Is it time to refinance your mortgage? Monthly fees getting you down? Maybe you have a great mortgage, but you’re just looking to cash out some of your equity. Either way, you’ve come to the right place. Home.Loans has all the information you need to decide if now is the right time to refinance.
If you’re already ready and want to skip the novel, just contact us, and we’ll be there to help you examine your options, free of charge.
Refinancing for Beginners
Whether it’s your first home refinance or you’ve not refinanced in a while, it’s a good idea to brush up on the basics. Taking out a new mortgage on an old house is a decision you’ll need to weigh carefully, since there are long term financial ripples to consider. For example, if you’ve been paying down your 30-year mortgage for 10 years, refinancing into a new 30-year mortgage means you’re not only extending your term by another decade, but adding all that interest on, too. But, if you’re about to sell your house and just need to reduce the payment until it finds a new family, well, that’s a different story.
Any time you borrow money, you should consider the pros and cons of the loan, both those that impact you immediately and those that may sneak up on you over time. Let’s take a look at some of the benefits, and then we’ll look at the drawbacks.
Benefits of Refinancing
Refinancing can be a smart financial move, especially if you can reap some of these benefits:
Reducing your interest rate. Although rates have been relatively stable since 2012, refinancing is worth a look if your credit is shinier now than it used to be. With a fully polished credit portfolio, you may find that you can improve your interest rate enough that it’s worth a mortgage refinance.
Locking in your interest rate. ARMs can be nerve-wracking, since you never know what to expect from your monthly payment. That’s why most responsible mortgage and real estate professionals recommend only using them for the short term, then refinancing into something with a fixed rate. That way, you have complete control over your finances.
Reducing your monthly payment. If you’re going through a tough time and your payment is getting to be a bit much, a refinance may be able to give you a little breathing room. You may be able to shed mortgage insurance or simply reduce your payment by spreading the remaining balance of your loan out over another 30 year term.
Cashing out your equity. Homeowners in areas with rapidly increasing home values may be interested in tapping their equity to help pay for major purchases or upgrades to the property. (There’s also no law against using that money for a jetski, but it’s just a really bad idea.)
Paying off a mortgage with a balloon. You might have gotten a mortgage that’s amortized over 30 years with a five year balloon, for example. What that means is that you have to pay that puppy in full before the five years are up. The loan holder doesn’t care if you borrow again to do it, so long as you pay it off, and most people end up refinancing to make everything work.
Refinancing isn’t for everyone, and it is a serious financial obligation that you need to really consider. Here are the drawbacks:
Starting from zero again. When you refinance, the loan’s term starts over, you’ll be at day one of repayment. That means another 30 years of payments on that note unless you sell before it’s paid in full. Do you really want to do that?
Acquiring additional debt. If you choose to cash out and buy that new minivan with the proceeds, you’re only going deeper in debt. Further, debt on your home can be more serious than other types of debt since it can lead to the dreaded “f” word -- foreclosure.
Increasing your monthly payment. Along with that additional debt, you may also see a pretty fat increase in your monthly payment -- even if your rate was significantly reduced -- because at certain equity thresholds you’ll also be obligated to pay for extras like mortgage insurance. This is a fairly big drawback.
Paying more in fees than you gain in rate savings. The math can get kind of complicated, but it’s important that you do it or ask that friend you made in Accounting 101 for their help (in exchange for a bottle of wine and some avocado toast, of course). Often, the improvements to your rate that you’ll earn aren’t worth the additional fees you’ll incur when refinancing. If the fees exceed the savings you’ll see during the time you plan to occupy your home, it’s not a good deal.
Reduced equity in your home. This one is pretty obvious, but it’s important to stress. During the housing crash of the mid-2000s, a lot of people learned the hard way what happens when you have no equity in your home. You can’t move, for one, but if the market starts to slide, you can’t even sell your house without taking a giant bath. Now, there’s no crime in cashing out some equity to help improve the overall value of your home with improvements, but it’s a careful balance. Leave something for a rainy day.
Falling into a riskier loan product. When you bought your home, you probably had a Realtor that you could ask about different mortgage products and lenders, so you could avoid walking into a trap. Although many of the worst lending practices have been removed from the market, there are still some really bad loan products out there and the lenders selling them are counting on you not knowing enough about them to see the difference. If you’re going to refinance, run the paperwork by that financial whiz from school (or a real estate professional) to get an honest evaluation.
We’re Doing This Thing: Refinancing is a Go
When you decide to refinance, the process is much the same as it was when you initially applied for your mortgage. Your lender will evaluate your debt to income ratio, your creditworthiness, and your home’s value before deciding if they’re willing to refinance the property. You’ll need the same paperwork as you did to get your initial mortgage, along with the most recent mortgage statement.
The program you used to get your initial mortgage may also dictate what kind of refinancing you’re able to do. Although FHA and conforming conventional loans bought by Fannie Mae will always refinance USDA and VA loans, the reverse isn’t always true. In fact, USDA will only refinance USDA loans.
Here’s a chart with details on refinancing.
Who Refinances Who?
Original Mortgage Type
|Conforming Conventional||FHA||VA||USDA||Non-conforming Conventional|
|*Homeowner must provide certificate of eligibility.|
As you can see, for the most part, common loan programs will refinance one another, but if you’re a veteran or live in a rural area, you need to ask the right questions to be sure you’re able to complete the refinance you have in mind.
Streamline Refinance Versus Traditional Refinance
Another point to ponder when you’re considering a refinance is whether you’ll do a streamline refinance or a traditional refinance. Like anything, there are good things and bad things about both options. See below:
|Streamline Refinance Versus Traditional Refinance|
|Fees||Lower, much of your original paperwork is recycled.||Higher, made like a brand new loan.|
|Speed||Fast, due to shortcuts built into system||Slow, all checks will be made like a new mortgage.|
|Appraisal||May be lower due to “drive-by” option, which is less invasive.||Can be higher because appraisers enter home and invest significant time.|
|Lender||No options. You stay with the lender who held your previous note.||Choose any lender you want to use.|
|Zero Cost Refi Available?||Yes, but means higher interest.||Possibly, but compare fees to lifetime interest boost.|
HARP May Still Be an Option
There’s one other type of refinance still kicking around that a limited number of homeowners are eligible to use. The Home Affordable Refinance Program was started in 2009 in response to all the homeowners who were losing their homes or simply walking away because they had so much negative equity that they couldn’t sell.
These borrowers often had adjustable rate mortgages, which they had planned to refinance before the rate adjusted, but hey -- the real estate market imploded before they could refinance. It was a really dark time. (We don’t like to talk about it. #RealEstateDarkAges.)
Due to that disaster, the HARP program lingers. Currently, it’s slated to go offline on December 31, 2018, but it’s already been extended a few times. Still, if this sounds like a good fit for your situation, take advantage while you can. You’ll need:
A totally perfect mortgage payment history for the last six months
No more than one mortgage late payment in the last year
A loan originated before May 31, 2009
Freddie Mac or Fannie Mae-owned loan
LTV ratio greater than 80 percent
Stay updated on the HARP program here, or call Fannie or Freddie to find out if your loan is eligible for the program. It’s easier than ever to qualify, so if your loan is from those #RealEstateDarkAges, it’s worth looking into.
Know Your Rights When You Refinance
Refinancing your primary residence is a lot like buying a new home, in ways. There’s something very specifically different that a lot of lenders like to gloss over because they really don’t want you to consider it an option: your right of rescission.
The right of rescission, in layman’s terms, is your right to cancel your refinance for any reason in the three days after closing. It gives you a little time to look over the paperwork, make sure you made the right decision, and ensure that your lender didn’t commit any monkey business when you weren’t looking.
It’s important to note that this only applies to refinance loans made by a new lender; streamline refinances (when you’re refinancing with your original lender for better terms) do not automatically have the right of rescission. Theoretically, you have a relationship with your streamlining lender and you know they’re going to do you right. A new lender, on the other hand, is a stranger.
You have to make your intent to undo the refinance you just completed very clear, in writing, and document it well (an overnight postal letter with delivery confirmation is a great way to do this). When the new lender gets your notice, they’re obligated to turn back time, including returning any fees paid within 20 days.
Your old lender will take you back (of course they will -- you were all they ever wanted and all they ever needed).
Is It Time to Refinance? Only You Can Decide
Choosing to refinance or not is a very personal choice, much like any other financial decision. Going into it with as much information as possible can make the process much easier. When it comes to refinancing, it makes sense to shop around, since rates and fees vary. If you shop for those loans around the same time, you can avoid your credit taking a beating.
And, hey, if you need anything else, let us know. Home.Loans is here to help you with these difficult financial questions. We can’t tell you what’s right for your family, but we can help you figure out the difference between the APR and the APY or what the heck a title search is for. Get in touch with our team today!