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However, with a range of refinance options available, it’s essential to understand how each one works so you can choose the best fit for your financial priorities.
At a glance: Types of mortgage refinance loans
Refinance type
What it does
Best for
Rate and term
Replaces your existing mortgage with a new one
Lowering monthly payments and switching loan types
Cash-out
Replaces your existing mortgage with a larger one and you pocket the difference
Tapping equity and funding major expenses, like home improvements
Cash-in
Replaces your existing mortgage while you make a large, one-time payment at closing to reduce the new loan balance
Paying off mortgage faster and qualifying for a lower rate
Limited cash-out
Replaces your existing mortgage and lets you receive a small amount of cash back
Borrowing a small amount of cash
No-closing-cost
Replaces your existing mortgage and fees are rolled into the loan or offset by a higher rate
Homeowners who are short on upfront cash
Streamline
Replaces an existing FHA, VA, USDA loan with a new one through a simplified process
Replacing an existing government-backed loan with less paperwork
Reverse mortgage
Replaces an existing reverse mortgage with a new one
Homeowners age 62+ whose primary residence has increased in value and want to tap more of their equity for additional funds during retirement
Deep dive: Types of mortgage refinance loans
What it is
Best for
Examples
You want to replace your current 30-year mortgage at 7% with a new 30-year loan at 5.75%.
You want to swap your ARM at the end of its fixed period for a 15-year fixed-rate loan.
What it is
Best for
Example
What it is
A cash-in refinance is similar to a rate and term refinance, but with one key difference — you take the extra step of making a lump sum payment at closing to reduce your loan balance. Think of it as a second down payment on your home. By lowering your principal, you may qualify for better loan terms, such as a lower rate or lower monthly payments.
🤓 Nerdy Tip
If you’re a homeowner who has come into extra money, a cash-in refinance could be a worthwhile option to strengthen your equity position.
Best for
Lowering your monthly payments and total borrowing costs
Paying your mortgage off faster if you qualify for a shorter-term loan
Examples
You want to qualify for a lower interest rate by reducing your loan balance.
You’re close to the 20% equity threshold and want to eliminate PMI.
You recently received a windfall and want to lower your monthly payments.
Limited cash-out refinance
What it is
Did you know…
Limited cash-out and no cash-out refinance borrowers can receive the greater of 1% of the new loan amount or $2,000 in cash back after paying off the existing mortgage and closing costs, according to Fannie Mae and Freddie Mac guidelines.
Best for
Lowering your interest rate, changing your loan term or switching loan types
Accessing a limited amount of cash
Reducing risk
Examples
You want to use the extra cash to cover closing costs rather than paying out of pocket.
You want to combine your primary mortgage and a second mortgage, like a home equity loan used to buy the property, into one lower-interest mortgage.
No-closing-cost refinance
What it is
Best for
Minimizing upfront costs and preserving cash for other needs
Borrowers with limited cash reserves
Homeowners who plan to sell or refinance again in the near term
Examples
You refinance and still secure a lower rate than your existing mortgage, even with closing costs rolled into the loan.
You expect to refinance or move within a few years. After doing the math, you determine the savings you get by avoiding upfront costs outweighs paying the higher rate.
You have the cash, but prefer to keep it on hand for other priorities.
What it is
A streamline refinance is a simplified refinancing option for borrowers with an existing FHA, VA or USDA loan. Streamline programs are designed to reduce paperwork and speed up the process, often requiring limited (or no) income or credit verification and, in many cases, no home appraisal or inspection. That said, individual lenders may set their own standards.
Best for
Existing FHA, VA or USDA loan borrowers who want to improve loan terms and rates with less hassle
Lowering monthly mortgage payments
Switching between an adjustable-rate and fixed-rate FHA, VA or USDA loan
Examples
Reverse mortgage refinance
What it is
Unlike a traditional mortgage, reverse mortgage payments flow from lender to borrower. Over time, the loan balance increases as fees and interest accrue, while home equity declines. The loan is typically repaid when the homeowner sells the home or passes away.
Did you know…
Lenders often require qualified homeowners to have at least 50% equity in the property to be eligible for a reverse mortgage refinance.
Best for
Taking advantage of increased home value to access more equity
Aligning with changes in personal circumstances
Switching to a more favorable loan product to lower interest rates
Examples
Your home value is higher than it was when you took out the original mortgage and you want to increase your supplemental retirement income.
Your spouse recently turned 62 and can now be added to the loan.
You want to switch from an HECM loan to a proprietary reverse mortgage with higher loan limits.
How to choose the right refinance
If you’re sure you want to move forward with a home loan refinance, keep in mind that there isn’t a single type of refinance that fits everyone. The right option will depend on your priorities and where you stand financially. Asking yourself a few key questions can help you find the best fit.
1. What’s your main goal?
Basically, what are you trying to achieve with a refinance? Ask yourself:
Do you want the immediate benefit of lowering your monthly payment, freeing up cash for other expenses?
Is saving on interest a top priority?
Do you want to switch from an ARM to a fixed-rate loan for stability and predictability?
Do you want to tap home equity for a major renovation project?
2. What’s your financial situation?
🤓 Nerdy Tip
Make sure to factor in loan affordability as well. Refinancing typically comes with closing costs, and a cash-out refinance increases your loan balance, which can put you at greater financial risk.
3. How much home equity do you have?
4. Can you afford the closing costs?
5. How long do you plan to stay in the home?
Refinancing can be a powerful financial tool for substantially lowering your mortgage costs, switching your loan type or term, and tapping your equity.
However, while refinancing a mortgage can offer borrowers some plum benefits, it isn’t always a guaranteed win. You need to consider things like:
How long do you plan to stay in your home?
Has your home value dropped?
Where does your credit and income stand?
Does the cost to refinance outweigh the advantages?
Make sure you run the numbers and carefully consider your financial situation and goals. Doing so can help you decide whether or not refinancing is a smart move for you.
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