Since the sharp drop in the real estate market a few years ago, interest rates have been sticking pretty close to all time lows. They fluctuate, of course, but when compared to rates in the past, interest rates today look pretty good. To take advantage of these low rates you’re probably considering a refinance. But there are quite a few types of refinance home loans available. How do you choose what is best for you?
Conventional Refinance Home Loans
When you refinance your home you will go through one of two types of lenders. The first is the conventional lender, which follows the underwriting guidelines of Freddie Mac and Fannie Mae. The second is a federally insured lender, which follows the guidelines created by the Federal Housing Administration. While there are many types of conventional refinances, the most common are the rate-and-term refinance, the cash out refinance, and the cash in refinance.
The rate-and-term refinance is perhaps the most common conventional refinance option on the market today. This refinance allows you to take advantage of interest rates today by basically re-doing your entire loan. When you are approved for a rate-and-term refinance you are given completely new loan terms, including interest rate, amortization schedule, and loan length. The new mortgage company pays off the remaining amount of your old loan, freeing you from the first mortgage so you can make the payments on the second. This loan is ideal if you want to reduce the interest rate or switch from an ARM loan to a fixed mortgage.
The cash-out refinance is pretty much exactly what it sounds like. This refinance is ideal for homeowners who have built up equity in the home and who now want to pull out the equity for other uses. In an ideal situation the equity will be going to further their investment portfolio. When done to your advantage, you will cash out your equity and adjust the loan terms, giving you a lower interest rate. This will be important because your new loan will be higher, adjusting for the cash that you pulled from the equity.
The last common refinance type is the cash-in option. With this refinance you adjust the terms of the loan and put more cash into it than you originally invested. The result is a lower mortgage with a hopefully smaller mortgage payment. The cash-in refinance will help reduce your debt.
Refinance Programs Through the Government
The Federal Housing Administration was created to help struggling homeowners get or keep their homes. As part of this, there are three refinance home loans that are available to homeowner’s through federally approved lenders. These are the streamline refinance, HARP, and the short refinance.
The streamline refinance is only an option for people who have existing federally insured loans. If you are one of these people and you are in good standing on the loan, you may be able to qualify through the lender you have or through any federally approved lender. The purpose of this refinance is to make the process easier and faster, cutting out a lot of the headache that comes with it. The one downfall is that you can’t cash out the equity with this one and if you don’t have the home appraised, you can’t increase the amount of your loan.
HARP is the second option. HARP stands for Home Affordable Refinance Program. This one is meant for homeowners who are underwater on their loans, meaning they owe more on the home than it is actually worth. For people who bought their homes right before the real estate market dropped, this may be a good option. To take advantage of this option you do have to be in good standing on the loan, with the last twelve months of payments paid on time.
Last but not least is the short refinance option, which is helpful for people who want to switch to a federally insured loan but are currently with a conventional lender. Like HARP, it is for homeowners who are underwater on their mortgage. The biggest difference is simply that it is for those who have conventional loans, not FHA.
Whether you want to refinance through the federally approved lenders or go through a conventional lender is entirely up to you. What matters most with refinance home loans is that the homeowner walks away with a loan that betters the financial situation either by reducing the bottom line of the mortgage or by dropping the mortgage payments. In an ideal situation, you will experience both.