There are basically two different ways to structure of mortgage refinancing a loan: Rate and Term Refinancing (RTF) and Cash-Out Refinancing (COR). Occasionally a lender will make variations on these basic types:
- Rate and Term mortgage refinancing is when you pay off an existing first mortgage with a new refinance. The guidelines allow you to roll the new closing costs into the loan and get a very small amount of cash back. The cash back is limited to 2% of the new loan amount or $2,000 whichever is smaller. You cannot pay off credit cards or installment loans as part of a Rate and Term. You can pay off an existing second mortgage with a Rate and Term, as long as it was used to buy the house originally, i.e. Purchase Money second mortgage like an 80/15/5. No other second mortgages can be paid off with a Rate and Term. Frequently, appraisals are not needed on Rate and Term refinances. The best rates apply to Rate and Terms.
- Cash-Out Refinancing is when you pull out some money from the equity in your home, hence “Cash-Out”. You can use the money to pay off credit cards, autos, consolidate first and second mortgages, do home improvements, pay for tuition and more. You let your loan officer know how much cash dollar amount you would like to get after paying off your first mortgage or choose a percentage of appraised value you want the loan amount to be (Loan To Value “LTV”). An 80% LTV Cash-Out mortgage refinancing would be for a loan amount of 80% of the appraised value. For example, if your house appraised for $200,000 and you borrowed a new loan at 80% LTV, you would get a loan for $160,000 ($200,000 X .80). You would pay off your current mortgage(s), deduct costs and get a check for the balance. Mortgage Insurance is usually required when you borrow over 80% LTV but there are ways to avoid this and some loans do not require it. Cash-Out mortgage refinancing almost always require a full appraisal less than 90 days old.
- Streamlines are a special refinance loan. They are Rate and Term only (No Cash-Out) and use the old appraisal, no matter how old. They only apply in very limited circumstances. Most of the time, you must place a streamline back through the same lender that wrote the current loan, or at least the same agency. You need to discuss with your loan officer if a streamline will work in your situation or if it’s even the best way to go.
Many times you are trying to get rid of mortgage insurance with a mortgage refinancing and want the loan approved using a new appreciated current value. This will not work with a streamline as you’re using the original old appraisal and value. You cannot pay off a second mortgage with a streamline. You must do a 30- or 15-year fixed rate loan, no ARMs (Adjustable Rate Mortgage) of any type. They can be a good option though if it will work in your situation and save you time and money.
- Conversions are not truly mortgage refinancing. Some Adjustable Rate Mortgage (ARM) loans come with an option for you to “convert” your ARM to a fixed rate loan at some future point. Usually these conversion options are more expensive overall than a normal refinance. You need to read your Note carefully to understand your conversion option or take it to a trusted loan officer. Most conversions can only be exercised on certain dates of your loan and expire after a few years. You don’t usually get the current best rate available; instead you pay a margin over some index for your new fixed rate. Typically the rate you get on a conversion is about .75% higher than the rate you could refinance for. There is also usually a fee from $300-$1500 to do it. Also, your payments are only spread over the remaining loan term instead of starting again at 30 years. Refinancing frequently gets you a lower payment than a conversion option. It is important to talk with an experienced loan officer and compare the loan if you convert it against a new refinance to see which is best for you.
- Modifications are very rare. Most lenders do not do them. Very simply, the current lender just adjusts the terms of your loan. This can be the term left, rate or whatever else you both agree to. Many people do not understand why they need mortgage refinancing when the current lender could “just lower my rate and not lose me as a customer”. They don’t want to go through the paperwork and costs of a refinance. Unfortunately, your current lender will more than likely have to fill out new paperwork, appraisals, title work etc. with new loan costs, just as another lender would do for your refinance. Modifications aren’t usually offered. Small portfolio lenders are usually the only ones who will offer a modification, and they charge for them.
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