Mortgage Refinance Guide
Finding a Refinance Loan that Meets Your Goals
Refinancing your mortgage is not necessarily the most exciting part of your week, but it can have a significant impact on your finances for many years. Mortgage refinancing is usually performed to provide the homeowner with a more favorable interest rate or term, the purpose of which is to reduce the amountof interest paid. Another option is to refinance to free up cash for home renovations, college expenses, or pay off debt. This mortgage refinance guide tells you all the basics about your refi options. Once you have reviewed this information, speak to your loan adviser about your financial goals and needs. They’re sure to be able to match you with the ideal refinance mortgage.
The most popular refinance is the classic cash-out refinance, in which you take out a new home loan for a larger amount than youinitially borrowed. This loan is usually at a lower rate than you firstborrowed it. You receive the difference between the loans in cash to use as you please.
The new loan takes the place of the old one, so you still have one payment, and it could be the same, more, or less than your old mortgage. If you do a cash-out refinance, it is vital to review the terms and understand the rate, fees, and closing costs to understand what your final costs are.
For instance, if you have a current rate of 6% and the new rate is 5%, you may assume that your payment will not change or could be lower. But, it depends on how much money you pull out and what the lender charges to close the loan.
Most lenders will allow you to borrow 80% or 90% of the home’s market value. For example, if your home is worth $300,000 and you owe $200,000, at 80% LTV, you could borrow up to $240,000 with a cash-out refinance and take the $40,000 in cash.
Many Americans do a cash-out refinance to pay off debt, pay for renovations, or cover college expenses. Depending on the reasonfor the loan, doing a cash-out refinance can be a smart move because the rate is usually lower than credit cards or other non-secured loans.
If you have a FHA mortgage, you could qualify for an FHA refinance, which has more flexible terms and credit requirements than conventional refinances.
Rate And Term Refinance
A rate and term refinance allows you to alter the interest rate and/or loan terms of the loan, but you do not take cash out. This can be a wise option when rates are lower and the borrower can obtain a lower-cost mortgage by refinancing.
The loan size stays the same and you could wind up with a lower payment, unless you shorten the length of the loan significantly. Doing a rate-and-term refinance from a 30 year to 15 year mortgage will usually raise your payment, even with a lower rate, but you will pay much less in interest over the term of the loan.
FHA Streamline Refinance
An FHA streamline refinance can be a good choice if you have an FHA loan and want to drop your payments. With an FHA streamline loan, you should not have to do another appraisal, which saves time and money. However, if you have a conventional loan, you cannot switch to an FHA streamline
This program is a good fit for current FHA borrowers who have less-than-perfect credit and qualifying for a rate-and term finance is usually simple.
VA Streamline Refinance
A VA streamline refinance is available to military members and former military members who have a VA loan. This streamline program lets you lower your payments and interest rates, and/or shorten the length of the loan. Or, you can change from an adjustable rate to a fixed rate mortgage. The VA funding fee is lower than for FHA loans, so this is a good choice if you are or were in the military.
USDA Streamline Refinance
A USDA streamline refinance lets someone with a USDA loan without equity in the home to lower their rate and/or term, while avoiding a new home appraisal or inspection.
A reverse mortgage is a refinancing loan for people over 62 with enough equity in their home. Borrowers who use a reverse mortgage do not have to make loan payments while they live. If you decide to use a reverse mortgage to refinance, you will get funds from the equity you have built up over the years. The money could be used for healthcare expenses, home improvements, or pay off credit card debt. Once the home is sold when you pass away, the balance is paid from the home sale or through payments your heir makes after a regular refinance.
You may have heard about no-closing-cost refinances. This means you do not have to pay upfront closing costs. Rather, closing coðsts are paid with a higher interest rate, or they can be rolled into the balance. This refinance is a good choice if you do not plan to stay in the home for more than a few years. Or, you want to save money on closing costs so you can snag a lower interest rate.
What Does It Cost To Refinance?
How much it is to refinance depends on the kind of loan and the form of refinancing you choose. Many refinancing loans cost between 3% and 6% of the loan balance. There also could be different fees depending on the type of loan, such as upfront funding fee for VA loans.
Before you sign any paperwork, carefully review your loan options carefully so you make the best choice. Compare the APR of each refinancing loan to one another and not just the interest rate. APR takes into account all loan fees and closing costs, so you have a better apple-to-apples comparison.
Which Refinancing Option Is Best?
There is no best refinancing option for all borrowers. The one that is ideal for you depends on your financial circumstances, credit, goals, and more. Some factors to consider include:
- The type of loan you have now
- The kind of borrower you are, such as a veteran
- The goals you want to achieve with a refinance
- How much equity is in the home
- Your credit score
- Your LTV
- Your FICO score
- Your overall finances, including your ability to pay closing costs
If you are not sure which refinancing option is best for you, talk to your loan adviser about your needs and goals. They usually have access to many different lending programs that can fit a variety of needs.
What If Your Interest Rate Is Already Low?
A common situation in the post-COVID world is the homeowner who got a low rate before rates started to rise in 2021. If you already have a 3% rate, it doesn’t make sense to refinance to a 6% rate. But what if you need cash?
Another option is to get a second mortgage – either a home equity loan or home equity line of credit (HELOC). These are both second mortgages that keep the first loan in place. A home equity loan is a fixed-rate, lump sum payment of equity to you, while a HELOC is a variable rate credit line.
Either type of second mortgage is another way to get the cash you need without changing your current, low-rate first mortgage. If you have a low rate already, speak to your lender about a second mortgage, as well. A HELOC may be best if you want a lower rate at first that can rise with time, while a home equity loan is ideal for the more conservative borrower who wants a fixed payment and term.
There are many refinancing options on the market in 2023. While rates are higher than a few years ago, there are still chances to lower your rate and get the cash you need. Talk to your lender about the various refinance options. And if you don’t want to alter your first mortgage, don’t forget to review your second mortgage options. A second mortgage backed by your home offers a lower rate than credit cards or personal loans!