The refinance process is intimidating– especially if it’s your first time refinancing. But, once you understand the types of refinance mortgage loans, making a decision is easy.
Types of refinance mortgage loans
Wondering which type of loan is best for a mortgage? It all depends on your individual preferences and situation. There are many different mortgage loan programs out there that you can learn about. The type of loan you choose will depend on many factors. A few include your income, credit score, equity, and property location.
Let’s go over the five main types of refinance mortgage loans.
1. Conventional Mortgages
Conventional mortgage loans are the most frequently used type. This is because you can buy your dream home with only a 3% down payment. The borrowing costs also tend to be lower than other loans.
You may still have a larger down payment than some government-backed loans. However, you'll be able to take advantage of lower interest rates.
Is a conventional loan right for me?
This is an appropriate option if you have a good credit score (at least 620 or higher) and a stable income. This is also a good route if you’re still learning the ins and outs of the mortgage process and are a first-time buyer.
2. Jumbo Mortgages
It's common to use a jumbo loan when you’re buying a more expensive home. With that in mind, these loans are popular in high-cost areas like New York City and San Francisco.
Interest rates for jumbo mortgages are similar to conventional mortgages. That said, it’s more difficult to qualify for a jumbo loan since you need a higher credit score. There’s also usually more in-depth documentation that’s required to qualify.
Is a jumbo loan right for me?
Of all the types of refinance mortgage loans, this is a viable option if you have a strong credit score (at least 700).
3. Fixed-Rate Mortgages
Fixed-Rate loans give a predictable monthly payment. This makes it easier to stay on top of your budget. The interest rate will also remain the same throughout the loan term.
This said, if the interest rates where you live are high, you may consider avoiding this type of loan. You don’t want to lock in and then overpay in interest over time.
Is a fixed-rate loan right for me?
This loan is best if you want to avoid potential changes to your monthly budget. Of the different types of refinancing home loans, this is a wise choice if you’re buying or refinancing your forever home (or plan to stay at least 5 to 7 years).
4. Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) is the opposite of a fixed-rate mortgage in terms of stability. What’s great about ARMs is that you’ll most likely have a lower fixed rate during the initial period of your homeownership.
Yet, with an ARM, your interest rates fluctuate over time, depending on how the market shifts. As a result, your monthly payments may become unaffordable, as they can increase during the duration of your loan. So, you won’t have the option to get mortgage payments stabilized throughout the term of the loan.
Is an adjustable-rate loan right for me?
This loan is a good choice if you don’t plan to live in your home for longer than a few years. If you’re purchasing a starter home, an ARM may help you save money on interest payments.
5. Government-Insured Mortgages
Government-insured mortgages are what they sound like– loans insured by the government. If you qualify for a government-backed loan, you could save on interest or a down payment.
These types of refinance mortgage loans help you finance a home when you can’t get a conventional loan. However, they typically have higher borrowing costs. You’ll also have to provide more documentation to prove your eligibility.
Is a government-insured loan right for me?
If you have a lower credit score and don’t qualify for a conventional loan, a government-insured loan may be a good fit. Also, these mortgage loans are helpful if you don’t have much cash to make a down payment.
When should I start looking at different refinance options?
Selecting the mortgage that suits your situation is key to getting the most out of your loan. And sometimes getting the most out of your mortgage means refinancing.
Say you’ve been paying off your mortgage for a few years, and as a result, you’ve built a good amount of equity. Then, you hear your neighbors talk about how they saved so much money from refinancing. This gets you excited about refinancing yourself. But you shouldn't jump the gun just yet. Before taking out one of the types of refinance mortgage loans, make sure you’re doing it for the right reasons and at the right time. If your current situation doesn’t make sense for refinancing, you won’t be able to reap the benefits.
So, before sorting through different types of refinancing, you should know how to choose the best scenario for refinancing.
Are you in the right place at the right time?
Answering “yes” to any of the following questions means refinancing could be right for you. Make sure you put thought into each question before browsing any lenders.
Do you need to shorten the length of your loan to save some money for the long haul?
Do you need to cash out your home equity for a huge purchase?
Do you need to lower your monthly payment to save money now?
Do you need a lower interest rate on your loan?
All these questions are important when considering types of refinance. But, the most crucial question to ask is: Will I gain more than I’ll lose from a refinance? If you’re going to end up losing money, then it’s likely you’re not in a good situation to refinance just yet.
Before diving further into the types of refinance mortgage loans, let’s go over scenarios that signal the time is right.
Different scenarios for when to refinance
The first step to choosing a refinance route is understanding your current situation. Here are a few common scenarios that can benefit from a refinance.
You now have a higher credit score
If you had a lower credit score when you bought your house, chances are you’re paying a high amount in interest. But, with a better credit score now, you may qualify for a better interest rate. As you browse types of refinance mortgage loans, you may find one that lowers your interest and monthly payment.
Your mortgage is no longer affordable
Perhaps you’ve lost your job or have had other expenses come up. If you’re in a situation where you can’t pay the full amount on your mortgage, refinancing can be a great option. To reduce your monthly payment, you can extend the terms of your loan to spread out your payments.
You have a big expense coming up
Life has a reputation for throwing surprises our way. Good or bad as the surprise is, it can mess up our budget plan. For example, you might suddenly have to pay off debt from medical bills. Or, maybe you have a huge wedding to fund or have a child going to college. Refinancing can allow you to borrow a large sum of money to fund your big expense.
How many types of refinances are there?
There are many different refinance options to choose from. So, it can be overwhelming to look at every single one. The good news is that once you know your scenario, it’s easier to choose from the types of refinance mortgage loans.
These are a few popular refinance choices that can help your current situation.
Conventional refinance
This refinance option swaps out your current mortgage loan with a conventional loan. This option can get you lower interest rates and help you save money in the long run for your financial goals.
Rate-and-term refinance
A rate-and-term refinance lets you change your monthly rate or the length of your loan. You’ll be able to save money with this option by paying less interest. This results from shortening your loan term or taking advantage of lower market rates.
Cash-out refinance
With cash-out refinancing, you’ll be able to use your equity and refinance your current mortgage at the same time. The new loan you take out will pay off your existing loan. This means that you’ll get to keep the leftover amount to put toward a big expense.
In the right scenario, refinancing can be a smart move. Understanding the types of refinance mortgage loans will help you choose the best option for your situation.
Get smart about refinancing
Still have questions? We’ve got the answers! Contact us today at NorthPort Funding to talk to a professional about refinancing. We can help you achieve your financial goals.