Refinance
With any type of purchase loan product, there will be refinancing options offered. A refinance may be done for many different reasons; either to simply get a lower interest rate and/or monthly payment, remove a co-borrower, completely change to a different loan product, take out some of the equity in an existing property, etc. Refinances are a great option to have more flexibility and be able to take more control of your finances.
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Table of Contents
Rate/Term
The most common and easy-to-understand type of refinance is the rate/term. As the name suggests, these types of refinance transactions are simply for the purpose of obtaining a new interest rate and potentially extending or shortening the term of the existing loan. These types of loans are also useful for removing a co-borrower that was on the original purchase loan of a property, or switching to a completely different loan product. For example, if someone purchased a home with an ITIN number and acquired a Social Security Number later on, they could refinance their loan and switch from whatever Non-QM loan they had to a Conventional or FHA loan that will allow them to have a much lower interest rate, something that wasn’t accessible before with an ITIN number.
For every type of purchase loan product, there is a rate/term refinance that can be done with similar LTV limits, or in some cases, even higher; in the case of FHA loans, you can do a rate/term refinance with just 2.25% down, or 97.75% LTV, which is cheaper than the minimum purchase down payment of 3.5%, or 96.5% LTV.
Cash-Out
A cash-out refinance is, in essence, a new home loan that you obtain that is higher than the one you currently have, but the extra balance will go to you at closing in cash, which can be used for things like debt consolidation or home improvements. Cash-out refinances will affect the rate and term of the loan as well, same as a regular rate/term refinance. These types of refinance transactions generally require you to have a certain amount of equity in your property already; you won’t be able to do a cash-out refi if you’ve still only got 3% equity in your home. In fact, the general rule is that cash-outs are only gonna be accessible once you’ve reached at least 20% equity in your home, or 80% LTV.
FHA Streamline
FHA Streamline refinances are a great option for those who have an existing FHA loan, as it can be done very quickly and easily, as the name suggests; it is a very “streamlined” process that may not even require a borrower to verify income, credit, or have an appraisal done on their home. For these reasons, it generally takes much less time to close an FHA Streamline, since the underwriting process is much more simplified. The loan amount of an FHA Streamline is primarily determined by the outstanding principal balance of your loan (what you currently owe) rather than the property’s current value; because of this, you can still do an FHA Streamline when the value of your property has decreased, resulting in an “underwater mortgage”, where you owe more than what your property’s worth.