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What’s the best mortgage refinance: Conventional, FHA, VA, or USDA? Rules and cash-out options

Larry Phillips
The Mortgage Reports contributor

There are almost as many ways to refinance as there are to get a mortgage

Interest rates on mortgages remain exceptionally low, making it a great time to refinance your home.  

So, from the many refinance options currently available — which one should you choose?

Each refinance program has its own unique set of benefits and rules. To help you decide which refinance is best for your mortgage, we break down the main options here. 

Start your search by checking refinance rates from a few different lenders. If you can drop your interest rate and save, the next step is to decide which refinance loan meets your financial goals and get started with a lender. 

Get your personalized refinance rate. Start here (Nov 16th, 2019)

Types of mortgage refinance programs: Which one is best? 

There are plenty of mortgage refinance programs to choose from. But which one is best for you? The answer depends on your current loan, your financial goals, and the amount of equity you’ve built in the home. 

For most people, the best mortgage refinance is one of the following: 

  • Conventional refinance: Good for lowering your rate or loan term, canceling PMI/MIP mortgage insurance, or taking cash out
  • FHA streamline refinance: Good for current FHA loans, lets you refinance fast into a lower rate 
  • VA streamline refinance: Good for current VA loans, lets you refinance fast into a lower rate with no mortgage insurance required
  • USDA streamline refinance: Good for current USDA loans, offers a fast refinance into a lower rate with the option to roll closing costs into the loan

If you play your cards right, you could not only drop your rate and lower monthly payments, but also have a chance to cancel mortgage insurance, take cash out at closing, or refinance without any closing costs. 

Check your refinance program eligibility. Start here (Nov 16th, 2019)

Conventional refinance

Conventional refinance loans are backed by Fannie Mae and Freddie Mac — the two agencies responsible for helping keep the U.S. housing market stable. 

  • Conventional refinance: Typically, these loans are for people with good credit scores and some equity in their homes. Refinancers must meet conventional loan guidelines set by Fannie Mae and Freddie Mac. If you have more than 20% equity, you can cancel your mortgage insurance   
  • Best for: Borrowers with strong credit who can benefit from refinancing into a lower rate 

No matter what type of mortgage you currently have, you can refinance into a conventional loan. 

One big benefit is that conventional refinances don’t require mortgage insurance if you have at least 20 percent equity in your home. This is especially important when it comes to FHA mortgages with mortgage insurance premium (MIP). 

Related: How to get rid of mortgage insurance (PMI or MIP) with a refinance

Under current FHA rules, you can’t refinance into a new FHA loan and cancel MIP. But if you refinance into a conventional loan with at least 20% equity in your home, you can stop paying mortgage insurance premium.

Also, the mortgage insurance requirement for conventional loans is non-permanent. Lenders must automatically drop conventional private mortgage insurance (PMI) once you reach a 78 percent loan-to-value ratio. 

When to choose a conventional refinance

There are two types of conventional refinances: the rate-and-term refinance and cash-out refinance.  

A rate-and-term refinance allows you to keep your loan balance practically the same, but replace the interest rate or loan term. For example, you might reduce your 30-year, fixed interest rate from 4.7% to 3.7%. 

Or, you might decide it will save you money to pay your mortgage off faster by switching from a 30-year term to a 15-year term. 

Related: Three foolproof methods to know when to refinance

A cash-out refinance allows you to replace your current mortgage with one that has a higher balance. You get to keep the difference between the old loan and new loan in cash — minus closing costs. 

In most cases, you’ll pay a slightly higher interest rate on a cash-out refinance, and lenders will limit how much you can borrow against the equity you have in your home. 

We explain cash-out refinance in more detail below. 

FHA refinance

If you have a mortgage backed by the Federal Housing Administration, you can refinance it into another loan backed by the FHA. 

So, why would you want to switch from one FHA loan to another? The answer is the FHA streamline refinance program. 

  • FHA streamline refinance: The FHA offers a streamlined refinance program for homeowners with existing FHA loans. The program waives many of the documentation and other requirements you typically need to refinance a loan 
  • Best for: Current FHA home loan holders who have less than 20% equity in their homes 

For example, the FHA streamline refinance has no appraisal requirement, credit score requirement or income verification requirement. 

The only caveat is you’re still required to pay mortgage insurance. Fortunately, you can refinance an FHA loan to a conventional loan with a lower MIP. If you have enough equity, you won’t have to pay mortgage insurance at all. 

If you want a fast, simple way to lower your interest rate into today’s low rates — and possibly reduce your mortgage insurance premium — then the FHA streamline refinance is a great option. 

Check your FHA streamline refinance eligibility. Start here (Nov 16th, 2019)

VA refinance

If you’re a veteran of the military or currently on active duty, you can refinance your current mortgage to a home loan backed by the Department of Veteran’s Affairs. 

You can use a VA-backed mortgage refinance to reduce your current interest rate or get cash out at closing. 

  • VA streamline refinance: Known as an Interest Rate Reduction Refinance Loan (IRRRL), the VA streamline refinance lets you replace your existing VA loan with a new VA loan with a lower rate
  • Best for: Active members of the U.S. military or qualified veterans with a VA mortgage currently

VA loans feature some of the most relaxed qualification guidelines among all mortgage programs — while simultaneously offering some of the lowest interest rates. 

For example, VA-backed loans don’t have a minimum credit score requirement, and there is no mortgage insurance requirement. 

IRRRLs have other benefits, too. First, you can roll your closing costs into the principal balance of your mortgage. 

Second, the VA funding fee is only 0.50% of the loan amount. And there are virtually no documentation requirements — and the VA doesn’t require a new appraisal. 

Related: The 10 biggest benefits to VA home loans 

The VA also allows cash-out refinances, and you can borrow up to 100 percent of your home’s value. VA-backed loans are the only mortgage programs available today that allow 100 percent financing on a cash-out refinance. 

However, you’ll need to pay a funding fee of 2.15 percent of the loan amount the first time you use a cash-out refinance. A 3.3 percent fee applies for each additional use.

Check your VA streamline refinance eligibility. Start here (Nov 16th, 2019)

USDA refinance

The United States Department of Agriculture offers affordable home loan programs for people who live in rural and suburban communities. (Which, surprisingly, covers about 97% of the U.S. land mass.)

If you already have a USDA home loan, you can easily lower your interest rate with a USDA streamline refinance. 

  • USDA streamline refinance: If you have a direct loan from the USDA or a mortgage backed by the department, you might qualify for the USDA streamline refinance program. In 2017, the USDA made the program available in all 50 states
  • Best for: Current USDA home loan holders 

The program offers benefits that aren’t available with other traditional refinances. Along with no LTV, income or credit score requirement, there is no appraisal requirement. You can also choose to add your closing costs into your new loan, so you won’t need to bring any cash to the closing table. 

Not only can you get a low interest rate with few eligibility requirements, but you also get the added benefit of a fast close. You’ll start enjoying your new savings sooner than you would with traditional refinances.

Check your USDA streamline refinance eligibility. Start here (Nov 16th, 2019)

Fannie Mae high-LTV loan

If you want to refinance your mortgage into today’s low rates, but you don’t have enough equity to qualify for a traditional refinance, a high-LTV loan from Fannie Mae can help. 

  • Fannie Mae High-LTV Refinance: A special refinance program for people who don’t have enough equity for a traditional refinance, because they have not benefited from rising home values 
  • Best for: Homeowners with a high interest rate and at least 97.1% loan-to-value ratio 

Although home values are rising across the U.S., there are many regions across the country where home values are the same — or falling in some cases. 

Many of these homeowners owe more than their houses are worth and don’t qualify for a refinance of any kind. The Fannie Mae high-LTV refinance option addresses the problem. 

For example, if you owe $250,000 on your mortgage, and your home’s value is $240,000, your loan-to-value ratio is 104 percent, which is too high for a regular refinance.

A high-LTV loan by Fannie Mae allows you to refinance your mortgage with that high LTV into a lower rate with a lower monthly payment. In fact, there is no maximum LTV ratio requirement for a fixed-rate mortgage refinance. 

If you want to refinance your adjustable-rate mortgage to a fixed-rate mortgage, the maximum LTV is 105 percent. 

The minimum LTV allowed under this program is 97.1 percent for both adjustable and fixed-rate mortgages on single-family properties. So, if your LTV is 96 percent, you’ll need to find a lender offering competitive rates using a different high-LTV program.

Cash-out refinance options

The difference between what you owe and what your home is worth is your equity. Like we discussed earlier, homeowners will often refinance their mortgages into a loan with a higher balance to take out some of that equity in cash. 

  • Cash-out refinance: Lets you refinance for more than the home is worth, and take the extra amount as a cash loan with the same interest rate as your refinanced mortgage 
  • Best for: Homeowners with strong credit and plenty of equity, who want a low-interest source of borrowing 

Fannie Mae, Freddie Mac, the FHA, VA and USDA all have cash-out refinance programs. Depending on the type of program you choose, you can walk away from the closing table with money for home improvements, beefing up your investment portfolio or buying another property. 

There are no restrictions on how you use the money. However, you’ll need to do a complete refinance application, as the streamline programs aren’t available for cash-out refinances. 

The amount of money you can get with a cash-out refinance depends on the program. For example, a program might limit your new LTV to 85 percent. So, if your current LTV is 75 percent (your current loan balance equals 75 percent of your home’s value), you can take out the remaining 10 percent in cash, which leaves 15 percent as an equity cushion. 

In today’s low-interest rate environment, you could get a lower interest rate than what you currently have — and walk away from the closing table with some cash. 

However, if you recently refinanced your mortgage or purchased your home, you’ll probably need to wait at least six months before you can refinance again.

Check your cash-out refinance eligibility. Start here (Nov 16th, 2019)

No appraisal refinance options

We’ve discussed that the FHA, VA and USDA streamline refinance programs don’t require a new appraisal. Fortunately, Fannie Mae and Freddie Mac are starting to follow suit and loosen their refinance requirements — and their appraisal requirements. 

In many cases, lenders will use an automated valuation to estimate your home’s value. It’s a less expensive method to determine how much your home is worth. 

Related: You might be able to skip the home appraisal — but should you? 

Additionally, Fannie Mae will sometimes grant an appraisal waiver. Although there is no guarantee you’ll qualify for a waiver, you’ll have a better chance if you just want to lower your interest rate and don’t plan to take cash out. Freddie Mac features a similar waiver for some refinances. 

No-closing-cost refinance options

Many lenders today offer no-closing-cost refinance loans. Instead of bringing a check to the closing table to pay for items such as your application fee, title insurance and credit report, you can get the lender to pay for these costs. 

Closing costs can run between 2 to 5 percent of your loan amount depending on a host of factors, including where you live, your loan amount and your home’s value. In other words: Closing costs can add up.  

For a slightly higher interest rate, lenders will pay some — if not all — of your closing costs on the front end. Of course, if a lender pays all of your costs, you’ll pay a little more in interest. 

If a lender pays part of your costs, such as the fees to originate your loan and not third-party fees like title insurance, you’ll pay a lower rate. 

If you want to lower the interest rate on your mortgage but you’re afraid you don’t have the money out of pocket to close the loan, a no closing-cost mortgage may be worth looking into. 

How to choose the best refinance loan for you

Choosing the best refinance loan depends on your financial goals and what you hope to accomplish with your mortgage. 

If you have a mortgage backed by the government and just want a lower rate, the streamline options might be the easiest and best route. 

If you want some cash along with a lower rate from your refinance, you should find out how much equity you have in your home. Use your home’s equity to find lenders offering competitive rates and LTVs that match your cash-out goals. 

Find the best refinance rates 

Getting a good deal isn’t just about finding the right refinance program. You also want to find the best refinance rate to maximize your savings. 

Find a few lenders that offer the refinance program you’re looking for, then compare their rates and see who can offer you the best deal on your mortgage refinance.

Compare refinance rates from major lenders. Start here (Nov 16th, 2019)