Refinancing mortgages in order to lower the current rate, term, or monthly payment is the one and only goal of a rate and term refi. The only way to actually replace a homeowner’s current mortgage with a better one is through this process. Rate and term refinances are designed in order to lower either the interest rate, the term of the current loan, or possibly both.
Homeowners who are looking to refinance their current mortgage with lower rates but at the same terms are able to achieve a lower monthly payment. When one refinances at a shorter term, they may find themselves having a higher payment. The advantage of this is equity building. When you reduce the loan term, it pays off the mortgage faster, which, of course, helps build equity faster.
There are many types of loans for rate and term refinance transactions:
- Conventional Refi – conventional refinancing is the process of refinancing your current mortgage loan with a conventional loan, which lowers the rate, term or monthly payment. They can either be conventional loan to conventional loan or FHA loan to conventional loan. Homeowners tend to make use of the rate and term refinance in order to convert their adjustable mortgage rate (ARM) loan into a fixed loan.
FHA to conventional refi does work for homeowners looking to get rid of their Mortgage Insurance Premium (MIP) loan to a fixed loan.
- FHA Refi – There are several types of FHA refinance loans. The overall primary objective in doing FHA refinance is typically to lower their rate and monthly payment.
- Conventional to FHA – typically done due to the loan-to-value exceeds the maximum allowed by a conventional loan. Borrowers could possibly get up to 97.75% loan-to-value on FHA refinance loans. It is also used to convert an ARM loan to a fixed rate mortgage.
- Non-streamline FHA to FHA refinance – existing FHA loans can be refinanced into a different FHA loan in order to lower the rate and monthly payment. Also known as a “regular FHA refi” transaction, homeowners can lower the rate, term, or monthly payment.
- Streamline FHA refi – the new FHA loan must meet the 5% monthly payment reduction rule if an existing loan isn’t an ARM. The new FHA loan must the net tangible benefit rule. According to HUD 4155.1 Chapter 6 Section C, “Net tangible benefit” is defined as:
- A 5% reduction to the P&I of the mortgage payment plus the annual MIP, or
- Refinancing from an Adjustable Rate Mortgage (ARM) to a fixed-rate mortgage.
FHA Streamline Refi
There are many kinds of FHA Streamline Refinance loans:
- Full Credit/No Appraisal Streamline Refi – Credit qualifies the loan but there is no appraisal required. There is no significance in the value of the property, as the file is underwritten based off of the original value and the existing loan.
- No Credit Qualifying/No Appraisal Streamline Refi – A credit report is not necessary and only a mortgage history is inspected in order to qualify. An appraisal is unneeded, as well. The existing loan acts as a value and the existing pay-off determines the loan amount.
- No Credit Qualifying/All Appraisal Streamline Refi – A credit report is not necessary and only a mortgage history is inspected in order to qualify. An appraisal report is needed in order to determine the value of the property.
Depletion in the term of a mortgage, no matter what, is NOT a net tangible benefit when it comes to the FHA Streamline Refinance Loan. On the other hand, a term depletion hand-in-hand with an interest rate depletion could potentially end with the net tangible benefit rule.
Homeowners have to be current on the mortgage being refinanced for the month due before the month where they close the refinancing and for the month where they close. Evidence of original ownership of the house is necessary in order to determine any undisclosed identity-of-interest transactions.
When using one of the Streamline Refinance options, whether it’s Full Credit/No Appraisal Streamline Refi or any other one, the homeowner simply can not carry/roll in the closing costs of the loan along with the new mortgage. Borrowers have to pay all of the closing costs as soon as the settlement is complete. Only the non-streamline or “normal” FHA refinance loan program allows closing costs to carry into the new loan.
- VA Refi – The Veterans Administration Home Loan offers a streamline refinance program that avails the lower existing interest rate by refinancing an existing VA mortgage.
- IRRRL – Interest Rate Reduction Refinance Loan. This could either lower the existing interest rate or it could convert an ARM to a fixed-rate mortgage.
IRRRLs must be VA to VA refinances and will use the entitlement originally used by the veteran or their (eligible) spouse. A new Certificate of Eligibility is not required. The occupancy requirement is different from other VA loans as the borrower only needs to assure that they indeed occupied the home.
IRRRLs are able to roll in the closing costs along with the new loan. While VA doesn’t set a capacity on the amount a borrower could use to refinance, they will limit their liability or exposure and, in turn, it affects the money they will allow to refinance. The “loan limits” vary by the county due to the value of a particular house depends partly on where it’s located.
The VA Funding Fee is, for the most part, paid by the veterans who use the VA Home Loan Guarantee. The funding fee is a percentage of the loan amount, however, the VA Funding Fee is refinanced for any of the reasons below:
- A veteran receiving either disability benefits or compensation for a disability related to their service.
- A veteran who would be entitled to receive compensation for a disability related to their service if they did not receive retirement of active pay duty.
- Living spouse of a veteran who died in service or in an incident related to their service.
IRRRL could be used as a benefit towards reducing the term of the current mortgage loan from 30 to 15 years. While this option does save money in interest over the loan’s life and builds equity faster, it could potentially equate to a higher monthly payment due to the reduction in the term.
- USDA Refi – A current USDA loan can refinance to a new USDA loan either as USDA Guaranteed or USDA Direct Mortgage. The main goal of refinancing from a USDA to a USDA loan is to lower its interest rate on the current mortgage, then lowering the monthly payment. Refinancing is only available at a fixed rate, however.
Homeowners who do not have an existing USDA loan can’t refinance to a USDA loan. However, it is possible to refinance to an FHA, conventional, or perhaps a VA loan.
There is absolutely no maximum loan amount allowed on the USDA refinance loan. A borrower’s debt-to-income (DTI) ratio tells them how much is affordable. Now set at 29/41, exceptions are only made with compensating factors.
Basic requirements for USDA refinance are:
- The existing mortgage must be current and not delinquent.
- The existing mortgage must be a USDA mortgage already.
- Proposed P&I monthly payment must be lower than the current USDA mortgage.
- Absolutely no cash out must be taken out using the USDA refinance program.
USDA Refinance Non-Streamline needs a full appraisal of the property. Closing costs and the guarantee fee can be included in the loan’s amount but the appraised value can only go farther by as much as the actual guarantee fee.
Home equity refinance loans (A.K.A. “Cash-Out Refi”) are different types of refinancing transactions.
For additional information about refinancing loans, contact our Home Loan Specialists at (855) 501-5927.