7 Types of Refinance Options

Quick insights

• Refinancingec-refinance-hl000061 your mortgage could help you improve your financial situation by potentially lowering your monthly payments, securing better interest rates or accessing cash for major expenses.
• There are various types of refinance options to consider such as rate-and-term refinance, cash-out refinance, streamline refinance and no-closing cost refinance, just to name a few.
• Before refinancing your mortgage, consider evaluating factors such as interest rates, loan terms, closing costs, credit score and your overall financial stability.

Refinancing your mortgage can feel like a breath of fresh air, especially if you’re looking to improve your financial situation. Whether you’re dreaming of lower monthly payments, hoping to secure better interest rates or needing extra cash for home renovations, refinancing could be a great option. There are a few options to consider: Rate-and-term refinance, Cash-out refinance and Streamline refinance to name a few. In this article, we’ll explore the ins and outs of refinancing your mortgage and the various refinancing options available. By the end, you’ll have a clearer understanding of which refinancing path might be the best fit for you.

What is refinancing?

Refinancing is the process of replacing your existing loan, typically a mortgage loan, with a new one. It often means securing better terms that could potentially lower your monthly payments and reduce your overall costs or fund your home improvement projects. Whether you’re aiming to lower your interest rate, change the length of your loan or access cash by tapping into your home’s equity, refinancing could improve your financial landscape. Now, let's get into the types of refinances:

A summary of the types of refinances

Navigating the world of refinancing can open new financial opportunities. It’s important to understand the different options available to make the right choice for your financial situation. The most common types of refinances include:

• Rate-and-term refinance: This option allows you to adjust your interest rate or change the length of your loan term.
• Cash-out refinance: You can borrow against your home’s equity to access cash for major expenses such as home renovations, college, investments or debt consolidation.
• Cash-in refinance: In this scenario, you pay a lump sum towards your mortgage balance when refinancing, which could help lower your loan amount and monthly payments. Chase does not offer cash-in refinance.
• Streamline refinance: This option was designed for certain government-backed loans like FHA (FHA Streamline refinance) or VA loans. It simplifies the refinancing process by reducing paperwork and requiring less documentation. Chase does not offer VA streamline refinance.
• No-closing cost refinance: A no-closing cost refinance allows you to refinance your mortgage without having to pay upfront closing costs.
• Short refinance: A short refinance occurs when a lender agrees to refinance your mortgage for less than the current amount owed. Chase does not offer short refinance.
• Reverse mortgage: A reverse mortgage is a financial product that allows homeowners, typically individuals aged 62 and older, to convert part of their home equity into cash. Chase does not offer reverse mortgages.

Rate-and-term refinance

Rate-and-term refinance involves replacing your existing mortgage to achieve a lower interest rate or change the loan term. This could reduce your monthly payments or help you pay off your mortgage faster.

Example: Imagine you purchased a home five years ago with a 30-year mortgage at 4.5% interest. Now, interest rates have dropped to 3.5%. By refinancing your loan:

• New loan amount: $250,000 (the remaining balance)
• New interest rate: 3.5%
• Previous monthly payment: $1,200
• New monthly payment: Approximately $1,125

In this scenario, you save $75 a month! Over the life of the mortgage loan, you could save thousands of dollars in interest.

Cash-out refinance

With a cash-out refinance, you are replacing your existing mortgage with a new one that’s larger. This allows you to take out the difference in cash.

How it works: Imagine you bought your home for $300,000, and over time, the value of the home has increased to $400,000. You’ve also paid down your mortgage, so you now owe $250,000. Normally, you can borrow up to 80% of the new appraised value, so for a $400,000 home, you can borrow up to $320,000 minus the existing loan balance of $250,000. Here’s how it typically plays out:

• Pay off your old mortgage: The $250,000 from the new loan pays off your existing mortgage.
• Take the difference in cash: You get $70,000 in cash. This is your equity that you can use as you wish.

Example: Let’s say you’ve been dreaming of a tropical vacation and a kitchen makeover. With that $100,000 from your cash-out refinance, you could do the following:

• Renovate your kitchen: Update appliances, cabinets and countertops to create your dream cooking space.
• Book a dream vacation: Treat your family to an unforgettable trip to Hawaii or Spain.

While you’re enjoying your beautifully renovated kitchen and planning your special getaway, keep in mind that your new mortgage payments might be higher due to the larger loan amount. It’s important to plan accordingly.

Cash-in refinance

A cash-in refinance is when you refinance your mortgage and pay a lump sum of cash upfront to reduce your loan balance. This may lead to lower monthly payments, a better interest rate or even a shorter loan term.

How it works:

• Pay down the principal: By paying extra cash at closing, you decrease the amount you need to borrow from the lender.
• Benefits: This could help you qualify for a lower interest rate or reduce your monthly payments tremendously.

Example: Imagine you have a $300,000 mortgage at a 4% interest rate. You decide to refinance to leverage lower rates but want to pay down your mortgage to improve your loan terms.

• Current mortgage: $300,000
• Cash payment: You pay a lump sum of $30,000 upfront.
• New loan amount: $270,000 (after the cash-in)
• New interest rate: 3%

With the new mortgage loan:

• Old payment: Approximately $1,432/month
• New payment: About $1,135/month
• Monthly savings: You save around $297 each month.
• Lower interest costs: Over the life of the loan, you pay less interest overall.

Streamline refinance

A streamline refinance is a quick and simple way to refinance your mortgage, primarily for government-backed loans (FHA or VA loans). It usually requires less paperwork and often skips the appraisal process.

How it works:

• Less documentation: Minimal paperwork is needed.
• No appraisal: In most cases, an appraisal isn’t required.
• Lower rates: Helps you take advantage of better interest rates.

Example: Imagine you have an FHA loan of $200,000 at 4.5% interest. You want to refinance to a lower rate:

• Current payment: About $1,013/month
• New rate: 3.5% with streamline refinance
• New payment: Approximately $898/month

After the streamline refinance, you save around $115 each month. Streamline refinancing can be an easy way to lower your mortgage payments with minimal effort.

No-closing cost refinance

A no-closing cost refinance lets you refinance your mortgage without paying upfront closing costs. As a result, these costs are either rolled into the new loan or covered by a slightly higher interest rate.

Example: Suppose you have a $200,000 mortgage at a 4.5% interest rate. You want to refinance at 3.5%, but closing costs are $5,000.

• Traditional refinance: Pay $5,000 upfront at closing and lower your payment.
• No-closing cost refinance: No upfront cost, but you might get a 4% rate instead.

This option could be an alternative to help you save on immediate costs while still benefiting from a refinance.

Short refinance

A short refinance is when you refinance your mortgage to a shorter loan term, typically to pay it off faster and save on interest.

Example: You have a $250,000 mortgage at 4% interest with 25 years left. Your monthly payment is about $1,300.

Current:

• 25 years left at 4%
• Payment: Approximately $1,300

Short refinance:

• New 15-year loan at 3%
• Payment: About $1,800

The main benefits:

• You save on interest: Lower overall interest payments.
• Faster ownership: Pay off your home sooner.

Please take into consideration that your monthly mortgage payments will increase.

Reverse mortgage

A reverse mortgage is a type of loan that allows homeowners, usually individuals 62 and older, to convert part of the equity in their home into cash. Unlike a traditional mortgage, where you pay the bank, in a reverse mortgage, the bank pays you. Please note that Chase does not offer this mortgage product.

How it works:

• Eligibility: Typically, you must be at least 62 years old and own your home outright or have a small mortgage balance.
• Cash payments: You receive money from the lender, which can be paid out as a lump sum, monthly payments or a line of credit.
• No monthly payments: You don’t have to make monthly payments. Instead, the mortgage loan is repaid when you sell the home, move out or pass away.
• Home equity: The amount you owe increases over time, as interest is added to the loan balance.

Example:

Ashley, a 70-year-old homeowner, has a home worth $300,000 and takes out a reverse mortgage for $150,000. She uses this cash for retirement. When she moves out or passes away, the home is sold to repay the loan. If sold for $350,000, the mortgage balance is paid off first, and any remaining funds go to her heirs.

What to consider before refinancing your home mortgage

Before refinancing your home mortgage, here are a few factors to consider:

• Interest rates: Compare current rates to your existing rate. A lower rate can save you money.
• Loan term: Determine if you want to shorten or lengthen the term. A shorter term may have higher payments but less interest overall.
• Closing costs: Calculate the closing costs associated with refinancing (usually 2-5% of the loan amount) and weigh them against potential savings.
• Break-even point: Estimate how long it will take to recoup closing costs through monthly savings. If you plan to move before this point, refinancing may not be worthwhile.
• Credit score: Check your credit score, as a higher score can qualify you for better rates. 
• Your current financial situation: Assess your income, expenses and overall financial stability.
• Debt-to-income (DTI) ratio: Assess your DTI ratio, which measures your monthly debt payments relative to your gross income. A lower DTI is usually better for qualifying for refinancing.

Start shopping, ask questions

As you consider whether refinancing your current mortgage makes sense, keep your situation and goals in mind. And there may be fees when you refinance, including closing costs.

Review your current mortgage to see if there's a fee for paying it off early. If you have to pay a high prepayment penalty, you may want to hold off on refinancing. And if you have additional questions, a Chase Home Lending Advisor will be happy to help.

Refinancing options FAQs

How much does it cost to refinance a mortgage?

The cost to refinance a mortgage usually ranges from 2% to 5% of the loan amount. Here’s a brief breakdown of the key costs involved:

Closing costs: Fees associated with the purchase or refinancing of a home that are paid at the closing of a real estate transaction. The fees typically range from 2% to 5% of the loan amount. The fees typically include the following:

• Appraisal fee
• Credit report fee
• Title insurance
• Origination fee
• Prepaid interest
• Property taxes and homeowners' insurance

Points: You may choose to pay points to lower your interest rate.

Miscellaneous fees: This can include attorney fees, which vary by state, and survey fees ($300 to $500).

Example: If you refinance a $300,000 mortgage, closing costs could be approximately 3%, which is $9,000. It’s a good idea to request a detailed estimate from your lender to understand the specific costs.

When is the right time to refinance?

Deciding when to refinance your mortgage depends on numerous factors. Here are a few key indicators: when interest rates drop, your credit score improves, change in your financial situation or you want to refinance to a shorter loan term to save on interest.

How often can I refinance my home?

You can technically refinance your home as often as you’d like, but there are some things to keep in mind:

• Lender policies: Some lenders may have restrictions or fees for frequent refinancing.
• Closing costs: Each refinance incurs closing costs, so consider whether the savings outweigh these costs.
• Waiting period: If you recently refinanced, some loan providers may require a waiting period before refinancing again (often 6-12 months).
• Loan terms: Frequent refinancing could affect your loan terms and overall financial situation.

Do you have to pay closing costs when you refinance?

Yes, you generally have to pay closing costs when refinancing a mortgage. These costs can range from 2% to 5% of the loan amount and include: origination fees, appraisal fees, title insurance, credit report fees, other miscellaneous fees. Some lenders offer “no-closing cost” refinancing options, but these often come with higher interest rates or other trade-offs. It’s key to review and understand the costs involved.