When first speaking with your loan officer and determining that a refinance makes sense, you also have the full suite of loan options available to you. Your loan officer will provide these options to you and help determine which program best suits your needs and meets your goals.
Fixed rate mortgage loans offer the stability of a principal and interest payment that will never change. For those who intend to keep the property for the long term and rates are at relative lows, then a fixed rate can be the better option.
Fixed rate loans also offer various loan terms ranging from 10 to 30 years in five year increments. You can have the choice of a 10 year, 15, 20, 25 and 30 year term. The longer the term the lower the monthly payment. The shorter the loan term the higher the monthly payment but you save on interest with a shorter term loan as the shorter term pays off the mortgage sooner.
Adjustable rate and hybrid loans have features that allow the interest rate to change based upon predetermined terms. Hybrid loans are those that have a fixed rate at the early stages of the loan, such as three of five years before turning into a loan that can adjust once per year. Such loans are listed as 3/1 and 5/1 hybrids.
Why choose an adjustable rate loan? Because the interest rates on adjustable rate programs start out lower than a fixed rate mortgage. For someone who intends to keep a property for say five years might decide to take a 5/1 hybrid and enjoy the lower monthly payments.
Conventional loans are those approved using Fannie Mae or Freddie Mac guidelines and are by far the most popular in today’s market. A conventional refinance will require at least a 10% equity position, meaning the new loan amount must be no more than 90% of the current appraised value of the home. Remember, for all conventional loans where the mortgage is above 80% of the current value of the home, private mortgage insurance will be required. PMI is paid in monthly installments along with the mortgage payment.
A conventional loan is the most common loan in today’s marketplace and lenders compete with one another for your business. Increased competition means more competitive rates.
VA, FHA and USDA loans are considered government-backed loans due to the inherent guarantee to the lender. When refinancing an existing, VA, FHA and USDA loan, the loan can be refinanced with much less paperwork often referred to as a “streamline” refinance. A streamline will not require income or employment verification, no minimum credit score and relaxed appraisal standards.
When replacing an existing FHA loan with a new one qualifies for the streamline status. This means no pay check stub will be required, no W2 forms and no income tax returns. There will be no minimum credit score required, either. Lenders will research your mortgage credit history to make sure there are no more than one payment made within the past 12 months more than 30 days past the due date and no such lates within the previous six.
FHA loans do require mortgage insurance. An upfrontnt mortgage insurance premium is required but is rolled into the loan amount. A second mortgage insurance premium is one paid every year and is made with monthly installment payments. A streamline doesn’t allow you to roll your closing costs into your loan with the exception of the new upfront mortgage insurance premium.
Streamline status is also available for existing VA loans, again as long as the old VA loan is being replaced by a new one. The streamline does not require an appraisal, credit report, income or employment documentation and no bank statements are needed. As long as the interest rate is lowered when refinancing an existing VA loan or the borrowers are switching from an ARM to a fixed, a VA streamline is an excellent choice.