are an option when you want to refinance into the same loan type as before — from an old FHA loan to a new one, for example. The process for streamline refinances is intended to be faster and easier than with full refinances, and you usually won’t need a credit check or appraisal. Streamline refinances are available on FHA, USDA, and VA loans (although VA loan streamline refinances are called IRRRLs — Interest Rate Reduction Refinance Loans).
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4. No-closing-cost refinance
Some lenders offer “no-closing-cost” refinances, which, as the name implies, require no up-front closing costs. These can save you on out-of-pocket cash initially, but you’ll still end up paying the closing costs in other ways. In most cases, your closing costs get rolled into your loan balance, resulting in a larger loan amount, higher monthly payments, and more long-term interest costs.
Sometimes, lenders will actually cover the closing costs for you, but they’ll charge you a higher interest rate instead. Either way, it’s important to run the numbers to determine if this type of mortgage refinance is right for you — especially if it results in more interest over the long haul.
Learn more: How soon can you refinance your mortgage after buying a home?
5. Cash-in refinance
A cash-in refinance is a lesser-known option for homeowners looking to lower their rate and payment or, in many cases, pay off their loan sooner. Think of it as the opposite of a cash-out refinance. A cash-out refi involves taking out a larger loan and receiving the difference in cash. With a cash-in refi, you refinance into a smaller new loan, putting a large lump sum down payment toward the new mortgage.
This smaller balance can often help you snag a lower refinance rate, and depending on the term you choose, it could lower your monthly payment too. You could also use this refinance option to speed up your mortgage payoff. In this scenario, you might refinance into a shorter loan term — along with putting cash in — to pay off your loan sooner.
Dig deeper: 7 ways to pay off your mortgage early
6. Short refinance
You might consider a short refinance if you were underwater on your mortgage, meaning you owe more on the loan than the home is currently worth. In this type of refinance, your lender agrees to let you refinance your current loan into a smaller one — more in line with your home’s current value. This would lower your monthly payment and, ideally, make covering your monthly payments easier.
Short refinances usually result in a financial loss to the lender, but they may cost less than pursuing foreclosure, which can take months or even years to finalize.
Read more: What to do if you’re underwater on your mortgage
7. Reverse mortgage
A reverse mortgage isn’t technically a type of refinance, but it is an option if you need to take cash out of your home. There are government-backed reverse mortgages — called Home Equity Conversion Mortgages (HECMs), which are for homeowners ages 62 and up, and there are reverse mortgages from private lenders. These sometimes allow for borrowers to be as young as 55.
With reverse mortgages, you turn your home equity into cash. Your lender will either give you a lump-sum payment, send you regular monthly payments, extend you a credit line, or some combination of these options. In the meantime, you won’t make any payments. Instead, the loan gets repaid when you pass away, sell the home, or move permanently off the property (into an assisted living facility, for instance).
Get professional advice
If you’re not sure which refinancing option is right for you, talk to a mortgage professional or financial adviser. They can help you make the right choice for your financial goals and budget. You might also consider working with a mortgage broker. These are experts who can help you compare lenders and loan options to ensure you get the best deal.
Read more: How often can you refinance your home?
Home refinance options FAQs
What is the most common refinancing option?
Rate-and-term refinances are the most common type of refinance. These allow you to replace your old loan with a new one that has a different rate, term length, or loan type.
How many types of refinances are there?
There are six types of mortgage refinance options: rate-and-term, cash-out, streamline, no-closing-cost, cash-in, and short refinances. A reverse mortgage is a sort of seventh type — it isn’t technically a refinance, but it offers a way to tap into your home equity and receive cash. The right choice depends on your financial goals and budget.
What are the alternatives to refinancing?
The alternatives to refinancing your mortgage depend on what your goals are. If you’re looking to pay off your loan sooner, you can simply make extra payments toward your principal balance or opt for biweekly mortgage payments instead of monthly ones. You can ask your lender about a loan modification or recast if you want a lower rate or payment. If you’re hoping to tap your home equity, you can look into second mortgages, like home equity loans and HELOCs.
This article was edited by Laura Grace Tarpley