Purpose

With a low interest rate environment, mortgage refinance activity continues to outpace purchase activity. The strategies and motivation for driving the refinance boom are as unique as the borrowers themselves, but the overarching goal with a refinance is to move into a better mortgage to either lower monthly mortgage payments¹, obtain more favorable financing terms (for example, lower rate), or both.

^{¹By refinancing the existing loan, the consumer's total finance charges may be higher over the life of the loan.}

How a Refinance Works

A mortgage refinance is replacing a current mortgage with a new mortgage loan. It is usually undertaken to obtain a new mortgage with a lower monthly mortgage payment¹ achieved by means of a lower interest, new loan term, or new loan type. 

There are several kinds of mortgage refinances: rate-and-term, cash-out, and reverse mortgages.

^{¹By refinancing the existing loan, the consumer's total finance charges may be higher over the life of the loan.}

Rate-and-term refinance

A rate-and-term refinance lets homeowners change their existing loan’s mortgage rate, loan term, or both, to save money. Most refinances are rate-and-term refinances, especially in a falling mortgage rate environment.

Cash-out refinance

A cash-out refinance is designed for homeowners to cash out a portion of their home equity. Because you’re cashing out some of your equity, your new loan will be larger than your current one. In a cash-out refinance, the new loan may also offer a lower interest rate or a shorter loan term compared to the old loan. But the main goal is to generate liquid cash — so getting a lower interest rate isn’t required.

FHA Streamline Refinance

The FHA Streamline is a special refinance program designed to help existing FHA homeowners refinance their home to take advantage of favorable market conditions and lower their overall loan costs with minimal documentation.

You will more than likely be eligible if you have made consistent, on-time mortgage payments for the last six months. The Streamline is designed to lower monthly mortgage payments¹, but small cash-outs may also be possible with the program.

Reasons to use the FHA Streamline Refinance:

• Lower interest rate
• Reduce loan duration
• Receive mortgage insurance premium discount on new refinanced loan (must refinance within the first three years of owning your home)

^{¹By refinancing the existing loan, the consumer's total finance charges may be higher over the life of the loan.}

Veterans Affairs (VA) Loan Refinance

A VA loan is a mortgage guaranteed by the United States Department of Veterans Affairs and available only to active service members, veterans, and eligible surviving spouses. Unlike conventional loans, VA loans require as little as $0 down payment for eligible borrowers.

Features

• As little as $0 down for eligible borrowers
• No private insurance required
• Less than perfect credit often accepted
• Reduced closing costs
• Issued by private lenders
• Often offers the possibility of better terms because it’s partially backed by U.S. government
• Certificate of Eligibility required

Jumbo Refinance

A jumbo loan is a mortgage that exceeds or doesn’t conform with lending limits set by the Federal Housing Finance Agency. This type of loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac, two large publicly traded corporations (agencies) formed by Congress to purchase the conventional loans that lenders make. Because there is less of a secondary market for these loans, lending standards tend to be stricter than for conventional or conforming mortgages. At AAG, the Advantage Jumbo Reverse Mortgage Loan offers loan amounts up to $4 million on homes valued up to $10 million.

Features

• Loan amounts that can be many times larger than those for conventional mortgages
• More appropriate for high-income earners
• Interest rates often on par with conventional mortgages
• Typically, more rigorous credit requirements than those for a conventional loan
• Typically, lower debt-to-income ratios required compared with conventional loans