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Difference Between Rate and Term Refinance versus Streamline Refinance Loans?
What is the difference between a rate and term refinance, and an FHA and VA Streamline Refinance?
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4 Replies
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I am in the process of taking my NMLS exam and are covering this topic.
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What is the difference between a rate and term refinance, and an FHA and VA Streamline Refinance AND a cash-out refinance mortgage loan? Can you please explain in detail the types of refinance loans and the mortgage process.
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Types of Home Loan Refinancing
Rate and Term Refinance:
Reason: Change interest rates, loan term, or both with no equity withdrawn.
Benefits: Can lower monthly payments, reduce the cost of interest over the life of the loan, or change loan term (e.g., from 30 years to 15 years).
Eligibility: Based on credit score, income, and home equity.
General Procedure:
Application: Submit a loan application along with financial documents.
Appraisal: An appraisal is required to determine the house’s value.
Underwriting: The lender reviews your credit, income, and appraisal.
Closing: Sign new loan papers and pay any closing costs.
FHA Streamline Refinance:
Purpose: To make refinancing easier for existing FHA loan holders.
Advantages: Less documentation required; often no appraisal necessary; can lower rates and monthly payments.
Eligibility: You must already have an FHA loan and be current on payments. The refinancing should show a net tangible benefit.
Normal Process:
Application: Submit a streamlined loan application
Verification: Limited verification of income and employment
Closing: Sign new loan documents – usually have reduced or no closing costs rolled into the loan
VA Streamline Refinance (IRRRL – Interest Rate Reduction Refinance Loan):
Purpose: To make refinancing easier for existing VA loan holders.
Benefits: Less documentation is required, no appraisal or credit underwriting package is needed, and rates and monthly payments can be lowered.
Eligibility—You must have a VA Loan and be current on its payments. Refinancing should show some net tangible benefit.
Usual Process:
Application: Submit a streamlined application for refinancing loans.
Verification – Limited verification of income and employment.
Closing: Sign the new refi mortgage note at settlement. Often, reduced or no closing costs are rolled into this type of lending product!
Cash-Out Refinance:
Purpose: Tap into home equity and take out cash for various reasons (e.g., home improvements, debt consolidation).
Benefits – Access to cash and lower interest rates than other forms of borrowing.
Eligibility: Based on credit score, income, and enough home equity.
General Procedure:
Application: Submit a loan application along with financial documents.
Appraisal: An appraisal is required to determine the current value of the home and the amount of equity available.
Underwriting: The lender reviews your credit, income, and appraisal.
Closing: Sign new loan papers and receive the cash-out amount minus closing costs.
Detailed Explanation & Mortgage Process
Rate and Term Refinance
Goal: Lower your interest rate or change it altogether. Shorten or lengthen your loan term – or both if necessary!
Procedure:
Application: Apply with your lender by submitting necessary financial documentation such as pay stubs, tax returns, bank statements, etc.
Appraisal: The lender may require a home appraisal to establish market value.
Credit Check: Lenders will check your credit score/history.
Underwriting: The Lender evaluates the financial information provided to determine eligibility for this type of lending product, which you are seeking today!
Approval: If approved, you will receive a Loan Estimate stating all terms and conditions associated with this new agreement.
Closing: Sign a new agreement between us (loan documents) + pay any closure costs that apply because we love you so much 🙂
New Loan Terms: Start making payments on those bad boys.
Refinance of the VA Streamline (IRL)
Objective: To streamline refinancing an existing VA loan to reduce interest rates and payments.
Procedure:
Application: Submit a streamlined application with minimal documentation necessary.
No Appraisal Needed: Usually, there is no need for an appraisal.
Verification: Limited verification of income and employment is needed.
Closing: Sign new loan documents, often with reduced closing costs rolled into the loan.
New Loan Terms: Start making payments on the new loan terms.
Cash-Out Refinance
Objective: Use home equity to get cash for different purposes.
Procedure:
Application: Apply with your lender and provide the necessary financial documentation.
Appraisal: A home appraisal is required to determine current market value and available equity.
Credit Check: Lenders will check your credit score and history.
Underwriting: The lender reviews your financial information to determine eligibility.
Approval: If approved, a loan estimate detailing the terms and cash-out amount is provided.
Closing: Sign new loan documents, pay any associated closing costs, and receive cash out amount
New Loan Terms: Begin making payments on the new loan terms.
Key Differences
Rate and Term Refinance- Focuses on changing interest rates and loan term
FHA Streamline Refinance – Simplified process for existing FHA loans with minimal documentation
VA Streamline Refinance – Simplified process for existing VA loans with minimal documentation
Cash-Out Refinance – Allows you to take out cash from home equity, usually involving full appraisal and more documentation.
By understanding the differences between refinance loans and the processes involved, borrowers can choose which option best suits their financial goals.
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Of course! I will gladly elaborate on the various types of refinance loans in detail. These include rate and term refinances, FHA and VA Streamline, and cash-out refinances. Moreover, I will provide a general mortgage process outline for each.
Rate and Term Refinance:
Objective: Change. Change the interest rate, loan term, or both without taking out extra cash.
Salient points:
Can lower monthly payments or shorten loan term
May switch from adjustable to fixed-rate or vice versa
It doesn’t significantly change the loan amount (except for closing costs)
Procedure:
- Application and credit check
- Home appraisal (usually required)
- Underwriting
- Closing
FHA Streamline Refinance:
Objective: Refinance an existing FHA loan with reduced documentation and underwriting.
Characteristics:
- Must be current FHA loan refinancing to another FHA loan.
- No cash-out option.
- No appraisal is required in most cases.
- Reduced credit check.
- Must result in a “Net Tangible Benefit” to the borrower
Procedure:
- Verify current FHA loan status.
- Application (simplified).
- Limited underwriting.
Closing
VA Interest Rate Reduction Refinance Loan (IRL):
Purpose: To refinance an existing VA loan with reduced documentation and underwriting.
Key Features:
Must be current VA loan refinancing to another VA loan No cash-out option No appraisal required in most cases No income verification typically required Must result in a lower interest rate (with some exceptions)
Process: Verify current VA loan status Application (simplified) Limited underwriting Closing