Refinancing your mortgage means replacing your current home loan with a new one. Homeowners typically refinance to lower their interest rate, reduce monthly payments, change their loan term, or access home equity for other expenses.

Choosing the right type of refinance depends on your financial goals. Do you want to save money on interest? Need cash for home renovations? Want to pay off your mortgage faster? Each home loan refinancing option serves different needs.

This guide explains the most common types of mortgage refinance loans, helping you understand which one might work best for your specific situation.

What Is Refinancing?

Refinancing is the process of replacing an existing mortgage with a new loan, typically with more favorable terms. The new mortgage pays off your old one, and you start making payments on the new loan instead.

Refinancing helps homeowners:

• Take advantage of lower mortgage interest rates
• Improve monthly cash flow with smaller payments
• Switch between fixed and variable rate structures
• Tap into built-up home equity
• End mortgage insurance payments
• Change their repayment timeline

According to the Federal Reserve, homeowners who refinanced in 2020-2021 saved an average of $279 per month on their mortgage payments. However, refinancing involves closing costs (typically 2-5% of the loan amount), so it’s important to calculate whether the benefits outweigh these expenses.

Rate-and-Term Refinancing

Rate-and-term refinancing is the most straightforward and common type of refinance. It replaces your existing mortgage with a new one that has a different interest rate, term length, or both—without changing the loan amount.

Ideal for: Homeowners looking to lower their interest rate or change their loan term without borrowing additional funds.

Example: On a $300,000 mortgage with 25 years remaining at 6%, refinancing to 4.5% would reduce your monthly payment from approximately $1,933 to $1,668—saving $265 monthly.

Pros:

• Lower monthly payments (with a lower interest rate or longer term)
• Reduced total interest over the life of the loan (with a lower rate or shorter term)
• Opportunity to switch between fixed and adjustable rates

Cons:

• Closing costs may take 2-3 years to recoup through monthly savings
• Extending your term means paying interest for a longer period
• Requires good credit and sufficient home equity to qualify for the best rates

Cash-Out Refinancing

Cash-out refinancing involves replacing your existing mortgage with a larger loan and receiving the difference in cash. This allows you to tap into your home’s equity for other financial needs.

Ideal for: Homeowners with significant equity who need funds for home improvements, debt consolidation, education expenses, or other major costs.

Example: If your home is worth $400,000 and you owe $200,000, you might refinance for $280,000. After paying off the existing mortgage, you’d receive approximately $80,000 in cash (minus closing costs).

Benefits:

• Access to large sums at mortgage interest rates (typically lower than personal loans or credit cards)
• Potential tax deductions for mortgage interest when funds are used for home improvements
• Opportunity to consolidate higher-interest debt

Risks:

• Increases your mortgage balance and usually your monthly payment
• Reduces home equity, which serves as a financial safety net
• Extends your debt timeline, potentially increasing total interest paid
• Puts your home at greater risk if you cannot make payments

Most lenders limit cash-out refinancing to 80-85% of your home’s value, ensuring you maintain some equity in the property.

Cash-In Refinancing

Cash-in refinancing is the opposite of cash-out—you bring money to the closing table to reduce your loan balance. This improves your loan-to-value (LTV) ratio, which can help you qualify for better interest rates.

Ideal for: Homeowners with available cash who want to strengthen their equity position, eliminate PMI, or qualify for better loan terms.

Example: If your home is valued at $350,000 with a $280,000 mortgage balance (80% LTV), contributing $35,000 at refinancing would reduce your balance to $245,000 (70% LTV). This improved ratio could qualify you for lower interest rates and eliminate PMI.

Benefits:

• Potentially lower interest rate
• Reduced or eliminated PMI
• Lower monthly payments
• Less total interest paid over the life of the loan

Considerations:

• Requires significant upfront cash
• Reduces liquid assets that could be used for other purposes or emergencies
• May not be the best use of funds if you have higher-interest debt elsewhere

Streamline Refinancing

Streamline refinancing programs are designed for homeowners with government-backed loans (FHA, VA, or USDA) to refinance with minimal paperwork, costs, and requirements. These programs typically waive the need for a home appraisal and extensive income verification.

Ideal for: Current holders of government-backed loans looking to reduce their interest rate with minimal hassle and expense.

Benefits of Streamline Refinance Programs:

• Simplified application process
• Reduced closing costs
• No appraisal requirement
• Faster closing timeline

Limitations:

• Limited to rate-and-term changes (minimal cash-out options)
• Must already have the specific type of government-backed loan
• Continuing mortgage insurance requirements for FHA and USDA loans

FHA Streamline Refinance

The FHA Streamline Refinance program offers a simplified path for homeowners with existing FHA loans to lower their interest rates and monthly payments with minimal paperwork. This program specifically caters to borrowers who already have FHA-insured mortgages and have maintained a good payment history.

Requirements:

• Current FHA mortgage in good standing
• At least 210 days since the closing of your current mortgage
• Demonstrable “net tangible benefit” (typically a 0.5% rate reduction)

VA Interest Rate Reduction Refinance Loan (IRRRL)

The VA Interest Rate Reduction Refinance Loan (IRRRL), also known as the VA Streamline Refinance, provides veterans and service members an efficient way to reduce their interest rates on existing VA loans. Designed exclusively for those who already have VA-backed mortgages, the IRRRL offers one of the most straightforward refinancing processes available.

Requirements:

• Current VA Loan: You must already have a VA-backed mortgage that you’re refinancing.
• Current on Payments: You should be up-to-date on your existing mortgage with no more than one 30-day late payment in the past 12 months.
• Waiting Period: At least 210 days must have passed since the first payment on your current VA loan, and you must have made at least six payments.
• Net Tangible Benefit: The refinance must provide a clear financial benefit, typically through a lower interest rate (at least 0.5% lower if moving from fixed to fixed rate) or by switching from an adjustable to a fixed-rate loan.
• Primary Residence: While you don’t need to still live in the home, you must certify that you previously occupied the property as your primary residence.
• VA Funding Fee: A reduced funding fee of 0.5% applies (compared to the higher purchase loan fee), though some veterans may qualify for an exemption.
• No Income Verification: In most cases, proof of income or employment verification isn’t required.
• No Appraisal Required: Typically, no new home appraisal is needed.
• No Credit Underwriting: Full credit underwriting is usually not required unless your payment will increase by 20% or more.

USDA Streamline Refinance

The USDA Streamline Refinance program helps rural homeowners with current USDA loans refinance quickly and affordably. Created specifically for low to moderate-income families in eligible rural areas, this program reduces paperwork and requirements while helping borrowers secure better loan terms.

Requirements:

• Current USDA loan with 12 months of timely payments
• Must show a tangible benefit (typically at least $50 monthly payment reduction)
• Continued income eligibility for the USDA program

No-Closing-Cost Refinancing

A no-closing-cost refinance eliminates upfront fees by either incorporating them into your loan balance or offsetting them through a slightly higher interest rate.

Ideal for: Homeowners without available cash for closing costs who still want to benefit from refinancing.

Example: On a $300,000 refinance with $9,000 in closing costs, you might choose between:

• Option A: Pay closing costs upfront and receive a 4.5% interest rate
• Option B: Take a 4.75% interest rate with no closing costs

Benefits:

• No out-of-pocket expenses at closing
• Immediate savings without waiting to recoup closing costs
• Makes refinancing accessible to those with limited liquid assets

Potential Downsides:

• Higher interest rate or loan amount
• Increased long-term costs (on a 30-year loan, a 0.25% higher rate could cost $15,000+ more in interest)

This option is typically most beneficial if you plan to sell or refinance again within 5 years, as you’ll avoid paying the full premium for the higher rate.

Debt Consolidation Refinancing

Debt consolidation refinancing is a strategy that uses cash-out refinancing to pay off high-interest debts like credit cards, personal loans, or auto loans.

Ideal for: Homeowners struggling with multiple high-interest debts who have sufficient equity in their homes.

Example: If you have $30,000 in credit card debt at 18% interest and a $200,000 mortgage at 4.5%, you could refinance for $230,000 and use the extra funds to pay off the credit cards. This could potentially save hundreds in monthly interest payments.

Benefits:

• Significantly lower interest rates compared to most consumer debt
• Single monthly payment instead of multiple bills
• Potential tax benefits (consult a tax professional)
• Improved cash flow with lower total monthly payments

Considerations:

• Converts unsecured debt (credit cards) to secured debt (mortgage)
• Extends the repayment period, potentially increasing total interest cost
• Puts your home at risk if you cannot make payments
• Requires discipline to avoid accumulating new high-interest debt

For this strategy to be effective, you must address the spending habits that led to the debt in the first place.

Reverse Mortgage (HECM)

A reverse mortgage allows homeowners aged 62 or older to convert part of their home equity into income without selling their home. Unlike traditional mortgages, you receive payments from the lender, with repayment deferred until you sell, move out, or pass away.

Best for: Senior homeowners with substantial equity who need to supplement retirement income.

Types of Payment Options:

• Lump sum
• Monthly payments
• Line of credit
• Combination of these options

Potential Drawbacks:

• High upfront costs, including mortgage insurance premiums
• Reduces inheritance potential for heirs
• Interest and fees accumulate over time, increasing the loan balance
• Must maintain the home and continue paying property taxes and insurance

Alternatives to Consider:

• Home equity line of credit (HELOC)
• Downsizing to a smaller, less expensive home
• Sale-leaseback arrangements
• Traditional cash-out refinance

Short Refinance

A short refinance is a specialized option for homeowners who are underwater on their mortgage (owing more than the home is worth) and at risk of foreclosure. The lender agrees to forgive part of the principal and refinance the remaining balance into a new, more affordable loan.

Ideal for: Homeowners experiencing financial hardship who owe more than their home is worth.

Example: If your home is worth $250,000 but you owe $300,000, a lender might agree to a short refinance that creates a new $240,000 loan, forgiving $60,000 of principal.

Benefits:

• Reduced principal balance
• More affordable payments
• Opportunity to stay in your home
• Alternative to foreclosure or short sale

Risks:

• Significant negative impact on credit score (typically 100+ points)
• Potential tax liability for forgiven debt
• Stringent qualification requirements
• Not all lenders offer this option

Short refinances are relatively rare and typically considered a last resort when other options have been exhausted.

Choosing the Best Refinancing Option for You

Selecting the right refinancing strategy requires honest assessment of your financial situation and goals.

Assess Your Financial Goals:

• Lower monthly payments? Consider rate-and-term refinancing or extending your loan term
• Reduce total interest? Look at rate-and-term with a shorter loan period or cash-in refinancing
• Access equity? Cash-out refinancing is your primary option
• Consolidate debt? Debt consolidation refinancing offers the most benefits
• Simplify the process? Streamline options are available for government-backed loans

Key Factors to Consider:

1. Credit score and home equity: These determine your eligibility and interest rate
2. Break-even point: Calculate total closing costs divided by monthly savings to see how long it will take to recoup expenses
3. How long you’ll stay in the home: Most refinances only make financial sense if you remain in the home past the break-even point
4. Current financial situation: Assess your available cash, debt levels, and income stability
5. Market conditions: Compare current interest rates to your existing rate

Comparison Shopping Tips:

• Request loan estimates from 3-5 lenders
• Compare the Annual Percentage Rate (APR), not just the interest rate
• Review the Loan Estimate form for all fees and costs
• Ask about rate locks and how long they’re valid

Tax Implications of Refinancing

Refinancing can affect your tax situation in several ways:

• Mortgage interest deduction: Remains available but is now limited to interest on up to $750,000 of qualified residence loans (for mortgages taken after December 15, 2017)
• Points paid: May be deductible over the life of the loan rather than all at once
• Debt forgiveness: May be considered taxable income, though exceptions exist for primary residences
• Home equity interest: Only deductible when used for home improvements, not for debt consolidation or other purposes

Consult a tax professional about your specific situation.

Comparing Refinance Options

Refinance Type	Best For	Key Benefit	Primary Drawback
Rate-and-Term	Improving terms without changing balance	Lower rate/payment or shorter term	Closing costs may take time to recoup
Cash-Out	Accessing equity for major expenses	Lower interest rates than other credit	Increases mortgage debt, reduced equity
Cash-In	Improving LTV ratio	Better terms, possible PMI elimination	Ties up liquid assets in home equity
FHA Streamline	Current FHA loan holders	Simplified process, reduced closing costs	Ongoing mortgage insurance requirement
VA IRRRL	Veterans with existing VA loans	Minimal documentation, competitive rates	Limited to rate/term improvements
USDA Streamline	Rural homeowners with USDA loans	Reduced paperwork, lower costs	Not available for cash-out needs
No-Closing-Cost	Those lacking funds for closing costs	No upfront fees	Higher rate or loan amount
Reverse Mortgage	Seniors needing retirement income	No monthly payments required	Decreasing equity, high fees
Short Refinance	Underwater homeowners	Reduced principal balance	Credit damage, potential tax implications

Conclusion

Refinancing provides different pathways to meet your specific financial goals as a homeowner, whether you’re looking to lower monthly payments, access your home’s equity, adjust your loan terms, or adapt to changing life circumstances.

Rate-and-term refinancing helps lower your interest rate or change your loan term length. Cash-out refinancing lets you access your home equity. Streamline options simplify the process for government-backed loans.

When deciding on refinancing:

• Be clear about your primary financial goal
• Verify that potential savings exceed refinancing costs
• Factor in how many years you’ll remain in your home
• Review your current credit score and home equity position

Before making a decision, compare offers from several mortgage lenders and understand all costs involved. A conversation with a mortgage specialist can help clarify which option best fits your financial situation and long-term plans.