When you refinance a home, basically you take out a new loan on the home. That new loan is used to pay off your old loan, and then you keep paying on the new loan instead. It's a good idea to refinance when interest rates come down as doing so will save you thousands over the life of your loan. However, most people also have other goals in mind when they refinance. Maybe you want to take some money out of your equity and improve your home. Or maybe you want to pay off a lump sum towards your mortgage as a part of your refinancing. It's important to think carefully about your goals before you refinance since this will determine which type of home refinancing loan is best for you.
Here are three of the most common types of refinancing home loans.
Cash-Out Refinance
A cash-out refinance is basically a loan with which you borrow more than you currently owe on your house. This allows you to take out some of your home's equity. For example, if you currently owe $80,000 on your home and have $100,000 in equity, you could take out a cash-out refinance loan for $120,000, which means you would have $40,000 in cash to work with.
Cash-out refinances are common with people who want to make large home improvements. Most banks will allow you to borrow up to 80% of your home's value in equity.
Streamline Mortgage
If you currently have an FHA loan but have now paid enough into your mortgage that you have more than 20% income in the home, you may want to refinance with a streamline mortgage. This is a rather simple type of refinance loan that basically replaces your FHA mortgage with a traditional one. You don't have to go through the whole underwriting process as you would if you were applying for a whole new mortgage. Refinancing to a traditional mortgage allows you to stop paying the PMI that is usually required for an FHA loan, which can save you thousands of dollars a year.
Cash-In Refinance
If you have cash laying around and want to pay it towards your mortgage, it is often worthwhile to refinance with a cash-in loan. You will basically use the money to pay off much of your existing loan and then take out a new loan for the smaller amount — whatever remains on your mortgage. This allows you to pay less interest over time than if you were to simply put more money towards the principle on your current mortgage.
Every refinance situation is different. If you're not sure which type of refinancing loan is best for you, reach out to a loan officer or banker. They can give you some recommendations.
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