Types of Refinance Mortgage Loans

Written By Matthew Thompson
Last updated April 28, 2021

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Loans
April 28, 2021

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Homeowners typically want to learn about the different types of refinance mortgage loans so they can take advantage of benefits like:

  • Lower interest rates.
  • Switching from adjustable rates to fixed mortgage rates.
  • Consolidating multiple loan payments to make their finances easier to control.
  • Repaying their mortgages faster.
  • Trading the home equity they’ve accumulated for cash.

Learn about the three most prominent types of refinance mortgage loans to find an option that helps you meet your goal.

Rate-and-term refinance (also called “no cash-out refinance” by some institutions) could give you an opportunity to lower your mortgage interest rate and shorten your mortgage’s term. Most institutions will let you lower your mortgage rate without changing your repayment term, assuming that you meet their qualifications.

Potential Benefits of Rate-and-Term Refinancing

Homeowners typically pursue rate-and-term refinancing when interest rates fall significantly. Even minor changes to the mortgage could help you save thousands of dollars.

Consider the following scenario:

When you got a mortgage to pay for your home, you borrowed $300,000 that you planned to repay over a 30-year term at 6 percent interest. Each month, you will pay your lender about $1,800. By the end of 30 years, you will have spent about $647,500. Your interest amount comes to $347,500.

That means you spent $645,500 on a home worth about $300,000. That’s a tremendous amount of money to spend, but people accept the situation because they can spread payments over three decades.

Consider the difference if you can refinance your current mortgage into a 15-year loan at 3.5 interest. The shortened term means that you need to pay a much higher monthly bill. In this case, you will pay about $2,145 per month over 15 years.

The amount of money you spend on interests falls dramatically, though. Assuming you follow the repayment schedule, you will pay about $86,000 in interest.

Recommended reading: 5 Tips to Get a Good Mortgage Deal

With a cash-out refinance mortgage loan, you borrow money to repay your existing mortgage. For example, if you still owe $150,000 on your current mortgage, you would borrow that amount from a different lender to eliminate your original debt obligation.

You would also receive an additional amount of money that you can use to pay for renovations. More realistically, you would borrow $200,000 to repay your existing balance and receive $50,000 in cash for home improvements.

Keep in mind that you can only access this type of refinance mortgage loan after you have invested a considerable amount into buying your home. You must have significant home equity to qualify.

Potential Pros and Cons of Cash-Out Refinance Mortgage Loans

If you need money for home renovations, it might make sense for you to choose this option. Cash-out refinancing usually gives you a lower interest rate than opening a home equity line of credit.

Then again, cash-out refinance mortgage loans tend to have higher interest rates than traditional, fixed-rate mortgages.

The benefit is that you get the money you need to improve your home while avoiding the high interest rates that usually come with home equity lines of credit. The downside is that you will probably pay a higher interest rate than your current mortgage charges.

Recommended reading: 4 Mistakes to Avoid When Refinancing Your Mortgage

With a cash-in refinance mortgage loan, you offer to pay a significant amount toward the existing mortgage’s principle. In return, you expect the new lender to give you a lower interest rate.

Many people use cash-in refinance mortgage loans when their home loans are “underwater.” If your house has lost value since you bought it, you might find that your current mortgage doesn’t make sense for you anymore. When you look at the numbers, you know you’re paying more than the home is worth.

Bringing a few thousand dollars to a different lender could get your loan “above water.” Ideally, the lower interest rate will help you stay above water until you finish repaying the mortgage and you own the property.

Pros and Cons of Cash-In Refinance Mortgage Loans

The obvious benefits of a cash-in refinance mortgage loan is that you could:

  • Get your home “above water.”
  • Lower your interest rate.
  • Eliminate private mortgage insurance (PMI) by reaching at least 20 percent equity in your home.

There are reasons to avoid these types of refinance mortgage loans, though. For example, you:

  • Might need to bring thousands of dollars to the table before you qualify for a low-interest loan.
  • Often pay a new round of origination fees, attorney expenses, and title search fees.
  • Don’t get any guarantees that your home value will stabilize, which means you could end up “underwater” again within a few years.
  • Could find that you get a better return on your money by investing.

You have a lot of unknowns when you enter this kind of agreement. Still, it makes sense for some homeowners.

Recommended reading: When Is the Best Time to Refinance Your Mortgage?

If you have a mortgage lender you trust to give you straightforward, accurate advice without ulterior motives, plan a consultation with that person to discuss the types of refinance mortgage loans available to you and decide whether any of them match your needs.

You might find that you already have an excellent mortgage with a low interest rate. A trusted lender could also point you to other options that will not affect your existing mortgage.

Don’t decide until you look at the individual features of your loan and how refinancing would affect your financial situation. In some cases, people find they save a lot of money by refinancing. Others discover that the closing fees cut into their potential savings so much that they don’t want to bother with another loan application.

About the Author

Matthew Thompson

With more than two decades of writing and optimization experience, I know how to keep readers engaged, mimic brand voices, and get first-page rankings on search engine results. I have written for companies in diverse industries, including emerging technologies, wellness, consumer apps, enterprise software, UI/UX, outsourcing, and education.

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