Refinance Mortgage Loan Types

Learn about the Major Refinance Mortgage Loan Types and other Home Loan Considerations

There are literally hundreds of refinance home loan types, including "niche-loans" for just about any type of home loan refinance scenario you can think of. For the sake of alleviating brain-overload, we will address the major types of home loan programs available on the market today, as they apply to the vast majority of people looking to refinance their home loan.

Major Types of Home Loans

Full Doc Loan: This is probably the most common type of refinance home loan. Most W2-type wage earners will qualify with a Full Doc mortgage program. All qualifying factors being equal, this loan-type typically gives the lowest overall mortgage rates. The major requirement being that income needs to be fully documented with W2's, income tax returns, Social Security award statements, etc. You can qualify for most refinance home loan programs with credit scores of 580 and above. For scores below 580, we suggest looking into a FHA mortgage program for the biggest chance of qualification and the most competitvie mortgage rates for those with low credit scores. In most cases, a full two-year work history is required with no gaps in employment.

Stated Income Loan: Here is another common type of refinance home loan, mostly utilized by self-employed individuals. Income is stated rather than documenting with actual income documents. Employment is verified with such documents as a business license, DBA, or CPA letter. Most home loan lenders will require that you be self-employed for at least two years. The tradeoff is that you will get a slightly higher mortgage rates and need a higher qualifying credit score relative to a Full Doc refinance home loan. You will most likely need a credit score of 680 and above for favorable terms, but there are mortgage lenders that will qualify a stated income home loan with scores lower than 680.

No Doc Loan: The "No Doc" refinance home loan program is just as the name implies. It requires no employment, income, or assets to be stated on your home loan application. The only areas verified are your credit rating and the value of your property. This refinance program is good for individuals with income that is difficult to verify or for people who wish to avoid the hassle of traditional home loan documentation. The resulting mortgage rates will be higher than a documented home loan and you will need a very good credit score. There are refinance lenders that will qualify a No Doc home loan with a scores in the 700 range and up.

NINA Loan: The NINA (No Income No Asset) refinance home loan program is very similar to the No Doc home loan, except that your employment is verified, but again, no income or assets are listed on the application. Self-employed individuals can produce a business license, DBA, CPA letter, or similar documentation for verification purposes. You will get slightly better lower mortgage rates ralative to a No Doc home loan and will still need a good credit score. Same as No Doc, there are refinance lenders that will qualify a NINA home loan with a scores in the 700 range and up.

Refinance Home Loan Considerations

In combination with a Full Doc, Stated, No Doc, or NINA refinance home loan program, you will need to decide on the home loan term (duration), and whether you want fixed mortgage rates or adjustable mortgage rates . We will take a look at these options next, including "interest only" home loan options, "balloon" refinance options, and "teaser" mortgage rates.

Home Loan Term: The most common refinance mortgage loan "terms" are 10 year, 15 year, and 30 year, with the latter being the most common. A fixed rate 30-year mortgage will be paid in full after the 360th monthly payment.

Mortgage rates will be lower on a 10 or 15-year term as opposed to a 30-year term. The shorter the term, the higher the monthly payments, but savings on interest over the life of the loan can be substantial.

Fixed Mortgage Rates: A mortgage loan where the interest rate does not change during the entire term of the loan. Offers predictable, fixed monthly payments, and protection from rising mortgage rates.

This is a great choice when mortgage rates are relatively low and you do not plan to move any time soon.

Adjustable Mortgage Rates: Adjustable Rate Mortgages, or "ARM's", offer lower mortgage rates to start, but the interest rate is adjusted at times based on an "index". The most common indices are the US Treasury Bills, California's 11 th District Cost of Funds (COFI), and the London Interbank Offered Rate (LIBOR).

Home loan lenders then add a set margin to that index resulting in payments, which can go up or down. ARM's normally have interest rate caps that limit how much your loan's mortgage rates can go up or down each time it is adjusted and how much it can go up or down over the life of the loan.

ARM's are often considered by borrowers in the process of restoring credit scores, increasing future income, or planning to move within a set number of years.

Interest Only Home Loan: With this option, you only pay the interest on your loan for a specified set period of time, usually 5 to 10 years. Payments are commonly based on a 30 year term.

Suffice to say, your monthly payment will be lower than a traditional amortized payment, but your principal balance will remain unchanged. At the end of the set period, most either refinance or pay off the balance in a lump sum.

This type of option can be a good fit for someone who expects to earn a lot more in the next few years. Speculators that expect a rise in the housing market will often consider an interest-only option.

Balloon Refinance: A balloon mortgage is usually based on a relative short term of 5 to 10 years, but the payment is based on a term of 30 years.

They usually have a lower mortgage rates and can be easier to qualify for than a traditional amortized loan, but there is a risk to consider. You will need to pay off your outstanding principal loan balance at the end of your term. You must refinance, sell your home, or convert the balloon mortgage to a traditional mortgage at the current mortgage rates.

This type of home loan is often considered by someone who expects to earn a lot more in the next few years and those who expect a rising value in the housing market.

Teaser Mortgage Rates: "Teaser Mortgage Rates" offer reduced introductory mortgage rates, designed to attract borrowers to ARM's. This initial discounted mortgage rates can be as low as 2% or even lower.

The mortgage rates adjust to the associated current market index rate plus a margin after the predetermined introductory rate time period has elapsed. The introductory mortgage rates offered are usually limited to a relative short period of a year or less.

Mortage rates increase sharply and monthly payments can virtually double after the introductory rate period has ended. This type of home loan can create "negative-amortization" (negative equity) for the homeowner because the market-rate interest (as opposed to the "discounted" introductory mortgage rates) on the loan starts to accrue from the get-go, and monthly payments aren't enough to cover it, let alone pay down any of your principle.

Hefty pre-payment penalties are often associated with teaser-rate refinance programs. Be very wary of home loan refinance advertisements quoting very low mortgage rates.

Mortgage Pre-Payment Penalties

No matter which home loan mortgage type you ultimately choose, always ask your mortgage lender if a pre-payment penalty applies to your home loan, before you apply for the refinance.

Pre-Payment Penalty: Penalty occurs if you pay off your home loan entirely or refinance into another mortgage before the predetermined time period (as required by your specific home loan program detail) expires. In effect, you are "penalized" for paying off your mortgage early. Not all lenders impose a prepayment penalty.

Pre-Payment Penalty Terms: A pre-payment penalty is typically expressed as a percentage of the outstanding balance at the time of pre-payment, or a specified number of months of interest. The penalty timeframe is normally between one and three years, but can go as high as five years.

Example: You took out a home loan with a 3 year prepayment term and a 2% penalty. After the second year, you decide to refinance to consolidate debts and to receive a lower mortgage rate. Since it is within the 3 year period, the penalty will apply. Your mortgage balance is $100,000 at the time of your refinance, so an additional $2,000 (100,000 x 2%) will be added to your mortgage payoff.

Borrowers can usually get a better interest rate if they accept a prepayment penalty. Lenders, and the investors who buy loans from lenders in the secondary market, are willing to accept a lower rate in exchange for a prepayment penalty. The benefit of a prepayment penalty to them is that it discourages refinancing if interest rates decline in the future.

Prime lenders seldom offer pre-payment penalty options, and for good reason... they offer the most competiive mortgage rates for borrowers with good to great credit scores. There is little need for investors to accept a lower rate for a pre-payment penalty clause on the secondary market because prime borrowers already have low mortgage rates. Therefore, the risk of the borrower refinancing that home loan in the future is diminished.

Subprime lenders and brokers that arrange home loans through third party lenders for those with bad credit, will commonly offer pre-payment penalty options. Since the subprime borrower will get much higher mortgage rates than a prime borrower, the risk of that borrower improving their credit and refinancing to lower mortgage rates in the future is increased.

The major pre-payment questions to consider are what you are giving up, how large is the penalty, and how many years must elapse before it goes away?

Also, does it apply only to refinancing... because you don't want to be subject to a pre-payment penalty if you sell your house! Some mortgage lenders waive the prepayment penalty fee if the borrower sells the home as opposed to refinancing it, and numerous states have passed laws and issued regulations that prohibit or restrict the use of prepayment penalties.

If a prepayment period does apply to your particular home loan mortgage, you should ask your lender under what conditions, if any, will the prepayment penalty be waived.

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