People seek to refinance home loans for a wide range of reasons. Whatever your reason for seeking the refinancing of your mortgage loan, the odds are good that there is a perfect loan option available for you. Of course, not all times are good times to refinance your mortgage. The better you understand your mortgage refinancing options and how they work for (and sometimes against) homeowners, the more informed decision you can make about when the right time to finance might be and the type of mortgage refinance program works best to meet your needs.

What Is a Mortgage Refinance Loan?

When you refinance your mortgage, you’re essentially paying off your existing mortgage and getting a new one. This allows you to make changes to your mortgage that will benefit your current economic situation or to assist you in obtaining specific economic goals. Things that can be adjusted in the new mortgage to benefit you include:

  • Monthly payments.
  • Interest rates.
  • Loan duration.
  • Loan terms (fixed-rate vs. adjustable-rate or ARM).
  • PMI (private mortgage insurance for conventional loans).
  • MIP (mortgage insurance premiums for FHA loans).
  • Total amount borrowed.

Then some people consider mortgage refinance loans to help them cash out the equity in their homes. While it places them right back at the beginning of the homeownership process, it allows them to use the funds for other things, such as making payments on medical bills, paying for college, or even eliminating high-interest credit card debt.

One of the reasons so many people can use a mortgage refinance loan to help reduce payments, payment duration, etc. without going broke in the process is by waiting until they’ve approved their credit situations to apply for a mortgage refinance loan and securing a lower interest rate in the process. Good credit makes a world of difference in the amount you ultimately pay for your home. Reducing your interest rate by as little as one point can swing your costs of homeownership by tens of thousands, if not more, of dollars over the next 30 years.

Reducing the term from 30 years to 15 years, or even 20, can also save massive amounts of money. Even if the total mortgage is only $1,000 per month, eliminating 10 years of payments saves you $120,000 in total interest on your home. Reducing it by 15 years saves $180,000. That’s a lot of money that could be invested, spent on a vacation home, or simply spent doing whatever you want with it because your home is paid for at this point.

So, how do you get the mortgage refinance loan rates that make all these great things possible? That’s the real question to ask when considering your refinance options.

What Impacts Mortgage Refinance Loan Rates?

For the most part, mortgage refinance loan rates are determined in the same way traditional mortgage rates are determined. It’s an intricate combination of details that include:

  • Current credit score.
  • Debt-to-income ratio.
  • Employment history.
  • Employment status.
  • Equity in the home.
  • Amount borrowed.
  • Ability to repay.

Any one of these unfavorable-appearing things can make it more difficult to get the lower rate homeowners seek. This is why it’s important to maintain a good credit score even after you buy the home of your dreams.

There is one exception when it comes to determining the loan interest rate when refinancing. That is for people who go the FHA streamline refinance loan route. For this loan, your payment history and standing with the FHA mortgage repayment process is what matters. Home values, the current condition of the home, income, employment status, credit records – none of these things matter. You simply must meet the FHA Streamline loan program requirements to qualify.

Of course, there are specifications for this type of loan that are different from all others. For instance, the loan must provide a benefit to the owner by either reducing the amount paid for the life of the loan or the duration of loan repayments. And then there are the qualifications which require the original loan to be an FHA mortgage loan and that the borrower has a history of timely payments with no late payments within the past three months and only one late payment within the previous 12 months.

For those who qualify, the benefits of no credit checks and no appraisals for the loan are reason enough to consider this option in many cases. This allows people who are even underwater (meaning they currently owe more on their mortgages than they originally borrowed).

Who Needs a Mortgage Refinance Loan?

Not everyone needs a mortgage refinance loan. Even among those who want one, they aren’t all necessary. Some people might find other financing options to be better matched to meet their short and long-term financial needs. Working with a trusted advisor can help guide you on the path to discover which option works best for you. However, some of the people in need of mortgage refinance loans might include:

  • Have good credit – especially those who have improved their credit scores since taking out their original mortgages.
  • Have 20 percent or more equity in their homes. This offers favorable interest rate placement and eliminates the need for private mortgage insurance.
  • Have sufficient income and low debt-to-income ratios. Lenders love crunching numbers and these numbers always look good to them.
  • Have long work histories at their jobs.

In these situations, people can use a mortgage refinance loan to help them reduce their monthly payments as well as the number of years they’ll repay the loans. The price they pay for this freedom is a new home appraisal (and perhaps a few small repairs to make that go well for them) and closing costs for the loan. The tens of thousands of dollars up for grabs in savings is well worth a few thousand in the here and now – for borrowers that have access to these kinds of closing costs.

One final group of people that may find themselves in need of a mortgage loan refinance program are those who have adjustable-rate mortgages that are about to increase on them. When this happens, it can swing their monthly payments hundreds of dollars in the wrong direction and that is something borrowers do not want. Refinancing now can spare them the crushing expense of increasing interest rates and secure them a much lower, more sustainable fixed-rate mortgage.

What Types of Mortgage Refinance Options Exist?

There are many options available for people interested in refinancing their mortgages. The better you understand the options available to you, the more informed decision you can ultimately make. These are some you might wish to consider:

  • Fixed-Rate Mortgage. As the name implies, the interest rates do not change for the life of the loan. This means you’ll never need to worry about interest rate increases for the life of your loan whether it is a 15, 20, or 30-year mortgage loan you’ve refinanced into.
  • Adjustable-Rate Mortgage (ARM). These types of loans lure borrowers in with tempting lower upfront interest rates. However, on the other side of the arrangement is that at the end of the agreed-upon term those interest rates can rise – substantially. These should only be attractive to people who intend to sell their homes or refinance before the end of their initial term and only if they have no penalties for early repayment.
  • Cash-Out Refinance. It allows you to refinance your existing mortgage and take out the equity in cash. With this loan, you’re essentially borrowing against the equity in your home. This is money you can use to eliminate other debt, take dream vacations, or fund important life events for your family. You will need a higher credit score to make this happen and the home must qualify through the appraisal process.
  • Cash-In Refinance. Some people receive windfalls of cash at various points in life that are not sufficient to completely pay off their mortgage but can help to shorten the number of years owed or the monthly payments, if not both.
  • VA Interest Rate Reduction Refinance Loans (IRRRL). This loan through the VA allows qualifying veterans to refinance their home without the qualifying process that most home refinance loans must go through. The upside is that you do not have to prove creditworthiness or go through the costly appraisal process. The downside is that you cannot cash out equity with this particular program.
  • FHA Streamline Refinance Loans. FHA borrowers who are in good standing with near-perfect histories with their mortgages may qualify for this refinance loan that has relatively few other requirements. Appraisals, job verification, and credit worthiness are not necessary with this loan, but borrowers cannot expect to cash out equity through this program either.

With any of these refinance programs that are pros and cons to keep in mind. Taking your time now to learn them can help you decide which loan is the right choice for you or even if you are best served through a mortgage refinance loan or some other option altogether.

Is Your Situation a Good Fit for a Mortgage Refinance Loan?

Not everyone is a good match for a mortgage refinance loan. For those who do not have FHA or VA loans, the need to qualify can be a bit difficult for anyone that has had credit hiccups within the past four or five years. Many of the people considering refinance loans are the ones who are struggling with debt or unforeseen circumstances (car accident putting them out of work, necessary home remodel to bring an aging parent into the home, prolonged illness, unemployment, etc.).

To get the best results from a mortgage refinance loan your credit situation needs to be greatly improved over your initial loan or you need to have a substantial amount of cash to infuse into the loan to help reduce the repayment period for the loan.

For those who have significant equity in the home, there may be other options that are a better fit than a mortgage refinance loan, such as home equity lines of credit (HELOCs). The beauty of a home equity line of credit in this situation is that the money is there for you to use as needed. It’s like a loan you can give yourself without applying for it. You take what you need and then repay it.

Before you borrow that money from yourself make sure you understand the borrowing and repayment terms to avoid financial disaster in your future.

The mortgage refinance process works differently for different people at different stages in their financial lives. It isn’t always right or always wrong and can be a useful tool in the financial planning process for many homeowners. The better you understand what it brings to the table – and what it might remove from it – the easier it becomes to decide if that is the right choice for you.