The Best Mortgage Refinance Options and Alternatives

Cardinal Financial June 26, 2023 | 5 min read
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Purchasing a home isn’t the final step in the life of your mortgage. At some point, you’ll likely want to refinance your loan for new terms. Luckily, you’ve got plenty of mortgage refinance options to choose from. The right fit for you depends on your goals—lowering your monthly payment, tapping into home equity, or paying off your mortgage faster are some common ones. 

To help you narrow it down, let’s explore the types of mortgage refinances, as well as some financial alternatives.

5 Types of Mortgage Refinance Options and Alternatives

  • Rate and term refinance
  • Cash-out refinance
  • Home equity line of credit (HELOC)
  • Sell your home and downsize
  • Turn your home into an investment property

Rate and term refinance

When most people think of refinancing a loan, they think of a rate and term refinance. This is the most traditional route, and for good reason. As the name implies, a rate and term refinance allows you to get a new rate and/or term on your mortgage. You may also be able to refinance to a different loan type that better meets your needs. 

For example, many homeowners start out with an FHA loan because it can be easier to qualify for as a first-time homebuyer. As they build home equity and grow their credit score, they may want to refinance to a Conventional mortgage so that they can drop monthly mortgage insurance premiums.

When is it a good idea?

Rate and term refinances are a great choice if you want to pay off your mortgage faster or take advantage of lower interest rates. 

Cash-out refinance

A cash-out refinance is when a borrower refinances their mortgage for more than the amount they currently owe and receives the difference in cash. They allow you to lock in a new fixed rate for the life of the loan and get predictable payments that make budgeting simple. Plus, all fees associated with the cost to borrow are paid upfront—no surprise fees down the road.

When is it a good idea?

If your goal is flexible funds, consolidating debt*, or financing home upgrades, a cash-out refi could be the right fit for you. Just keep in mind that unlike a rate and term refi, your monthly payment will likely go up, not down.

*Using your home equity to pay off debts or make other purchases does not eliminate the debt or the cost of the purchases, but rather increases the loan amount of your mortgage to be paid according to your new mortgage terms.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a refinance option that allows you to borrow against your home equity and use that to pay for miscellaneous expenses. It’s unique in the sense that the cash may be advanced to the borrower via a line of credit—like a credit card—rather than in a lump sum. You may have heard HELOCs more commonly referred to as second mortgages.

When is it a good idea?

Cash-out refis and HELOCS are similar. But, if your goal in tapping into home equity is for more flexible finances in general (rather than for a specific project like renovations) a HELOC might be a better fit.

Sell your home and downsize

Refinancing isn’t the only way to meet your homeownership goals. If your goal is to get cash from your home equity, selling your home might also be a viable option. In fact, you may even get more money back from selling your home than you would from refinancing. A smaller home may come with a smaller monthly mortgage payment, leaving you with more money in your pocket to pay for other expenses.

When is it a good idea?

This option could be right for you if you’re ready to downsize and current rates are more optimal than when you bought your current home. 

Pro Tip: For borrowers age 62 or older, a reverse mortgage is a way to leverage the home equity of your current home to reduce the cost of purchasing a new home.

Turn your home into an investment property

If you’re cash-strapped, flipping your home into an investment property might pay off more than refinancing. You could rent out a room, a floor, or the whole place if you’re away often. This option means you can keep living in your home, continue with your current mortgage terms, and make additional income at the same time. Renting out your home isn’t for everyone, though. And in some cases, using your home as an investment property may not be permitted by your existing mortgage, local government, or homeowners association.

When is it a good idea?

If you don’t mind people in your space, aren’t looking for new mortgage terms, and want to increase your cash flow, renting out your home could be the right choice for you.

Are there any other mortgage refinance options I should consider?

There’s no single right answer when it comes to refinancing or using your home to access more flexible finances. The right choice for you depends not just on your goals, but also on the current market rates. Whether you decide to keep your current terms, refinance, or take a different route with your home loan altogether, don’t rush a decision just because it seems like the next milestone you should reach. At the end of the day, homeownership happens at your own pace.

The right mortgage refinance type for you depends not just on your financial goals, but also on the current market rates.

Ready to make moves?

One of our loan originators is standing by to assist you with your free rate quote.
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