The 7 types of mortgage refinancing

Mortgage refinancing lets you change the terms of your home loan. The most common type, rate-and-term refinancing, enables you to get a new interest rate or payment schedule, which can save you thousands of dollars over the life of your mortgage.

But there are other refinancing options, too — some of which let homeowners leverage their home equity into a cash loan, drop private mortgage insurance faster or even avoid foreclosure.

Learn about the different kinds of refinancing, their benefits and requirements and which may be the right option for you.

Refinancing your mortgage means taking out a new home loan to replace your existing one. Homeowners often refinance to change their rate or term, to access cash from the value of their home, to switch from a variable to a fixed rate or from one kind of mortgage to another.

You can refinance with your current mortgage lender or choose another one, although you may have to wait a certain period after moving in before you're eligible.

To refinance, lenders typically require a credit score of at least 620, a debt-to-income ratio of 43% or less and at least 20% home equity.

As with purchase mortgages, refinance mortgages come with lender fees and other closing costs that can add up to as much as 6% of your loan total.

After closing, your lender will pay off your existing mortgage and provide you with a repayment schedule based on your new loan total, term length and rate.

If you've opted for a cash-out refinance, the extra funds will be deposited into your account.

A rate-and-term refinance replaces your mortgage with a new loan that has a different rate or repayment length (or both). Homeowners can save money, pay off their home faster or change from one kind of mortgage to another.

Streamline refinancing is essentially rate-and-term refinancing for borrowers with VA, FHA or USDA loans. Because the federal government backs these mortgages, they're usually faster and cheaper than traditional refinancing.

Streamline refinancing doesn't require a home appraisal and may not entail a credit check, and it has more flexible credit and income requirements.

There are several types of Streamline refinancing:

• FHA Streamline Refinance
• USDA Streamline-Assist Refinance
• USDA Standard Streamline Refinance
• VA IRRRL Streamline Refinance

Borrowers must use the loan for their primary residence and have made on-time payments for 6 to 12 months before applying. They must also show that refinancing will have a positive financial impact, such as a lower rate or smaller monthly payments.

A cash-out refinance replaces your mortgage with a larger loan, allowing you to take the difference in cash.

It's a common option for homebuyers who need money and would rather leverage the equity they've earned than take out a personal loan or use credit cards, which can have higher interest rates and shorter terms.

Older homeowners can apply for a reverse mortgage, which doesn't require monthly payments. Instead, the loan balance and any interest are due when the borrower sells, passes away or stops using the property as their primary residence.

FHA-backed reverse mortgages, called home equity conversion mortgages (HECM), are available to owners age 62 or older for as much as $1.2 million.

Private lenders have proprietary reverse mortgages for borrowers as young as 55 and for as much as $4 million.

Reverse mortgages carry unique risks, however: Borrowers must keep up with property taxes, homeowners insurance and household maintenance or risk their loan coming due early.

In addition, your loved ones may be left to deal with paying off the loan or surrendering the deed after you die.

With cash-in refinancing, borrowers take out a new mortgage to replace their current one. A large amount of the loan is paid at closing, however, leaving you with a smaller loan with new terms.

After refinancing, you'll have more equity and may be able to drop private mortgage insurance. Interest rates on cash-in refinancing are typically lower than a cash-out or rate-and-term option.

Short refinancing is used to avoid foreclosure if a borrower is on the brink of defaulting. In rare circumstances, a lender may forgive a portion of your loan and allow you to refinance the balance.

While you'll owe less, you'll also seriously damage your credit and may have to pay taxes on the amount that has been forgiven.

Borrowers who get a short refinance must prove they've experienced a recent financial hardship and can make regular payments on the new, but other requirements vary by lender.

Refinancing closing costs can be as much as 6% of your total loan, which can be a barrier for some homeowners. 

A no-closing-cost refinance allows you to roll those costs into your new mortgage, paying them off monthly alongside the principal and interest.

Many lenders offer no-closing-cost refinancing. Better and Ally Bank don't charge lender fees, which will take a big chunk out of those costs to start with. 

When you shop around for the best mortgage refinancing lender, there are a variety of factors to consider:

Cost: Many lenders will let you get sample mortgage rates online, often without getting pre-approval. You should also factor in lender fees and other closing costs.

Eligibility requirements: Make sure any lender issues loans in your state and that you meet its credit score, debt-to-income ratio and home equity standards.

Customer service: How does the lender rank on J.D. Power's mortgage satisfaction surveys? Does it service its home loans? Can you apply or close online? Are their branches in your area for in-person assistance?

Closing timeline: It takes an average of 44 days for a refinance mortgage to close. Does the lender advertise a shorter timeframe or offer an on-time closing guarantee?

Both Rocket Mortgage and Chase Bank made our list of the best mortgage refinance lenders, with top scores from J.D. Power and on-time closing guarantees.

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