In this article
- What is the Best Refinance Program
- Comparing Your Refinance Options
- Conventional vs FHA Refinance
- With Conventional Refinance Loans You Have to Pay a PMI (Private Mortgage Insurance) Annually
- Conventional to VA Refinance
- FHA vs VA Refinance
- USDA Refinancing
- Jumbo Refinancing
- Cash-out Refinance Options
- No Appraisal Refinance Options
- Finding the Best Refinance Rate
The best refinance program is not the same for everyone. If you are one of the millions of Americans with mortgage rates above the current interest rates, then it might be a good idea to think about refinancing. It gives you a chance to lower your interest rate and monthly payments. You can end up paying your loan faster or cash out equity in your home.
Before you can get started with the process, you have to answer an important question: which loan type is the best option for you? Here is a guide to help when choosing the best refinancing program for you.
What is the Best Refinance Program
There is a wide range of options when it comes to mortgage refinancing, but which of them is the best option for you? The answer is going to depend on the loan you have currently, the amount of equity you have in your home, and your financial goals. Below are some of the most common refinance options.
Conventional Refinance: this is good when you want to lower your loan term and rate, take cash out, or cancel PMI/MIP.
FHA streamline Refinance: this is a good option if you have an FHA loan and want to lower your rate.
VA Streamline Refinance: this is a good option if you have a VA loan and you want to lower your interest rate.
USDA Streamline Refinance: this is a good option for people who have a USDA loan and want to roll the closing costs into the loan and lower rates at the same time.
If you do things right, you can manage to lower your rate and monthly payments. You also get the chance to cancel your mortgage insurance, refinance with no closing costs, or take cash out at closing.
Comparing Your Refinance Options
You have to answer some questions when figuring out the best refinance option for you.
- What type of mortgage loan do you have?
- What is your goal for refinancing (pay off your loan early, lower interest rate, cash-out)?
- Do you have 20% or more equity in your home?
- How long are you planning to be in the home after you refinance?
Conventional vs FHA Refinance
One of the biggest benefits you are going to get from the conventional loan is that you don’t have to pay mortgage insurance when you have at least 20% equity in your home. Not everyone can qualify.
You will need a good credit score (at least 620) and a good employment history. If you have lower credit, consider FHA refinancing. Those who went for the FHA loan because they had a poor credit score or wanted to put a lower down payment can be eligible. This will get rid of mortgage insurance.
If you have at least 20% equity in your home, you can go with a conventional refinance and get rid of MIP. This is going to reduce your monthly payments. The lender will have a look at the estimated value of your home and if you have enough equity to remove MIP for good.
If you don’t meet these criteria, it might still be a good idea to refinance because the interest rates today are low. If you have less than 20% equity, you will still have to pay MIP, but you can save a lot when it comes to your monthly payments.
FHA refinance needs two types of mortgage insurance; an annual mortgage insurance premium and an upfront mortgage insurance premium (UFMIP).
With Conventional Refinance Loans You Have to Pay a PMI (Private Mortgage Insurance) Annually
You don’t pay an upfront fee. Conventional PMI rates tend to be higher for those with low credit, which might make it better to choose an FHA refinance.
A reason why someone might refinance from a conventional to FHA loan is if they are looking to take cash out, but they don’t have enough credit score needed for the conventional cash-out refinancing. FHA cash-out loan will allow someone with a 600 score (there are lenders who will accept 580). You need a minimum credit score of 640-680 if you want a conventional cash-out loan.
If you have an FHA loan and you just want to lower your monthly payment and rate, then just go with the FHA Streamline Refinance. This is a good refinance program because it is fast since you don’t have to start re-verifying your income and employment. You also don’t have to get a home appraisal.
When an FHA refinance may be your best option:
- You have a 620-640 credit score
- You currently have an FHA loan but don’t want to prove your income
- You have an FHA loan and you want to avoid home appraisal
- You don’t have twenty percent equity in your home
- You need a cash-out but you cannot qualify for the conventional loan
- You want to take cash out
For those with a current VA mortgage, there are a couple of reasons for refinancing into the conventional mortgage.
VA loans tend to have lower rates compared to conventional refinance rates. You are most likely going to get more savings when you use a VA refinancing instead of a conventional refinance – even when the VA funding fee is added to the new loan.
There is a Streamline Refinance option on VA loans. This is known as IRRRL (Interest Rate Reduction Refinance Loan). This is a low-doc program that allows veterans to refinance from a VA loan to a new one with faster closing times and less effort. You don’t need ongoing mortgage insurance when it comes to VA loans, so you don’t have to choose a conventional loan because you want to get rid of PMI.
Conventional to VA Refinance
If you have a conventional loan and you are eligible for VA financing, then it might be a good idea to refinance into a VA home loan. You are going to get a better rate than what you can get from the conventional loan. Remember that you have to pay a funding fee when switching, ensure that it is cost-effective.
You can have the lender check whether you are eligible for VA financing and it is only going to take a couple of minutes. They will request the certificate of eligibility from the VA. You can also qualify if your spouse is an active-duty service member or veteran. When you refinance from the conventional to VA loan, then you can get rid of PMI, save on monthly payments, and lower your interest rate. If you are eligible, then you can cash out a loan to refinance up to 100% of the home’s value.
This is the only refinancing option that allows you to cash out all of the equity, you don’t need to have a VA home loan currently to apply as long as you qualify for VA financing.
When an VA refinance may be your best option if you currently have a conventional loan:
- You want to remove mortgage insurance
- You have a VA loan and don’t want to go through income verification and appraisal
- You don’t have twenty percent equity
- You are looking to cash up to 100% of your home’s value
- Why choose a conventional refinance
- You don’t want to pay the upfront funding fee charged by VA even though you have 20% equity
FHA vs VA Refinance
Both FHA and VA loans have Streamline refinancing. This is why it is easy to refinance from VA-to-VA or FHA-to-FHA for a lower rate.
When you use Streamline Refinance, you don’t have to submit income verification or employment verification. You also don’t need to have your home appraised – so you can still refinance even if you have negative, no, or little equity. If you have an FHA loan and are eligible for VA, then you might think about refinancing your loan into a VA loan. VA is going to give you a lower rate compared to FHA refinance, and you don’t have to worry about mortgage insurance fees both upfront and continuing.
You can use VA cash-out refinance to refinance from FHA to a VA loan. You don’t have to take cash out at closing, despite the name. This loan is going to help you refinance to a VA loan from a non-VA loan and get lower rates and monthly payments.
When an VA refinance may be your best option:
- You have a VA loan and don’t want to provide asset documentation, income, and do a home appraisal
- You are interested in cashing out equity
- Why choose an FHA refinance
- You currently have an FHA loan and you are looking to use the Streamline Refinance option.
If you have at least 20% equity in your home, then it might be a good idea to refinance from a USDA to a conventional loan. This will let you get rid of annual mortgage insurance, which will help you save more on mortgage payments.
If you want to just lower your monthly payments and get lower interest rates, then go for the USDA Streamlined Assist Refinance Loan.
Like the VA and FHA Streamlines programs, this is an easier option when applying and qualifying for refinancing.
Keep in mind that USDA mortgages come in only 30-year terms. This means you are not going to pay the mortgage faster by refinancing.
If you are interested in paying off early, then it might be better to choose an FHA or conventional loan with a 15-year loan term.
When an USDA refinance may be your best option:
- You have a USDA loan and want to use the Streamline Refinance option
- Why choose the conventional refinance option
- You want to stop paying mortgage insurance fees charged by the USDA loan and have a 20% equity in your home.
- You want the 15-year loan term
If you have a mortgage above the conventional loan limits, then you need a non-conforming loan or ‘jumbo loan’.
Let’s say you bought an expensive home and made a large down payment, and now you are looking to refinance and take cash out. The new larger balance can push it to the jumbo loan territory. The exception to this is a VA loan refinance, or a VA mortgage with no loan limits.
You can get jumbo financing with good mortgage rates. The loans are not regulated by Fannie Mae and Freddie Mac, which is why there is a lot of variances from one lender to another. To qualify for a jumbo loan, you need to have a higher credit score requirement compared to other refinancing options. You will need to have a 680-700 score to qualify for the loan. If you need the jumbo loan, make sure you shop around and find the best rates. You can get a great deal when you shop around and you will notice a larger spread between lenders.
When a Jumbo refinance may be your best option:
- You are looking to reduce your rates on a big loan
- You are looking to take cash out of your home, and this pushes you to the jumbo category
- Why get the conventional refinance
- The refinance amount is below your local loan limit or $548,250
- Little to no closing costs
Lenders today are offering no closing costs loans when refinancing. You don’t have to bring a check when closing to pay for things like title insurance, application fee, and credit report. The lender is going to cover these costs.
The closing costs can be between 2-5% of the loan amount, but it depends on a number of factors, which include the loan amount, where you live, and home value. Some lenders will offer to pay some or all of the closing costs, but they will charge a higher interest rate. You are going to pay a lower rate if the lender covers part of the costs, like fees to originate the loan, and not third-party fees such as title insurance.
It might be worth looking at a no closing-cost mortgage if you want to pay lower rates on your mortgage but don’t have the money to close.
Cash-out Refinance Options
This lets you take a new loan with a balance above what you currently have on your home. The difference between the old balance and the new is the amount you can cash out when closing. FHA and VA, as well as Fannie Mae and Freddie Mac, have cash-out refinance programs.
You can walk away after closing with money to use in beefing up your investment portfolio, home improvements, or buying another property, but it will depend on the type of program you choose. You aren’t restricted when it comes to how you spend this money. You have to do the complete refinance application because the streamline programs don’t offer cash-out refinances.
The program you choose is going to determine the amount you can get with a cash-out refinance.
- The conventional cash-out refinances allow up to 80%
- FHA cash-out refinancing limits new LTV to 80%
- VA cash-out allows you up to 100%
The interest rates today are low, and this could be a chance to get a lower interest rate than what you have currently. You can even walk away with cash after you close. If you have recently purchased your home or refinanced your mortgage, then you have to wait at least 6 months before refinancing again.
No Appraisal Refinance Options
VA, FHA, and USDA Streamline Refinance programs will not ask for a new appraisal. Fannie Mae and Freddie Mac have started to follow suit and they are loosening the refinance requirements – which includes home appraisal.
Lenders in most cases use automated valuation to estimate the value of the home. This method of determining how much your home is worth is less expensive compared to other methods like appraisals. There are also instances where Fannie Mae grants appraisal waivers. You cannot be sure of getting the waiver, but there is a better chance of you are looking to lower your interest rate and not take cash out. Freddie Mac has the same waiver for some refinances.
Finding the Best Refinance Rate
Getting a good deal is not just about choosing the best refinance option for you. It is also about locking in the lowest rate so you can get maximum savings.
Find some lenders offering the program you are looking for, then compare their rates and see which of them gives the best deal on a mortgage refinance.