Refinance

Types of Refinance

• Rate-and-term refinance - Replaces the existing loan with new rate or term (or both) without extracting equity. The new loan amount covers only the remaining balance plus closing costs.
• Cash-out refinance - The new loan exceeds the current balance, and the borrower receives the difference in cash. Conventional cash-out refinances typically allow up to 80% LTV. FHA and VA programs have their own cash-out limits.
• Streamline refinance - Simplified process available for FHA, VA, and USDA loans with reduced documentation and underwriting. Often does not require a new appraisal.

When Refinancing Makes Sense

The decision to refinance depends on several factors: the difference between the current and new interest rate, the cost of refinancing, and how long the borrower plans to stay in the home. Closing costs on a refinance typically range from 2% to 5% of the loan amount. Dividing total closing costs by the monthly payment savings gives the break-even period. If the borrower will remain in the home beyond that point, refinancing produces a net benefit.

Refinancing resets the amortization schedule, which can increase total interest paid over the life of the loan even at a lower rate, particularly when refinancing into a new 30-year term late in the original loan's life.

Qualification Requirements

Refinancing requires the borrower to qualify under current underwriting standards, including credit score, debt-to-income ratio, and employment verification. A new appraisal is typically required to confirm the property's current value and establish the LTV for the new loan. Borrowers with less than 20% equity after refinancing will generally need mortgage insurance on conventional loans.