In the third quarter of 2023, around 516,461 people opted for various types of refinance. They were either able to lower their mortgage rate or reduce their loan term.
Refinance mortgage rates are expected to decrease from 6.9% to 6.5% by the fourth quarter of 2024. This makes it a good time for you to refinance your mortgage.
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Types of Mortgage Refinance
Mortgage refinance is the process of replacing your current mortgage with a new one. There are several types of refinance options available:
- Rate-and-Term Refinance: This refinance allows you to adjust the interest rate or the loan term of your current mortgage. You can lower your interest rate or shorten the loan period. Additionally, you can switch from an adjustable-rate mortgage to a fixed-rate mortgage, and possibly avoid Private Mortgage Insurance (PMI).
- Cash-Out Refinance: This option allows you to obtain a new mortgage that exceeds the balance of your current one. You get the extra amount in cash. You can use it to cover your home renovations costs, pay off high-interest debt, or fund an educational course.
- Cash-In Refinance: With this refinance, you can either lower your monthly payments or shorten your loan term. Alternatively, you can pay a lump sum amount of cash towards your mortgage balance. This will effectively reduce the amount you owe.
- FHA Streamline Refinance: This refinancing option is for homeowners with an existing FHA loan. It involves minimal documentation. Moreover, it doesn’t require a new appraisal and makes the refinance process quicker and easier.
- VA Streamline Refinance: This refinance option is available to homeowners with an existing VA loan. It’s also known as the Interest Rate Reduction Refinance Loan (IRRRL). Additionally, this type of refinance requires less documentation and doesn’t need a new appraisal.
- USDA Streamline Refinance: This option is for homeowners with existing USDA loans. It offers a simplified process to refinance and also requires less documentation.
- No-Closing-Cost Refinance: This option allows you to refinance your mortgage without paying any upfront closing costs. Lenders either include these costs into the new loan amount or increase the interest rate.
How Much Does It Cost to Refinance a Mortgage?
The average cost to refinance a mortgage is $2,398. This means you pay around 2% to 5% of the new mortgage as closing costs. For example, if you want to refinance your $300,000 mortgage, you’ll have to pay between $6,000 and $15,000.
The costs of almost all the types of refinance include origination fee, application fee, credit report fee, appraisal fee, etc. Generally the fee amounts depend on your location, mortgage size, lender, and loan type.
Factors to Consider When Choosing a Refinance
Mortgage refinance gives you shorter loan term and lesser interest rate. Which is why many people opt to consider it. These are some of the factors you should consider when choosing among the types of refinance:
- Interest Rates and Terms: Compare the interest rates offered by different lenders. Additionally, consider whether a Fixed or Adjustable-Rate Mortgage (ARM) is more suitable for your financial situation.
- Closing Costs and Fees: Determine if you have the funds to cover the upfront costs. Also, be aware of any prepayment penalties on your existing mortgage. Compare the total cost of refinancing, including these fees. It will help you decide if the savings on interest and monthly payments justify the expense.
- Credit Score: Review your credit score. A higher credit score results in better rates and terms. Additionally, correct any errors before you apply for a mortgage refinancing.
- Break-even Point: It’s the point when the savings from your lower monthly payments surpass the refinancing costs. Calculate how long it will take to recoup closing costs with monthly savings. If you’ll stay in your home long enough, refinancing can be financially beneficial.
How to Qualify for a Refinance?
To qualify for a mortgage refinance, you need to know given factors:
- Credit Score: Ensure you have a credit score in the range of 300 to 850. Chiefly a higher credit score improves your chances of approval and getting better loan terms.
- Employment History and Income: Showcase lenders that you have a stable and sufficient income. Generally, provide recent pay slips or tax returns for the past two years. Also, you can provide bank statements showing regular deposits.
- Debt-To-Income (DTI) Ratio: Ensure you have a DTI of 36% or below. Because lenders typically prefer applicants with a lower DTI. The lower percentage indicates better financial health and lesser risk.
- Home Equity: Ensure you have at least 20% equity in your home. Chiefly higher home equity improves your mortgage refinance terms and reduces the lender’s risk.
Which One Should You Choose?
| Requirement | Recommended Refinance Type | Key Features and Benefits |
| Low interest rate | Rate-and-Term Refinance | Lower interest rates, potential to switch from adjustable to fixed rate |
| Less documentation | Streamline Refinance | Minimal paperwork, faster process (available for FHA, VA, and USDA loans) |
| Existing VA loan | VA IRRRL (Interest Rate Reduction Refinance Loan) | Lower interest rates, no appraisal or income verification required |
| Cash for home improvements | Cash-Out Refinance | Access home equity, higher loan amount than existing mortgage |
| Lower monthly payments | Rate-and-Term Refinance | Extended loan term, potentially lower interest rate |
| FHA loan holder | FHA Streamline Refinance | No appraisal or income verification, reduced paperwork |
| Reducing private mortgage insurance (PMI) | Conventional Refinance | Switch from FHA to conventional to remove PMI if equity is sufficient |
| Accessing home equity for large expenses | Cash-Out Refinance | Access significant home equity, higher loan amount |
| USDA loan holder | USDA Streamline Refinance | No appraisal or credit review, streamlined process |
Bottom Line
Finally, no matter which refinance option you choose, navigating the process and finding the best rates is a crucial step. Houzeo, connects you to a network of qualified mortgage lenders. Compare rates from multiple lenders. Lastly, choose the one that best suits your needs.
» Need More Clarity? Read these exclusive Houzeo reviews and learn why the platform is the best in America’s competitive housing market.
Frequently Asked Questions
What does refinance mean?
Mortgage refinance means you replace your current loan with a new one. You usually do it to shorten the loan term or to get lower interest rates.
What are the stages of refinancing?
The stages of refinancing are:
1. Choosing a refinance type
2. Choosing a lender
3. Gathering documents and applying for a refinance
4. Locking in your interest rate
5. Going through underwriting
6. Getting a home appraisal
7. Closing on your new loan
What is a type 2 cash-out refinance?
A type 2 cash-out refinance is same as Cash-Out refinance. It's a term specifically used by the Veterans Administration (VA). It means the new loan amount exceeds the original payoff amount by more than 100%.
