This section ' Refinance Mortgage ' will give you a wide range of tips and tools if you are looking into information to refinance your existing home mortgage. Other than home loan modification, which mainly applies a homeowner with a hardship not being able to make monthly payments due to job loss, illness, etc., mortgage refinance is a quite common way to lower your payments in case lower rates become available.
Discussing refinancing we will cover topics such as:
Let's start by answering the first basic question when it comes to refinance mortgage - What is refinancing?
Mortgage refinancing gives you the chance to replace your current mortgage with a new loan, having a more favorable rate and terms that you can afford to manage. The new loan is offered against the same property as the collateral and may or may not exceed the current loan balance. The new loan funds are used to pay down the current mortgage while any remaining cash can be used to your best advantage.
For example: Mr. X and Mr. Y both took a mortgage loan worth $400,000. After 4 years, both of them paid off $200,000 each on their loans. Mr. X then took another home loan worth $200,000 in order to repay the existing balance on the loan. On the other hand, Mr. Y opted for a second home loan worth $300,000 in order to repay the unpaid loan balance which is $200,000. Mr. Y could use the remaining balance in order to fulfill other financial obligations.
The first scenario is called mortgage refinancing and the second scenario where the new loan amount is higher than the amount of the existing loan balance is called cash-out refinancing.
6 Reasons why you should refinance
If you're thinking "Should I refinance my home?", check out current mortgage rates AND these reasons as to why you may make such a decision.
You want to save more:
Your monthly payments will be reduced if you get a lower mortgage rate than you currently have or when your loan term can be extended (e.g. from 25 to 30 years). However, with the latter - an extended term, your monthly savings will increase, BUT you will be paying more in total interest for the life of the loan.
You want to pay down your mortgage quickly:
You can shorten the length of your mortgage life by reducing the loan term. Monthly payments will go up, but you will be able to save more on the overall interest payments over the life of the loan. Moreover, you will be debt free in a shorter time.
You need extra cash to pay off credit cards or other debt:
If you have enough home equity in your home, you can borrow more than the current loan balance. With the extra cash, you can pay off high interest debt such as credit card balances or installment loans. Your gain out of this option is, that interest payments on such debt (credit cards for example) is not tax deductible unlike mortgage interest.
You wish to consolidate 2 loans into one:
Again, if you have enough equity, you can consolidate first and 2nd mortgages and refinance into a single first mortgage. The monthly payment on the new loan is likely to be lower than the combined payments on the first loan and the second mortgage.
You want to convert an ARM into FRM:
This allows you to lock in at a low rate. Therefore you can repay the loan with stable monthly payments rather than variable payments over the loan term.
You want to get rid off PMI:
If your current loan balance is below 80% of the new appraised home value, you can go for a home refinance and stop paying the PMI.
Tips on when to refinance mortgage
"Should I refinance my house now?" – This is what most homeowners ask when they are planning to reduce their mortgage payments by taking advantage of lower rates. To find the answer, check out the mortgage refinance tips given below.
Build up equity:
It is feasible to go for a mortgage refinance when you have built up at least 10% equity in your home (for Fannie Mae owned mortgages, the value is 5%). It is also possible for you to choose this option if your equity is less than 5%, but you may have to pay down a certain amount of cash in order to make up for the difference in equity.
Check if refinance mortgage rates are low:
It is better to follow the 2% Rule which suggests that you can enjoy the benefits of refinancing if your mortgage refinance rate is 2% lower than that on your current loan. The interest savings will help you recoup the costs you pay for the new loan - provided you stay in the property for a certain period of time (break-even period). However, there are no-cost as well as low-cost mortgage refinance loans, where the costs are included into the loan. But you can expect comparatively higher rates on such loans. Moreover, these loans are limited when the market is in a credit crunch.
It is advisable that you compare mortgage refinance rates offered by different lenders in order to find the best rate that you can afford. This will help you save more in interest over the life of the loan.
Pay off any late payment:
There is no such limit on the number of times you can go for home mortgage refinance loans. Most lenders prefer that you have no late payment for the past 12 months before you switch over to a new loan.
Remove negatives and improve credit score:
Pull your credit report from the bureaus and review it for any negative items (late pays, collections, etc.) and inaccurate details. Try to dispute negative items and remove them from the report. If required, pay off any unpaid debt. Otherwise, you won't get a low rate and - even worse - you may not even qualify. Of course, there are lenders in the (almost non-existent anymore) sub-prime market who may offer you a 'bad credit' refinance loan, but it is better to avoid them as they will possibly charge higher rates and fees.
When NOT to refinance
Refinance mortgage terms does not make sense under the following circumstances:
Your property value has gone down:
If your property value reduces and you refinance up to 80% of the re-appraised value, your original mortgage amount may be higher than this amount. Therefore the new loan will not be sufficient enough to help you pay down the existing one.
You are paying off the first loan for a long time:
If you have been making mortgage payments on a long term loan, (i.e.) a 30-year mortgage for the past 15 to 20 years, then refinancing to another 30 year loan will not be a good option as it may increase your overall payments.
You have used up too much of the equity in your home:
Refinance mortgage may not be that useful if you have already used up 90% or more of your home value in taking out a mortgage or any home equity loan. You won't be able to get the best rates available in the market as when you refinance a 90% LTV loan, you will probably require a loan of that value or higher. This will be quite closer to being a 100% financing option and hence refinance mortgage rates will be comparatively higher. Moreover, 100% loans are hardly available in times of mortgage market crisis.
You have only a few years left on the current loan:
If there are only a few years left on your current loan, there is no value in refinancing with a long term loan. You may need extra cash but with a long term loan, you will end up paying much more for the entire loan term.
Refinance mortgage terms will make sense if you are into it for the right reasons and at the right time. You need to decide whether you want to choose a simple refinance mortgage option or take out extra cash on top of the amount to-be-refinanced. In case you would like to check out what mortgage rates and terms are currently available, you may check out the LowerMyBills Mortgage Calculator.