Refinancing an Equity Loan

An equity loan is typically an adjustable rate mortgage based on a certain percentage of value on the home. Refinancing an equity loan into a first mortgage gives the borrower one lower, typically fixed interest rate.

Most equity loans are adjustable rate mortgages based on the Wall Street Journal’s prime rate, and can move up or down throughout the life of the equity line. An equity line is like a checking account or credit card, only the amount you can borrow is limited to the value of the home and your available equity. When you refinance an equity line, you can refinance it by itself or roll it in with a first mortgage to pay it off.

Refinancing Home Improvement Loans

A home improvement loan is used to upgrade or remodel a house and is almost always fixed and almost always in a second position. Like other second liens, they carry a higher rate and can be rolled into a first mortgage when refinancing. A major home improvement, such as adding square footage or another roof, would be considered a construction loan. A construction loan is also short term, as it only lasts until the construction is completed. At the end of construction, a permanent mortgage must replace the construction note by refinancing.

Refinancing Investment Properties

Financing investment properties with a refinance means higher rates and loan limits, when compared to primary residences. Rates for investment properties are typically ¼ to 3/8 percent higher. Refinancing investment properties also requires a minimum equity amount, most often 10 percent. An investment refinance loan must then be no more than 90 percent of the value of the property.

Note Modification

A note modification is not a refinance in the traditional sense, but it does bear mention because it changes the rate of a mortgage loan, only not with an official refinance.

A note can be modified to a new lower rate by the lender who originally issued the first mortgage. Fees for a modification are minor. When a lender modifies a note, the borrower can’t expect the absolute best rates available. The lender knows that a refinance will take some time and effort, so instead of offering their best rate, they might offer something in between. For instance, if you have an 8 percent rate, and market rates are at 7 percent, then you might get a 7.50 percent rate offered to you. If you want to take that rate and not refinance, go ahead. There’s nothing to stop you from refinancing a modified note if rates continue to move downward.

Note modifications are the most cost-effective way to reduce an interest rate, but they can only be done by the original lender, and they can’t be done at all if the note has been sold by one lender to another.

A Streamline

A streamline is a feature of a government loan, which is one that is backed by the federal government by way of the Department of Housing and Urban Development for an FHA loan, or the Department of Veterans Affairs for a VA loan.

For an FHA loan, the streamline refinance requires that the loan to be refinanced must already be an FHA loan and can’t be a cash-out loan; it must only be a rate-and-term. The current FHA loan also cannot be delinquent, and the refinance must lower the monthly payment. An FHA streamline requires almost no paperwork, other than a loan application. An appraisal is rarely required, and there are no credit or income checks the lender needs to perform. As with any other refinance, there are closing costs. If the borrower wants to roll closing costs into the mortgage loan, then an appraisal must be performed. A new refinance loan offered by the FHA is called an FHA Secure Refinance. It lets homeowners who have adjustable-rate mortgages that have adjusted to a rate higher than they can pay refinance into an FHA loan with lower rates.

A VA streamline operates in much the same way as an FHA streamline, in that the paperwork is reduced, and there is no need for an appraisal or for credit or income checks, as long as the interest rate is being reduced and also refinanced into a fixed-rate mortgage. A VA streamline refinance is called an IRRRL, or an Interest Rate Reduction Refinance Loan.