Which Refinance Is Best: FHA, VA, Conventional, or USDA?

Dan Green
The Mortgage Reports contributor

Mortgage Rates Falling To New Lows

Current mortgage rates are at their lowest levels of 2014 and pricing is the best it’s been since June of last year. It’s an excellent time to refinance. But which refinance program is best?

There are a bevy of refinance options in today’s mortgage market and each offers advantages to a borrower.

Have you checked today’s mortgage rates against your current one? U.S. homeowners are locking-in new, bigger monthly savings.

Click to see today's rates now (Sep 22nd, 2019).

Freddie Mac: 4.10% 30-Year Fixed

According to Freddie Mac’s weekly mortgage rate survey of 125 banks, the average 30-year fixed rate mortgage rate is currently 4.10%. This rate is available to prime mortgage borrowers paying 0.5 discount points at closing.

A prime mortgage borrower is one with verifiable income meeting standard debt-to-income ratios; with at least twenty percent to put down on a home purchase; and, with a credit score of 740 or better.

Notably, based on the Freddie Mac definition, “prime” mortgage borrowers do not include existing homeowners looking to refinance. However, for refinancing households, today’s refinance interests rates and APRs are equally low.

Mortgage applicants report getting rates in the 3-percent range from their banks and even zero-closing cost loans are coming in cheap.

If you’ve been considering a home refinance, now would be an excellent time to get started on the process. Mortgage rates are hovering near 15-month low but could reverse and move higher in an instant.

More than 1 million U.S. homeowners are currently “in the money” to make a refinance. Perhaps you are among them.

Click to get today's live rates now (Sep 22nd, 2019).

Which Refinance Is Best?

Today’s refinancing households have a multitude of mortgage programs from which to choose. Each program carries its own mortgage rates and rules, so you’ll want to make sure to pick the optimal program for you and your home.

Conventional Refinance

The conventional home refinance is best for homeowners with at least 15% home equity and good credit scores. Conventional loans are backed by either Fannie Mae or Freddie Mac and are available in three formats.

The first format is the Rate-and-Term Refinance. In a Rate-and-Term Refinance, you are changing either the rate of your loan, the term (i.e. length) of your loan, or both. Your loan size remains mostly unchanged. An example of a Rate-and-Term Refinance is a homeowner reducing his 30-year mortgage rate from 4.5 percent to 3.5 percent; or changing from a 30-year mortgage to a 15-year loan.

The second refinance format is a Cash-Out Refinance.

In a Cash-Out Refinance, the homeowners increases its loan balance by five percent or more; and, typically receives the additional borrowed amount as cash paid at closing. Sometimes, a Cash-Out Refinance is used for debt consolidation and the additional borrowed amount is dispersed directly to a bank or other creditor.

The third refinance format is a Cash-In Refinance. In a Cash-In Refinance, the homeowner brings cash to closing to reduce the borrowed amount — often to get the loan to a lower loan-to-value (LTV).

The conventional mortgage refinance is one of the few program to allow for Cash Out, so homeowners wanting to extract home equity should look at conventional financing first; as should homeowners refinancing a second home or investment property.

Lastly, the conventional refinance could be a terrific way for FHA homeowners to cancel their FHA MIP. Rather than refinance with the FHA, homeowners could refinance to a conventional loan instead. This strategy is increasingly popular as home values recover nationwide. 

HARP Refinance

The Home Affordable Refinance Program (HARP) is a special loan program available to homeowners with existing loans backed by Fannie Mae or Freddie Mac. The HARP loan waives most requirements of a “typical” conventional mortgage refinance including the need for a home appraisal. The typical HARP homeowner saves more than 30% on a refinance. There are more than 667,000 U.S. households currently eligible to use HARP.

FHA Refinance

The FHA Refinance is typically best for homeowners with an existing FHA mortgage, but not always.

For homeowners with low credit scores, a multi-unit home, low amounts of home equity, or all three, an FHA loan may be the best way to reduce your rate and monthly payment. Because the FHA doesn’t “raise rates” for higher-risk loans like Fannie Mae and Freddie Mac do, borrowers can save 200 basis points (2.00%) or more on their refinance.

For homeowners with an existing FHA mortgagethe FHA Streamline Refinance can be the fastest, simplest way to get access to a new, lower rate. The FHA Streamline Refinance waives the need for a home appraisal, and many lenders waive income and credit score requirements. Additionally, for homeowners whose mortgage pre-dates June 1, 2009, the FHA offers reduced mortgage insurance premiums (MIP).

FHA homeowners whose homes have at least 10% equity should also consider refinancing out of MIP, via a conventional loan. FHA homeowners are eligible to refinance with a “standard” Fannie Mae or Freddie Mac loan in order to cancel MIP.

Click to refinance out of your FHA MIP (Sep 22nd, 2019).

VA Refinance

The VA Refinance is available to homeowners who are active military servicepersons, or veterans of the Armed Services. The program is backed by the Department of Veterans Affairs.

The most common VA refinance program is the VA Streamline Refinance. Formally known as the Interest Rate Reduction Refinance Loan (IRRRL), the VA Streamline Refinance requires no appraisal, no income verification, and no credit score during the underwriting phase. The main requirement of the VA Streamline Refinance is that the homeowner’s new payment is lower as a result of the refinance. 

The VA also offers a “standard” refinance which is known as the VA Cash Out Refinance, although you’re not required to use it as a “cash out” program. Homeowners with a non-VA loan, for example, will sometimes use the VA Cash Out Refinance to “get into” the VA Home Loan Guaranty program.

VA mortgage rates are currently the lowest of all common loan types and VA loans never require mortgage insurance. 

USDA Refinance

Via its Rural Loan Program, the U.S. Department of Agriculture (USDA) allows the refinance of its own loans via the USDA Streamline Refinance. The USDA Streamline Refinance is available in a limited number of states and homeowners are required to use 30-year fixed rate financing. However, as part of the program, home appraisals are waived and mortgage insurance requirements are low.

Get Today’s Mortgage Rates Now

Mortgage rates are near 15-month lows. Refinancing homeowners are getting access to interest rates in the 3-percent range and current APRs are the lowest they’ve been in more than a year.

Get access to today’s live rates. Quotes are available online for free with no social security number required to get started and no obligation to proceed whatsoever.

Click here to get started now (Sep 22nd, 2019).