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What’s a good reason to refinance?

Refinancing your mortgage can help you save money, either right away or over time. But there are other good motives, too. Here are some common reasons people choose to refinance.

Get a lower interest rate. If mortgage rates have dropped since you got your original mortgage, you might be able to refinance at a lower rate. This could reduce your monthly payments.

Pay off your loan faster. You can refinance from a 30-year mortgage to a shorter term, like 15 or 20 years. Your monthly payment may go up, even if you get a lower rate. But you'll pay less interest over time and own your home sooner.

Get rid of private mortgage insurance. If you bought a home with a conventional loan and put down less than 20%, you probably have to pay private mortgage insurance (PMI). PMI is a temporary surcharge you pay until your mortgage balance reaches 80% of the appraised value. You could hit that milestone sooner if you make extra payments or the value of your home has grown. However, you’ll need a new home appraisal to prove its value.

Get rid of FHA mortgage insurance. If you have an FHA loan backed by the Federal Housing Administration, refinancing is the only way to get rid of FHA mortgage insurance.

Change your loan type. If you have an adjustable-rate mortgage and don’t want to worry about rising interest rates, you can refinance to a fixed-rate loan. If you first bought your home with an FHA loan but now qualify for a conventional loan, you might be able to switch.

Borrow money from your home’s value. Home equity is the market value of your home, minus what you owe. With a cash-out refinance, you borrow more than your current loan balance. The difference is paid to you in cash. A cash-out refinance is a popular way to pay for major home improvements.

Add or remove a borrower. Let’s say you’re getting a divorce, and you want to remove your ex-spouse’s name from the mortgage. You need to refinance to do that, since your mortgage is an agreement with the lender saying who is responsible for repaying the loan. Similarly, after getting married, you might want to refinance to add your spouse’s name to the loan.

Lower your monthly payment. Refinancing to a 30-year mortgage can make your payments lower, since you stretch them out over a longer time period. But there’s a catch: A longer loan also means paying more interest over time, so you’ll lose money in the long run. If you're struggling to make payments, other options like forbearance or loan modification might be a better fit.

» MORE: Compare today's refinance rates

Is it hard to get approved for a refinance?

Each lender sets their own requirements to qualify for a mortgage refinance. Here’s a general idea of what to expect.

Credit score. In general, you’ll need at least fair or average credit to refinance. A higher credit score can help you get a lower interest rate. Government-backed loans usually allow lower credit scores than conventional refinance loans, but each lender sets its own minimums. Bottom line: If your credit could use some polishing, you may want to work on it before applying for a refinance.

Debt-to-income ratio. Your debt-to-income ratio (DTI) shows how much of your money goes to paying bills compared to how much you earn. DTI includes your mortgage payment. Many lenders require a DTI below 36%. You can refinance a mortgage with a higher DTI, but you may pay a higher interest rate.

Home equity. It’s common for lenders to require you to have 20% equity before you can refinance. However, that amount can vary by lender and type of loan.

Refinance wait period. While you can refinance as often as you want, some lenders require a waiting, or “seasoning,” period between loans. With a conventional cash-out refinance, for instance, you will have to wait six months. If you are refinancing an FHA, VA or USDA mortgage, the waiting time varies between six and 12 months.

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What are the most common types of mortgage refinance loans?

Whether you’re looking to refinance a conventional or government-backed mortgage, there are generally four types of refinances:

Rate-and-term refinance. A rate-and-term refinance is exactly what it sounds like: you refinance your mortgage to reduce the interest rate, alter the length of the loan, or both.

Cash-out refinance. A cash-out refinance is when you replace your mortgage with a new one for more than your current loan balance. You receive the difference as cash. You can use the money for home improvements or other financial responsibilities. There are conventional, FHA and VA cash-out refinancing options.

Streamlined refinance. The FHA, VA and USDA offer streamlined refinancing options. These allow you to skip steps, like the appraisal and/or credit check, saving you time and money. To qualify, the FHA streamline and VA IRRRL both require that you'll get a financial benefit from the new loan: Either a lower monthly payment or lower interest rate.

Renovation refinance. A renovation refinance loan works somewhat like a cash-out refinance: You take out a larger loan than what you previously owed. The extra money goes toward fixing up your home. With an FHA 203(k) loan, the lender directly pays your contractor.

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