Conventional vs. VA vs. FHA refinance: Which refi program is best for you?
The best refinance program is different for everyone
If you, like millions of Americans, have a mortgage rate above current interest rates, you might be thinking about refinancing.
A mortgage refinance is a great way to lower your monthly payments, pay off your loan faster, or achieve another goal — like cashing out your home equity.
But before you can do any of those things you need to answer one big question: Which refinance loan will you use?
Here we’ll compare the main programs — conventional refinance vs. VA, FHA, and USDA — to help you find the best option for you.Find the best refinance loan for you (Dec 3rd, 2020)
In this article (Skip to…)
- Types of mortgage refinance programs
- Compare refinance options
- Refinancing with a high LTV
- No-closing-cost refi options
- Cash-out refinancing
- No appraisal refinance options
- Find the best refinance rate
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.Verify your refinance eligibility (Dec 3rd, 2020)
Compare refinance options
To figure out which refinance option you should use, you’ll have to answer a few questions.
- What type is my current mortgage loan?
- What’s my goal for refinancing (lower interest rate, pay off my loan early, cash-out, etc.)
- Do I have at least 20 percent equity?
- How long do I plan to stay in my home after refinancing?
Here’s a brief overview of how the main programs compare.
Conventional vs. FHA refinance
The biggest benefit to a conventional loan is that you don’t pay mortgage insurance if you have 20% equity in the home.
But not everyone can qualify.
You need good credit (at least a 620 score) and a solid employment history. FHA refinancing is often better for lower-credit borrowers.
Homeowners who originally chose an FHA loan — maybe because they had lower credit or wanted a low down payment — could be eligible to get rid of their mortgage insurance for good.
If you have at least 20 percent equity, you may be able to refinance to a conventional loan with no MIP and save big on your monthly payments.
A lender can estimate your home’s value and whether you have enough equity to get rid of MIP.
But even if you don’t, a refinance still might make sense, thanks to today’s rock-bottom rates. You’ll retain mortgage insurance if you have less than 20 percent equity, but your savings could still be significant.
Here’s a breakdown of FHA vs conventional mortgage insurance.
- FHA refinance loans require two types of mortgage insurance: Upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium
- Conventional refinance loans charge ‘private mortgage insurance’ (PMI) annually — there is no upfront fee. But conventional PMI rates will be much higher if you have low credit, in which case an FHA refinance may be the better option
One reason a homeowner might refinance from a conventional loan to an FHA loan is if they want to take cash out, but don’t have a high enough credit score for a conventional cash-out refi.
The FHA cash-out loan typically allows credit scores starting at 600 (though some lenders might go as low as 580), while a conventional cash-out loan often requires a minimum credit score of 640-680.
If you currently have an FHA loan and your goal is simply to lower your rate and monthly payment, consider the FHA Streamline Refinance.
This low-doc refinance program is a faster way to refinance into a lower rate without having to re-verify your income and employment or get a new home appraisal.
Reasons to choose an FHA refinance
- Your credit is below 620-640
- You don’t have 20% equity in the home
- You have an FHA loan and don’t want to re-verify the home’s value
- You have an FHA loan now and want to avoid proving current income
- You need cash out but can’t qualify for a conventional loan
Reasons to choose conventional
- You have 20% equity and good credit and want to get rid of mortgage insurance
- You can prove current income and the home’s value
- You want to take cash out
VA vs. conventional refinance
If you have an existing VA mortgage, there are few reasons to refinance into a conventional mortgage.
VA loan rates tend to be significantly lower than conventional refinance rates. So you’re likely to see bigger savings with a VA-to-VA refinance than by refinancing your VA loan into a conventional one — even when you include the VA funding fee on your new loan.
VA loans also offer a Streamline Refinance option.
This is called the ‘Interest Rate Reduction Refinance Loan,’ or ‘IRRRL.’ It’s a low-doc program that lets veteran homeowners refinance from a current VA loan to a new one with less effort and faster closing times.
VA loans do not require ongoing mortgage insurance, so there’s no motive to refinance into a conventional loan to get rid of PMI.
Refinance from conventional to VA
On the other hand, if you currently have a conventional mortgage but you’re eligible for VA financing, you might consider refinancing into a VA home loan if the rate is significantly better than what you’d get with conventional.
Keep in mind that you’ll pay a funding fee to switch, so make sure the VA loan is cost-effective.
A lender can typically check your eligibility for VA financing in just a few minutes, by requesting a Certificate of Eligibility (COE) from the Department of Veterans Affairs. You might qualify if you or your spouse is a veteran or active-duty service member.
By refinancing from a conventional loan to a VA one, you might be able to get rid of PMI, lower your interest rate, and save on your monthly payments.
Plus, any VA-eligible homeowner can use the VA cash-out loan to refinance up to 100 percent of their home’s value.
This is the only major refinance program that lets you cash-out ALL your home equity, and as long as you qualify for VA financing, you do not need a current VA home loan to apply.
Reasons to choose a VA refinance
- You have a VA loan and want to skip the appraisal and income verification
- You want to get rid of your mortgage insurance
- You don’t have 20% equity in your home
- You need to cash out up to 100% of your home’s value
Reasons to choose a conventional refinance
- You have 20% equity in the home and you don’t want to pay VA’s upfront funding fee
FHA vs. VA refinance
FHA and VA loans both offer Streamline refinancing. This makes it easy to refinance from FHA-to-FHA or VA-to-VA for a lower interest rate.
Using a Streamline Refinance, you’re not required to submit employment or income verification. And a home appraisal is not required — so you might be able to refinance into a lower rate and payment even if you have little, no, or negative equity.
If you currently have an FHA loan, but you’re eligible for a VA mortgage, you might consider refinancing into a VA loan. You’re likely to get a lower interest rate than you would with an FHA refinance, and you won’t have upfront or continuing mortgage insurance fees.
Refinancing from an FHA loan to a VA loan can be done using the VA cash-out refinance.
Despite the name, you aren’t required to take cash out at closing. You can use this loan simply to refinance from a non-VA loan to a VA loan with a lower mortgage rate and payment.
Reasons to choose a VA refinance
- You have a VA loan currently and don’t want to provide an appraisal, income, or asset documentation
- You want to get rid of FHA mortgage insurance
- You want to cash out your home’s equity
Reasons to choose an FHA refinance
- You have an FHA loan and would like a Streamline Refinance
For homeowners who have at least 20 percent equity, it might make sense to refinance from a USDA loan to a conventional one. This could eliminate your annual mortgage insurance and help you save even more on your mortgage payments.
Or, if all you want is a lower interest rate and monthly payment, you can apply for the USDA Streamlined Assist Refinance Loan.
Like the FHA and VA Streamline programs, this is a low-doc refi that’s easier to apply and qualify for than other refinancing options.
Just note that USDA mortgages only come in a 30-year term. So a USDA refinance will not help you pay off your mortgage faster.
If your goal is to pay off your home early, you may be better off refinancing into a conventional or FHA loan that allows a 15-year loan term.
Reasons to use a USDA refinance
- You have a USDA loan currently and want a Streamline Refinance option
Reasons to use a conventional refinance
- You have 20% equity and want to stop paying USDA’s mortgage insurance fees
- You need a 15-year term
If your current mortgage is above conventional loan limits, you’ll likely need to refinance into a non-conforming or ‘jumbo’ loan.
Maybe you originally bought a high-priced home with a large down payment, but now you want to refinance and take cash-out. In some cases, the new larger loan balance could push you into jumbo loan territory.
The only exception is for homeowners refinancing a large VA loan, as VA mortgages have no loan limits.
It’s possible to find jumbo financing with very competitive mortgage rates. But, since these loans aren’t regulated by Fannie Mae and Freddie Mac, there tends to be a lot more variance between lenders.
Jumbo loans also tend to have higher credit score requirements than other refinance loans. You’ll likely need a credit score above 680 or 700 to qualify.
If you need a jumbo refinance loan, be extra thorough as you shop around and look for rates.
You’re likely to see a larger spread between lenders and shopping carefully could net you a great deal.
Reasons to get a jumbo refinance
- You need to reduce your rate on a large loan
- You want to take cash out of the home, pushing you into jumbo loan territory
Reasons to get a conventional refinance
- Your refinance loan amount will be below $510,400 or your local loan limit
Refinance with a high LTV
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 refinance loan from Fannie Mae can help.
- Fannie Mae High-LTV Refinance Option (HIRO): 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.
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 this 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 refinance by Fannie Mae allows you to lock in a lower rate and monthly payment, even though your mortgage is currently ‘underwater.’
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.Check your eligibility for a high-LTV refinance (Dec 3rd, 2020)
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 add up.
For a slightly higher interest rate, many lenders will pay some or all of your closing costs.
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.
Cash-out refinance options
A cash-out refinance lets you take out a new loan with a balance above what you currently own on your home.
The difference between your old loan balance and your new one is the amount you can cash-out at closing.
Fannie Mae and Freddie Mac, as wells as FHA and VA, 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.
- FHA cash-out refinancing limits your new LTV to 80 percent
- Conventional cash-out refinances also allow a max LTV of 80 percent
- VA cash-out refinance loans allow up to 100 percent LTV
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 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 (Dec 3rd, 2020)
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.
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.
Find the best refinance rate
Getting a good deal isn’t just about finding the right refinance program. You also want to lock in the lowest 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.
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