Refinancing a Home

Short refinance refers to the refinancing of a mortgage by a lender for a borrower currently in default on their mortgage payments. The strategy is one used by lenders in order to help a borrower avoid foreclosure, because it is more cost-effective than foreclosure proceedings. The new loan amount is typically less than the existing outstanding loan amount, and the lender sometimes forgives the difference.

Current USDA loan borrowers with low or no equity can refinance for more affordable payment terms under the USDA streamlined refinancing option. The USDA offers home loans directly and guarantees loans issued by qualified lenders. A streamlined refinanced loan even allows borrowers to wrap closing costs and escrow charges into the new loan amount. That helps homeowners receive a zero out-of-pocket refinance for which no cash is needed upfront.

Homeowners typically choose no-appraisal refinancing—which replaces an existing mortgage on a residence and does not require a new value assessment of the home—when they are unlikely to qualify for a new standard loan. No-appraisal refinancing is typically available from government agencies, including the Federal Housing Administration, Veterans Administration, and the Department of Agriculture.

The opposite of a cash-out refinance, which advances new money to the borrower, a no cash-out refinance replaces an existing loan with the same principal value, or potentially less. It does not allocate any cash to the borrower. A no cash-out refinance is a rate and term refinance, because it focuses primarily on adjusting a borrower’s interest and terms without advancing new money.

Since the 1980s, the FHA has been allowing streamlined refinancing of mortgages it insures. An FHA streamline refinance—available to homeowners who already have FHA-insured mortgages—offers a low-hassle way to refinance the mortgage, including not requiring an appraisal. To qualify for an FHA streamline refinance the borrower must show there will be a net tangible benefit to doing so.

In a cash-out refinance, a new mortgage is taken out for more than the previous mortgage balance, and the difference is paid to the borrower in cash. A lender will determine how much cash you can receive with cash-out refinancing, based on your property’s loan-to-value (LTV) ratio and your credit profile. You will usually pay a higher interest rate or more points on a cash-out refinance mortgage compared with a rate-and-term refinance, in which a mortgage amount stays the same.