California Refinance Loan Types
Refinancing options are offered on all mortgage types, from government loan programs such as FHA, VA, and USDA loans to conventional loans. Different refinance loan types address different borrower needs, such as changing the terms of your loan or accessing home equity.
Borrowers with FHA (Federal Housing Administration) loans can take out a cash-out refinance, an FHA simple refinance, or a streamlined refinance. In all cases, the borrower must already have a loan insured by the Federal Housing Administration.
A cash-out FHA refinance works similarly to cash-outs on conventional loans. This refinance type is ideal for people who want to access their home equity.
Simple refinances on FHA home loans work to change the mortgage rate, reduce your monthly mortgage payment, or change the term length. However, you cannot liquidate any of your home equity with a simple refinance. If the refinance results in over $500 in profit, the money is used to reduce your principal.
The third option, streamlined refinance, has a streamlined procedure, as it requires less documentation from the borrower, and it doesn’t require another FHA appraisal. These refinances can be credit-qualifying, meaning the lender will check your credit score and finances to determine if you qualify for better rates.
They can also be non-credit qualifying, which would mean your personal finances would not be examined as closely. As with simple refinances, you cannot take money out with this refinance type.
A Department of Veterans Affairs loan is typically used for purchasing a single-family home as a primary residence without needing a down payment. Once you’ve accrued some equity in your home, you can refinance a VA loan in two ways.
The first is through a VA Interest Rate Reduction Refinance Loan (IRRRL), which aims to reduce your rate and monthly payment. The second refinance type is a VA cash-out refinance, used for addressing various financial needs.
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California Rate-and-Term Loans
Rate-and-term loans are the most popular among California refinance types. The aim of a rate-and-term refinance is to reduce your monthly mortgage payment by replacing your current mortgage with a new mortgage that has a better rate or different term length. For example, you can switch to a shorter term to pay off the mortgage faster.
California homeowners typically get these refinances in times of falling interest rates to save money on their total loan amount. They can also switch between a variable rate and a fixed-rate mortgage.
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Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) has an introductory period with a lower mortgage rate, after which the rate is adjusted to market conditions on a regular basis, typically every six months. Since variable rates come with more unpredictability, interest adjustment caps help protect borrowers.
Compared to fixed-rate mortgages, adjustable-rate mortgages typically have lower introductory rates, making them suitable for people who plan to pay off their mortgage fast, sell their home and move, or refinance again in a few years.
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California Fixed-Rate Mortgages
Fixed-rate mortgages typically have higher rates over the mortgage term, but they provide borrowers with predictability that helps them plan their finances, since your monthly payment stays the same.
Homeowners tend to switch to a fixed-rate mortgage during more volatile periods. Fixed-rate home loans are also more suitable for people who plan to live in their home for the long term. If you plan to switch from an ARM to a fixed-rate mortgage, it’s important to check for a prepayment penalty in your contract.
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California Cash-Out Refinance
A cash-out refinance in California involves refinancing an existing mortgage for a higher amount than what is currently owed. This allows homeowners to receive the difference in cash.
Mortgage companies offer cash-out refinances to homeowners who need access to their home equity to cover significant expenses like home renovations, debt consolidation, or large purchases.
Cash-out refinances can also be beneficial when the new interest rate is lower than the borrower’s current mortgage rate. Homeowners should also look into other ways to access their equity, such as home equity loans and a home equity line of credit.
As opposed to cash-out refinances, cash-in refinance loans involve refinancing while paying down a part of the principal. This option can yield a lower interest rate, reduced monthly payment, or remove PMI if the loan-to-value ratio improves significantly.
Homeowners choose this route when they have excess funds to invest in their home equity. The lump-sum payment provided at closing can also lower the number of payments left until you can repay in full.
California’s home prices often require loan amounts that exceed the amounts set by Fannie Mae and Freddie Mac. And just as it’s more difficult to qualify for a jumbo loan, it’s also more difficult to refinance one. However, securing a lower interest rate on such a substantial amount helps you save thousands in the long run.
California mortgage rates for conforming and non-conforming home loans aren’t much different, and the same is true for refinance rates. Your refinance rate will primarily depend on your LTV and credit score. Finally, homeowners must take closing costs and their monthly payment into account, as these will be much greater given the sizable loan amount.
