Replacing a current mortgage loan with a new mortgage loan is referred to as refinance.
Common reasons to refinance include: lower mortgage rate, obtain cash out, consolidate other debt, reduce or increase term, refinance from ARM to FIXED, satisfy a divorce agreement, etc…
Because a refinance amounts to establishing a brand-new loan with brand-new terms, it follows that refinance applicants are subject to the same approval process as for the initial mortgage which was given at the time of purchase. A refinanced mortgage represents a brand-new debt and must be underwritten accordingly.
There are three basic areas against which a refinance applicant is evaluated :
- Credit Score and Payment History
- Income and Employment History
- Equity (home value vs amount owed on mortgage loan)
2 Types Of Mortgage Refinance
Rate-and-term, & cash-out. The refinance type that’s best for you will depend on your individual circumstance.
In a rate-and-term refinance, the only terms of the new loan which differ from the original one are either the mortgage rate, the loan term, or both. Loan term is the length of the mortgage. For example, in a rate-and-term refinance, a homeowner may refinance from a 30-year fixed rate mortgage into a 15-year fixed rate mortgage; or, may refinance from a 30-year fixed rate mortgage at 6 percent mortgage rate to a new, 30-year fixed rate mortgage at 4 percent.
With a rate-and-term refinance, a refinancing homeowner may not walk away from closing with more than $2,000 in cash. Closing costs and escrow reserves may be added to the loan balance.
In a cash-out refinance, the new mortgage may have a lower mortgage rate or shorter term as compared to the original home loan. However, the defining characteristic of a cash-out mortgage is that the loan balance of the original mortgage is increased to account for cash-in-hand at closing of more than $2,000; for debt consolidation; or, to combine an existing first and second mortgage, or to add to savings, etc…
“Special” Refinance Programs For Homeowners
With respect to refinancing, there are four mortgage programs for which the mortgage approval process is different. Collectively, these programs are known as “streamline” programs because their respective underwriting requirements are grossly simplified.
With a streamline refinance, lender often waive large chunks of the “typical” mortgage approval process which may include waiving appraisals, waiving income verification, and waiving credit score minimums.
Four common streamline refinance programs are :
- FHA Streamline Refinance : For homeowners with an existing FHA mortgage
- VA Interest Rate Reduction Refinancing Loan (VA IRRRL): For homeowners with an existing VA mortgage
- Home Affordable Refinance Program (HARP): For homeowners with an existing Fannie Mae or Freddie Mac mortgage
- USDA Streamline Refinance: For homeowners with an existing USDA mortgage