A refinance is a new mortgage that pays off the mortgage you have, to change the interest rate, the length of the loan or both, or to turn some of your home’s equity into cash. Here is when refinancing can make sense, the difference between a rate-and-term and a cash-out refinance, and how to start.
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Fidelity Residential · NMLS #103098 · Equal Housing Lender
Every refinance pays off the mortgage you have with a new one. The main difference is whether you take cash out.
Replaces your mortgage with a new one to change the interest rate, the length of the loan, or both, or to move from an adjustable to a fixed rate. The new loan pays off the old one, and you take little or no cash at closing.
Fixed rate loansReplaces your mortgage with a new, larger one and pays you the difference in cash; it can also place a new mortgage on a home you own free and clear. The cash may be used for anything, such as paying off credit cards or student loans, home improvements or tuition. The new loan is limited to a share of the home’s current value, so some equity stays in the home.
Cash-out refinancesAlready have an FHA loan? The FHA Streamline refinance needs less paperwork and no appraisal, and it must give you a real benefit. Have a VA loan? VA’s Interest Rate Reduction Refinance Loan usually needs no appraisal or income check, must pass VA’s benefit test and gives no cash back; the lender may still ask for a value estimate and a credit score.
| Question | Rate-and-term | Cash-out |
|---|---|---|
| What it does | Replaces your mortgage to change the rate, the length of the loan, or both | Replaces your mortgage with a larger one and pays you the difference |
| Cash to you | Little or none | What is left after the old mortgage, any debts being paid off and closing costs |
| How much you can borrow | Usually close to what you owe now | Up to a set share of the home’s current value, so some equity stays in the home |
| Time in the home | Depends on the program | Usually some months on title, with exceptions for an inherited home, one received in a divorce, and a home recently bought with cash |
| Common reasons | Move from an adjustable to a fixed rate, change the length of the loan, change the rate | Home improvements, combining debts into one loan, tuition, buying another property |
| Things to weigh | The closing costs against the change in your payment | A larger loan secured by your home; on your main home, a federal right to cancel applies before the money is released |
Every situation is different. These are the most common reasons homeowners refinance.
Weigh the cost first. Add up what the refinance would cost and divide it by how much your monthly payment would change. That is roughly the number of months it takes to break even. If you plan to keep the home and the loan longer than that, refinancing may make sense. Combining debts into a mortgage spreads them over a longer time and secures them with your home, so compare the total cost, not just the monthly payment.
Tell a loan officer what you want the refinance to do and, for a cash-out, how much cash you need. The loan officer estimates the home’s value and checks it against the program’s limits.
You apply and allow a credit report. Income is documented with pay stubs and tax returns, or with bank statements, assets or rental income for some programs.
Title is checked for who owns the home, for how long, and any liens. An appraisal sets the current value; some conventional loans get a waiver, and streamline refinances usually need none.
An underwriter confirms the loan fits the program. At closing the old mortgage and any debts being paid off are paid from the new loan. On your main home, a federal right to cancel applies before the money is released.
The underwriting findings list exactly what your loan needs. Most homeowners can start with these.
A cash-out refinance replaces your first mortgage. If you would rather keep the mortgage you have, a second loan behind it may fit better.
One new, larger mortgage in place of the old one, with the difference paid to you at closing.
Cash-out refinancesA line up to a set limit that you draw on as you need it during a draw period, then repay. The rate is variable, so the payment can change, and many programs ask you to draw part of the line at closing. Your first mortgage stays as it is.
Ask about a home equity lineOne lump sum at closing, repaid in equal monthly payments at a rate that does not change. Your first mortgage stays exactly as it is.
Ask about a second mortgageIt depends on the home’s current value, what you owe, the program and your credit. Each program lets you borrow up to a set share of the home’s value, so some equity stays in the home, and some programs also cap the cash you receive. A loan officer can work out the figure for your home.
For a cash-out refinance, most programs want you to have owned the home for some months, and the mortgage being paid off to have been in place for a while. There are exceptions for an inherited home, one received in a divorce, and a home you recently bought with cash. For a rate-and-term refinance, it depends on the program.
Usually, yes. On some conventional loans the automated underwriting system offers an appraisal waiver. An FHA Streamline refinance needs no appraisal, and a VA streamline usually needs none, though the lender may still ask for a value estimate.
Yes. Credit cards, student loans and other debts can be paid off from a cash-out refinance at closing, leaving one loan to pay. Because the debts move into a longer loan secured by your home, compare the total cost, not just the monthly payment.
Yes. A conventional loan can refinance a rental property of one to four units. A rental can also be refinanced with a DSCR loan, qualified on the property’s rent rather than your income; that is a business-purpose loan, explained on our DSCR loans page.
Fidelity Residential is licensed for home loans in 40 states and the District of Columbia. The full, current list is on NMLS Consumer Access (opens in a new tab), or call us at 732-686-9999.
Sources: Fannie Mae, Selling Guide B2-1.3-02, limited cash-out refinance transactions (opens in a new tab); Fannie Mae, Selling Guide B2-1.3-03, cash-out refinance transactions (opens in a new tab); Consumer Financial Protection Bureau, Regulation Z, 12 CFR 1026.23: right of rescission (opens in a new tab). Facts are stated in our own words.
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This page is general information, not a commitment to lend. Programs, terms and eligibility depend on credit, income, property and underwriting review and are subject to change without notice.
Reviewed by Robert Shamie, CEO, NMLS #241428 · Last reviewed:
Fidelity Residential (PFN Lending Group, Inc., NMLS #103098) is a direct mortgage lender licensed in 40 states and the District of Columbia, with 26 years in business.