Refinance For The Right Reason
Refinancing may refer to the replacement of an existing mortgage obligation with another mortgage obligation under lower interest rate and different terms.
A mortgage loan (debt) might be refinanced for various reasons:
1. To take advantage of a better interest rate (a reduced monthly payment or a reduced term)
2. To consolidate other debt(s) into one loan (a potentially longer/shorter term contingent on interest rate differential and fees)
3. To reduce the monthly repayment amount (often for a longer term, contingent on interest rate differential and fees)
4. To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan)
5. To free up cash (often for a longer term, contingent on interest rate differential and fees)
Refinancing for reasons 2, 3, and 5 are usually undertaken by borrowers who are in financial difficulty in order to reduce their monthly repayment obligations, with the penalty that they will take longer to pay off their debt.
In the context of personal finance, refinancing multiple debts makes management of the debt easier. If high-interest debt, such as credit card debt, is consolidated into the home mortgage, the borrower is able to pay off the remaining debt at mortgage rates over a longer period.
For home mortgages there may be tax advantages available with refinancing, particularly if one does not pay Alternative Minimum Tax.
What are Points? (mortgage)
Refinancing lenders often require a percentage of the total loan amount as an upfront payment. Typically, this amount is expressed in “points” (or “premiums”). 1 point = 1% of the total loan amount. More points (i.e. a larger upfront payment) will usually result in a lower interest rate. Some lenders will offer to finance parts of the loan themselves, thus generating so-called “negative points” (i.e. discounts).
No Closing Cost
Borrowers with this type of refinancing typically pay few if any upfront fees to get the new mortgage loan. This type of refinance can be beneficial provided the prevailing market rate is lower than the borrower’s existing rate by a formula determined by the lender offering the loan. Before you read any further do not provide any lender with a credit card number until they have provided you with a Good Faith Estimate verifying it is truly a 0 cost loan. The appraisal fee cannot be paid for by the lender or broker so this will always show up in the total settlement charges at the bottom of your GFE.
This can be an excellent choice in a declining market or if you are not sure you will hold the loan long enough to recoup the closing cost before you refinance or pay it off. For example, you plan on selling your home in three years, but it will take five years to recoup the closing cost. This could prevent you from considering a refinance, however if you take the zero closing cost option, you can lower your interest rate without taking any risk of losing money.
True No Closing Cost mortgages are usually not the best options for people who know that they will keep that loan for the entire length of the term or at least enough time to recoup the closing cost. When the borrower pays out of pocket for their closing costs, they are at a higher risk of losing the money they invested. In most cases, the borrower is not able to negotiate the fees for the appraisal or escrow. Sometimes, when wrapping closing costs into a loan you can easily determine whether it makes sense to go with the lower rate with closing cost or the slightly higher rate for free. Some cases your payment will be the same, in that case you would want to choose the higher rate with no fees. If the payment for 4.5% with $2,500 in settlement charges is the same for 4.625% for free then you will pay the same amount of money over the length of the loan, however if you choose the loan with closing cost and you refinance before the end of your term you wasted money on the closing cost. Your loan amount will be 2,500 less at 4.625% and your payment is the same.
No Appraisal Required
The Obama Administration authorized several refinance programs aimed at helping underwater homeowners take advantage of the historically low interest rates. Most of these programs do not require an appraisal, and encompass all loan types. The programs offered in 2013 include:
1. FHA Streamline Refinance: The largest group that benefits from this refinance program will be those who have a FHA loan that was endorsed prior to May 31, 2009. For those who meet this date, the FHA PMI rates are very very low. This Streamline Refinance Program without an appraisal is also available to borrowers who no longer live in the property (as their primary residence)/ own the house as Investment Property.
2. VA Loan Refinance: The Veteran’s Administration offers Interest Rate Reduction Refinances IRRR for Veteran Home Owners who simply want to reduce their interest rate, with no appraisal. These loans are also available to qualifying Veteran’s who no longer live in the property as their primary residence.
3. HARP Refinance: When the Home Affordable Refinance Program (HARP) was launched in 2009, it sought to help homeowners with underwater mortgages refinance their loans into lower monthly payments and /or interest rates. Unfortunately, the first version of the program failed to help as many homeowners with underwater mortgages as was hoped, leading to the release of a new and improved version of HARP, dubbed HARP 2, to deal with the complications. HARP 2 no longer caps the loan-to value at 125%, and allows any loan-to-value acceptable, thereby covering underwater homes.
4. USDA Home Loans: No appraisal required – the current residence must be in a USDA “Footprint Area” and currently be insured under the USDA program. So refinancing from a Conventional loan or a FHA loan to USDA will not work under this program. No Credit Report Required – the current mortgage must be current, and all of the previous 12 months of mortgage payments need to be made on time. That’s all. We just verify that you made your house payments on time. Employment Verification Required – we will need to verify that you are employed, and drawing enough money to meet the underwriting guidelines… meaning we must prove that you have enough income to make your house payments. Can not take cash out – All you can do is finance your current loan balance, and the new Guarantee Fee (USDA PMI) which is 1.5%.
Cash out refinancing
This type of refinance may not help lower the monthly payment or shorten mortgage periods. It can be used for home improvement, credit cards, and other debt consolidation if the borrower qualifies with their current home equity; they can refinance with a loan amount larger than their current mortgage and keep the cash out.
Call us today at 424 225 2167 for help. One of our mortgage professionals will help you get the best possible loan solution for your situation. We’ll be with you every step of the process and not hand you off to someone else.