Mortgage Refinance Options: Which One is Right for You?

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There’s more than one way to refinance your mortgage, and the best option depends on your financial situation and goals. 

If you're looking for a longer mortgage term, lower costs or lower interest rates, a mortgage refinance could be right for you. Choosing the right mortgage refinance option for your needs can greatly impact how much you can save with a refinance. 

Below, we'll break down the nine most popular options to help you decide based on your current mortgage type, your home’s value or whether you plan to get rid of private mortgage insurance. 

How Does Mortgage Refinancing Work?

Mortgage refinancing works by replacing your original home loan with a new one, often with more favorable terms. In most cases, the new mortgage will be for more than what you owe, so it can pay off the first mortgage. Then, you’ll start making payments on the new loan. 

Mortgage Refinance Options

Here are the nine most popular options to refinance your mortgage and some key considerations from mortgage experts. 

1. Rate-and-Term Refinance

You can consider a rate-and-term refinance when adjusting the interest rate or term without advancing additional cash. You might choose a rate-and-term refinance if mortgage interest rates have decreased or if your credit has increased significantly.

Daniel Cabrera, owner of Sell My House Fast SA Texas, says homeowners should know that this refinance type still requires closing costs. “These closing costs can be expensive, eliminating the savings since you won't be there long enough,” he says. 

2. Cash-Out Refinance 

With a cash-out refinance, you can access some of the equity you've built up in the home. With this refinancing option, you'll take a new loan higher than your existing mortgage and get the difference in cash. You might consider a cash-out refinance if you need to make home repairs, if interest rates have dropped or to pay off high-interest debt. 

Tim Gordon, a San Diego-based real estate investor and financial expert at Gordon Buys Homes, adds, “This option can result in a lower interest rate, but it also extends your mortgage term.” In other words, if you have 10 years left on a 15-year mortgage, your home loan could be pushed back five years or up to 30, depending on your refinancing terms. 

3. Cash-In Refinance

A cash-in refinance is the opposite of a cash-out refinance. You'll take a new loan, but you'll pay additional cash into the loan, increasing your equity in the home. With a cash-in refinance, you could potentially drop private mortgage insurance (if you surpass 20% equity) or qualify for lower interest rates. You might choose a cash-in refinance if you've recently received an inheritance, bonus or other financial windfall. 

Reed Letson, owner of Elevation Mortgage, says homeowners should not do a cash-in refinance if interest rates are higher than when they first got their mortgage. “For example, if you currently have a 3% interest rate and you want to look at a cash-in refinance, but current market rates are 6%, a cash-in refinance may not benefit you enough to make it worthwhile,” he says. 

4. No-Closing--Cost Refinance

With a no-closing-cost refinance, you'll roll the closing costs into your new mortgage. By moving these expenses into the loan's principal or for a higher interest rate, you'll still pay the costs (and possibly more) but won't need additional cash at closing. A no-closing-cost refinance can make sense for families short of savings who need to refinance for a longer mortgage term or because interest rates have dropped substantially. 

“Lenders typically charge a higher interest rate on no-closing-cost refinances to cover the costs they are absorbing,” says Jose Garcia, president and CEO of Northwest Community Credit Union. “Alternatively, the closing costs may be added to your loan balance, which means you'll be paying interest on these costs over the life of the loan. While you save money upfront, you may end up paying more over the life of the loan due to the higher interest rate or increased loan balance.”

5. Reverse Mortgage

A reverse mortgage allows older homeowners to tap into some of the equity in their homes to cover retirement expenses. Unlike a standard home loan in which you pay the lender a monthly mortgage payment, a reverse mortgage pays you a monthly sum from the equity in your home. 

“It allows them to pull money from their home’s value, but it also reduces home equity over time,” says Ryan Fitzgerald, owner of Raleigh Realty. 

Of course, there are pros and cons to a reverse mortgage, as you'll be taking away equity and could risk losing your home. On the other hand, you can qualify over a certain age and only need to repay the reverse mortgage when you sell the home or move out. Before choosing this option, you can find the best reverse mortgage lenders to compare offers. 

6. Short Refinance

With a short refinance, the lender issues a new loan and forgives the difference between what you owe on the original mortgage and the new loan amount. This is commonly used to help a borrower avoid foreclosure. It is more time- and cost-effective for the lender than a foreclosure proceeding. A short refinance could be a good option for a borrower struggling to make monthly mortgage payments. 

7. FHA Streamline Refinance 

An FHA Streamline Refinance allows you to refinance your current FHA-backed mortgage. You can choose between credit-qualifying and non-credit-qualifying options based on your credit score and refinancing needs. An FHA Streamline Refinance is usually the best option for low-income borrowers who meet the FHA qualifications and already have an FHA loan.

“If you are doing an FHA loan, remember the upfront MIP rate is 1.75% of the base loan amount,” Letson says. 

8. USDA Streamline Refinance

Like an FHA Streamline Refinance, a USDA Streamline Refinance is often the best option for borrowers with a USDA loan. The property will need to be in a USDA-qualified area. You could choose this option for a better interest rate or terms to lower your monthly payment. You can choose between a streamline-assist or standard streamline refinance to save even more. 

9. VA Streamline Refinance

A VA Streamline Refinance, called a VA IRRRL, pronounced as “VA earl,” is a mortgage refinance option for borrowers with an existing VA loan. This option allows homeowners to convert an existing VA loan to a new VA loan with a lower interest rate or convert a VA loan from an adjustable to a fixed rate. 

This can be a good option for qualifying veterans or service members and their families to take advantage of lower interest rates or to secure a fixed rate. 

How to Refinance Your Mortgage

To refinance your mortgage, you must be approved for a new loan that takes over your primary mortgage. Here’s a step-by-step guide: 

• Research your options and find the best refinancing type for your needs 
• Shop around for lenders, making sure to read the fine print 
• Make sure you meet your lender’s mortgage refinance qualifications on things like your credit score, debt-to-income ratio and more 
• Submit the application 
• Go through the underwriting process
• Get a home appraisal (may not be needed for some refinancing types) 
• Continue making payments on your original home loan 
• Close on your new mortgage 

What to Know About Your Mortgage Refinance Options 

• You can choose from various mortgage refinance options based on your financial needs and current mortgage, from a USDA Streamline Refinance to a rate and term refinance.
• While most mortgage refinancing will require you to pay closing costs of 2% to 5% of the loan, some lenders will let you roll these costs into the loan.
• Before applying for any mortgage refinance, consider your financial strengths and current home loan to determine whether it is wise for you.

Why You Should Trust Us

Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.

For this story, we worked with Daniel Cabrera, owner of Sell My House Fast SA Texas; Tim Gordon, a San Diego-based real estate investor and financial expert at Gordon Buys Homes; Reed Letson, owner of Elevation Mortgage; Jose Garcia, president and CEO of Northwest Community Credit Union; and Ryan Fitzgerald, owner of Raleigh Realty.

FAQ

Sources

• Daniel Cabrera, owner of Sell My House Fast SA Texas
• Tim Gordon, San Diego-based real estate investor and financial expert at Gordon Buys Homes 
• Reed Letson, owner of Elevation Mortgage
• Jose Garcia, president and CEO of Northwest Community Credit Union
• Ryan Fitzgerald, owner of Raleigh Realty