Practical Advice on Refinancing Your Mortgage

Practical Advice for Mortgage Refinancing- 150x150Any approach to refinancing mortgages needs to be timely, sensible, rational, and most importantly, affordable. While refinancing can certainly create great savings benefits in the long run, it must still balance itself out against time, effort, and costs involved. This is especially true when the bottom line is weighed against the long-term financial goals and the short-term practicalities for maintaining a sound household budget.

Interest Rate Factors

There is no factor more important when making a refinancing decision than interest rates. The refinancing interest rate determines the economic feasibility of the entire process, especially over the length of the loan term. If the current mortgage rates are at least two percentage points below the existing mortgage rate, then refinancing may be well worth the trouble and short-term expense, and could save the homeowner thousands of dollars over the term of the mortgage.

Calculate Monthly Savings

Having a lower interest rate is the most important factor in making a refinancing decision because of its significant lowering effect on your monthly mortgage payments. By reducing monthly mortgage payments by just $200, refinancing can save a homeowner over $24,000 in the first decade of the new loan, adding considerable flexibility to budgets for other debt obligations.

Evaluate Up-Front Costs

Since the refinance option is in reality a completely new loan, there will be initial costs involved that are almost identical to the original loan process, from the loan origination fees all the way to the closing costs. In some cases, to minimize up-front expenses, the closing costs can be added into the loan itself, although interest rates will now be added to the closing costs. In other scenarios, if the lender for the original loan is willing to discuss the refinancing effort, there might be reduced or eliminated expenses during the new loan’s closing process. If a borrower’s financial condition is in good standing, and their credit rating remains high, there may be additional terms or conditions the lender may adjust more favorably, such as even lower rates and points, or be willing to negotiate closing fees.

Multiple Mortgage Refinancing

Multiple Mortgage Refinancing- 150x150With the economy showing signs of improvement, there are many homeowners wondering if they may have jumped the gun in terms of refinancing. Whether they opted to do so before the present decline in interest rates began, or are considering the feasibility now before the rates begin climbing again, it boils down to whether it makes sense financially to do so. While there is no limitation on how many times a homeowner may get a refinance loan, there are still some factors to consider that may tip the scales one way or the other. It also depends on finding a lender offering an affordable loan package, as well as meeting a new set of approval standards and mortgage loan credit requirements.

Factoring in Prepayment Fees

One major consideration is the possibility of a prepayment clause written into the original loan agreement. This stipulates that should the original mortgage be paid down before a specific date or time frame, a substantial amount of money must be paid to the lender as a penalty. These fees are generally based on a certain percentage of the original mortgage amount, and are put in place to ensure refinance lenders hold specific profit margins. The technique is designed to discourage a borrower from considering refinance options too often. If the original loan did not carry this penalty, it was more than likely offset by a higher interest rate applied.

Factoring in New Closing Costs

Should the borrower be fortunate enough to renegotiate the original mortgage with the same lender, there may be certain benefits to be had. Otherwise, the same expenditures will still apply to the new refinancing process, just as they were for the original loan. These costs include the origination, appraisal, title search, recording, and attorney fees. These closing costs can run from 3% to 5% of the total loan amount, which can become quite costly in terms of repetitive refinancing. However, if a borrower wants to do mortgage refinancing with no closing costs, it is possible to roll these closing costs into the loan itself, but interest will be added to this amount over the loan duration.

Mortgage Refinancing Factors to Consider

Mortgage Refinancing Factors to Consider- 150x150Everyone has an idea about what mortgage refinancing entails. But, for those who don’t, here it is in a nut-shell. The mortgage refinancing process can provide a homeowner with a few cost-saving options to improve their cash flow, or make their current mortgage a little easier to manage. Homeowners can use cash from the new loan for various purposes or they can simply borrow enough to rewrite the first mortgage into one with much better terms. Here are a few factors to consider before making this option a reality.

Financial Motivations

The most important reason behind exploring the refinancing option and mortgage refinancing rates is to take advantage of current mortgage interest rates. A lower interest rate will have a dramatic effect on the monthly payment obligation, which can be a huge benefit to any household budget. Over time, this will also reduce the overall cost of the loan by a substantial amount. By doing a little math, you see that a $200 reduction in the monthly payment puts $24,000 dollars back into a homeowner’s budget over the course of just ten years.

Mortgage Type – Fixed or Adjustable

Another option in refinancing is to consider switching the type of mortgage loan to save money. In this case, an adjustable rate mortgage with a higher ‘adjusted’ rate can be re-worked as a fixed-rate mortgage to stabilize the monthly payments. On the other hand, an adjustable rate mortgage loan (ARM) usually begins with a much lower interest rate, which may work to the homeowner’s benefit in the short-term, if remaining in the home only until the rate ‘adjusts’ back up is part of the strategy.

Naturally, there are certain fees and closing costs to consider, but in some cases, a lender will offer the option of adding these costs into the new loan. Bear in mind, that closing costs for refinancing can be in the range of 3% to 5% of the loan amount. But if the lender of the original loan is willing to renegotiate, there are a few ways to cut down on the closing costs as well.

Documentation Required for Mortgage Refinancing

Documentation Required for Mortgage Refinancing-150x150Once the homeowner has investigated all of the available lending options and has selected the lending institution offering the most affordable refinancing options, all of the documents the lender will require need to be put together to start the refinance process. This will be the relevant information regarding not only the property to be refinanced, but all the documentation regarding the borrower’s financial circumstances as well. Some will come from the borrower’s own files and records, most pertaining to the existing mortgage, and the rest will be requested from various agencies by the lender with the borrower’s authorization.

Having all of the required documentation on hand prior to negotiating with a lender is necessary to move the entire refinancing process forward with minimum delay. Generally, most of this documentation is the same as what is provided at the time of the original mortgage loan application process, but if a certain amount of time has transpired since then, lenders will want to rebuild the application file from scratch in order to re-verify the information.

Assets, Income, and Employment Records

Every refinance lender will request income verification from the borrower in order to proceed. Such documents may include wage payment stubs going back a few months, W-2 forms and tax returns for the preceding two years, as well as employer references and contact information to verify employment and job stability for at least two years. If a borrower is self-employed, they will have to provide tax returns for the two preceding years, along with profit and loss statements.

Any other forms of income sources will also be needed for verification, including pension, dividends, rental income, as well as child support documentation and alimony. A borrower will also need to supply bank statements for any checking or savings accounts, IRAs and 401Ks, possibly even records for mutual funds, stocks, bonds and other securities. Borrowers in possession of substantial stock portfolios, savings or other investments present far less risk to the lender, indicating an ability to maintain mortgage payments if they are temporarily unemployed.

Homeowner Insurance Policy, Title, and Deed

In addition, the existing homeowner’s insurance documents will need to be brought in to verify that the existing policy is in effect and that there is adequate coverage on the residence. Along with this will be copies of the recorded deed on file, the abstract, the land survey, current title report, and the required title insurance documentation for the necessary legal descriptions of the property and its owners. Most of these documents will be readily available from the original loan provider, which can speed up the entire process should that same lender be considered for the new refinancing.

Liabilities and Credit History

Last but not least, the lender will request to gain access to the borrower’s credit reports via written authorization from the borrower. This will give the lender a complete credit history of payment records and total amount of liabilities the borrower has under current obligation, their credit scores, and to evaluate what type of refinancing program they are qualified to apply for. There are also certain lenders who provide a fast-tracked refinance process for borrowers with significant equity in their home and top-tier credit ratings.

New Appraisal

Because the original appraisal done on the existing property will have gone beyond the required 90 day time-frame to still be valid, some mortgage refinance requirements will stipulate that a new property appraisal needs to be performed in order to confirm the current market value of the property for the lender. This of course will establish the amount of funds the lender will endorse for approval. Generally, this appraisal is ordered by the lender through a contracted agency after the loan application has been submitted, and the expense is paid by the borrower when the appraisal is completed.

Whatever the financial necessities or motivations for seeking refinancing on an existing mortgage are, whether it be cutting the monthly expenditures, extending the loan term, changing the loan type, or just freeing up that equity, this information is a valuable tool for reaching that goal. Regardless of which lender is selected to begin the negotiations, the refinancing process can be expedited by putting together the necessary documentation beforehand. In the end, saving both time and money will be the most desirable outcome, for both the lender and the homeowner, if all the pieces of the refinancing puzzle are in the same box.

Is Putting Money Down Required in Mortgage Refinancing?

Is Putting Cash Down Required for Refinancing- 150x150When the refinancing issue is brought to the homeowner’s table, especially when current mortgage interest rates make the option a very favorable consideration, there are the usual ‘costs’ to be factored into the feasibility equation. In the case of refinancing, one of the variables being eliminated is the need for putting down payments into the process, as was required for the original home purchase. Bringing money to the lender’s table in a mortgage refinance is an exception to the normal procedure, and not a standard requirement, which makes the entire concept very appealing for a number of reasons. The only time it might be necessary would be if there is a lack of sufficient equity in the home, or if there is a debt pay-off needed to qualify for the financing.

Money Down is an Option

The basic premise in refinancing is to accomplish a few strategic and money-saving goals. The decision is based on what type of loan package was negotiated at the time of purchase, and what the interest rates were set at by the lender at the time. Therefore, the tactic is to either lower the interest rate, change types of mortgage loans, change the length of the loan term, or tap into the equity resource for cash. There is also the choice of folding the closing costs of the new loan right into the loan itself, which makes the ‘money down’ issue even more attractive. This choice, however, means increasing the overall loan amount, as well as paying more interest in the long run.

More Money Down = Lower Interest Rate

Naturally, when a homeowner chooses to apply any amount of funding toward the refinancing process, if only to lower the loan principle, it will of course reduce monthly mortgage payments. If enough money is brought to the table, there is a good chance the lender will lower the interest rate. This is because the lower loan amount is compared to the current value of the home itself. More funds brought to the closing may also eliminate the need for private mortgage insurance.

Is Cash-Out Refinancing a Good Idea?

Is Cash Out Refinancing a Good Idea 150x150For most homeowners, the sluggish economy may not be gaining the necessary momentum quickly enough to make managing a budget any easier. Naturally, they are looking at their home as not just a roof over their heads, but as a source of much needed cash in the form of equity to tap into, to relieve all sorts of financial needs or opportunities that remain beyond reach. Many are looking at the possibility of accessing this cash resource by investigating the option of cash-out refinancing programs.

Utilizing Home Equity

This option allows a borrower to refinance existing mortgages to ‘cash out’ some or most of the equity value in the home. In essence, the principle is to refinance the home for more than its present value and pocketing the surplus cash at closing. While the funds can be used for almost any purpose, the best strategic move would be to use these funds for either home improvements or debt consolidation.

Check into the Most Favorable Loan Programs

Examine this brief example of how a cash-out refinancing program would work. If the present home has a market value of $120,000, and the current balance on the existing mortgage is $70,000, the procedure would allow a homeowner to refinance for $100,000, eliminate the existing loan obligation of $70,000, and retain a surplus of $30,000 in equity. The process is of course dependent on how much is owed on the original loan, what the prevailing market value of the home is, and the specific mortgage loan types a refinance lender is willing to offer. There are many refinancing plans available, with loan amounts ranging from 80% to 125% of the home’s present value.

The advantages to this plan are based on a homeowner owing less than the home is worth, combined with being able to refinance at a much lower interest rate than the existing loan, adding more savings to the budget. In addition, gaining access to home equity funds will allow debt consolidation and tax benefits by paying off obligations with non tax- deductible interest.

Home Refinancing Objectives: The Basics

Home Refinancing Objectives-150x150Home refinancing decisions are generally based on market influences on the housing industry, and what effect they have on current mortgage interest rates in particular. When the overall economy is sluggish, the interest rates on home loans are proportionately lower as well. Any homeowner with a fixed-rate or adjustable rate mortgage drawn up a few years ago will consider the benefits of refinancing while interest rates are in their current downward swing. The motivation to refinance is to take advantage of this trend by re-placing the old mortgage with a more budget-friendly monthly payment and a lower interest rate.

Three Benefits to Refinancing

Refinancing a current mortgage can save considerable money if it is done at the right time and for the right reasons. In a refinancing plan, there are usually three significant benefits that play a major role in the decision, depending on the long-term goals or current economic factors affecting the borrower.

  • Decreasing Monthly Payment AmountLower mortgage interest rates will significantly reduce the amount the homeowner will pay each month, often by hundreds of dollars. However, this formula needs to be weighed against the long-term effects of extending the term of the original loan further out, which means much more interest being paid out over the life of the loan.
  • Decreasing Loan Term – A shorter term will result in far lower overall costs, as well as having the loan paid off that much quicker. While the interest rate applied will be a few percentage points lower, this advantage may be offset by the monthly payments being somewhat higher because of the shorter loan term. However, the less paid toward interest, the more is paid toward the loan principle.
  • Accessing Home Equity – Tapping into home equity provides the borrower with funds to utilize toward any immediate financial need or cash requirement. Many factors will influence the overall benefits of this decision, such as the monthly payment amount, loan term, interest rate, and current mortgage pay-off amount.

If refinancing turns out to be the best option for you and you have decided to move forward with the refinancing process, you have ample benefits to look forward to. Want to learn more about refinancing? Here are some articles we suggest: Should I Refinance My Home, Top 10 Refinancing Tips, and Best Mortgage Refinancing Indicators.

How to Refinance a VA Loan

Refinance VA Loan- 150-x150Since 1944, the U.S. Department of Veterans Affairs (VA) has helped more than 18 million American veterans become home owners. The loan, issued by a lender, is insured against default by the VA. They also dictate the requirements for those who can qualify and the terms of the mortgage. A VA loan offers benefits to active-duty military members, veterans, and surviving spouses. VA loans are generally used for a few purposes, such as buying or building a new home, refinancing a mortgage loan, or home improvements.

Benefits of a VA Loan

VA loans feature a number of benefits compared to conventional loans. If you are an eligible veteran or active duty personnel, then you should seriously take into consideration the VA loan as the most important option for mortgage financing. Benefits that make a VA loan better than the alternative are:

  • No down payment. Apart for a couple of options that have strict requirements, it is impossible to find a lending option that will finance 100 percent of the loan. There is also no prepayment penalty on VA loans, unlike conventional loans.
  • Lesser requirements. Your credit score will not matter as much as it would if you were to apply for a conventional loan. In fact, it is estimated that close to 80 percent of the people who choose a VA loan would not qualify for a conventional loan.
  • No mortgage insurance. Compared to conventional and FHA loans that require you to pay a small percent of the total loan amount as mortgage insurance, VA loans do not have this requirement.
  • Easier to refinance. You can easily qualify for a lower interest rate when refinancing within the VA program through their streamline refinancing option.

Types of VA Refinancing

Also known as the streamline refinance, the Interest Rate Reduction Refinance Loan (IRRRL) is the best choice if you already have a VA loan and want to refinance in order to reduce your monthly mortgage payments. Because you are refinancing from one VA program to another, this type of refinance will be completed quickly. Unless the lender specifically requests it, you won’t have to have your home reappraised. Also, closing costs can be rolled into the balance of the loan, meaning that you will have to pay little or nothing out of pocket.

Your other option when refinancing a VA loan is the cash-out refinance loan. This program will give you the opportunity to refinance your VA loan while taking cash out of your home’s equity for home repairs and improvements, or in order to pay off debts. Normally, you can refinance up to 90 percent of your home’s value with VA’s cash-out loan. You qualify for this type of refinancing based on your income and credit score. Same as with the IRRRL, the closing costs can be rolled into the entire loan amount.

Steps of VA Loan Refinancing

Refinancing a VA loan is a good choice if you wish to reduce the cost of your mortgage. However, you should be aware that refinancing can get pretty expensive. Refinancing fees, such as the origination fee and the VA funding fee, appraisals and closing costs, can make this whole process cost a few good thousands of dollars. If you have decided that refinancing is the right path for you, here are the steps that you should follow:

  • Contact a few mortgage refinance lenders until you find the best rates. The interest rate on your new loan will have to be lower than the one on the original loan, as this is a requirement of the VA Interest Rate Reduction Refinancing Loan program.
  • Your lender will ask you to provide documents that will prove your monthly income and expenses. Documents that you will have to show are your last two paychecks, your last two income tax returns, bank statements, and statements from other loans and credit cards.
  • Even if the VA doesn’t require this, it is up to each lender’s requirements, so you might be asked for permission to have your credit report checked.
  • The VA doesn’t require an appraisal for refinancing, but some lenders may require one, so they will hire a real estate appraiser to determine the value of your home. Unfortunately, you will have to pay for this appraisal.
  • After you receive the new loan terms and interest rate, you will need to sign a contract and start making the new monthly payments.

Refinancing a loan that is backed by the U.S. Department of Veterans Affairs is not a difficult process and the requirements are very lenient. While refinancing is typically a good choice and will improve your financial situation, you need to do your homework and look beyond interest rates when deciding if it’s the right choice for you.

Should I Refinance My Home?

should I refinance- 150x150With interest rates at an all-time low, many homeowners are beginning to wonder whether they should refinance their mortgages. There are many things to consider when thinking about refinancing so be sure to put in the effort to research all of the things you should know before making a final decision. In helping you with your decision, also look at Pros and Cons of Refinancing as well as our Top 10 Refinancing Tips. But first, take a look at these resources we have put together to help get you started.

Crunch Numbers: Refinance Calculators

There are many refinance calculators available online, and you can use any of them to crunch numbers and determine the specifics of your mortgage situation. The calculator will ask you to enter several facts about your existing mortgage: the current amount of your loan (the balance owed), the interest rate you are paying, the term of your mortgage (fifteen years, thirty years, etc.) and the year your mortgage originated. (A side note: If your loan is not a fixed rate mortgage, there will be some guess work involved, since not even a computerized calculator can predict future interest rates.)

Next you will be asked to provide specific numbers for the proposed new loan. The amount of the loan might simply be the amount of the balance you still owe on the original mortgage, or perhaps you would like to add an additional amount, such as balance owed on credit cards, so you can use the refinance to consolidate other debts as well.

Next you will be asked to fill in the interest rate for the new loan. The resources provided with online refinance calculators should include the current interest rates for standard loan types (thirty year fixed rate, etc.), so you can select the appropriate number for the loan for which you intend to apply. Finally, you will be asked to provide the term of the new loan, and the refinance fees, which your bank can estimate for you.

Comparing the Old and the New

Once you have crunched numbers with the refinance calculator, you will have the information in hand to help you make a decision about the potential advantages of refinancing. Some of the relevant statistics will include the prediction of how much time it will take you to “break even” from the costs of the refinance. For example, if it will take four years for you to offset the expense associated with refinancing, the refinance will not be worthwhile if you do not intend to stay in the house for four years. But if you do intend to stay long enough to benefit from the refinance, there are still other factors to consider.

  • Will the refinance fees be rolled into the new loan, or will you have to come up with sufficient funds to pay the fees upfront?
  • Does refinancing lower your monthly payments?

One option to consider, if your income allows, is to keep paying the same monthly amount you have been accustomed to paying, with that extra amount going toward the principal. The loan will be paid off more quickly, and you will save money on the total interest you would otherwise have paid. You can use another online calculator to find out how much money this will save you over the life of the loan. With the help of calculators to break down the numbers, you can easily make a decision about the advantages of refinancing.

How to Refinance An Underwater Mortgage Loan

iStock_000020697947XSmall-150x150The last few years of economic upheaval in the U.S. housing market have left some eleven million homeowners “underwater”—owing more money than their homes are currently worth. When the remaining principle on the mortgage is higher than the assessed value of the home, it becomes exceedingly challenging to refinance the loan.

Banks and lenders are looking for collateral to secure a new loan, and in the case of a mortgage refinance, the collateral traditionally takes the form of equity in the home itself. Most banks require enough equity to equal twenty percent of the proposed loan, but of course an underwater loan has zero equity to offer. To help you deal with an underwater mortgage, take a look at the HAMP and HARP programs.

The Home Affordable Refinance Program (HARP)

Certain underwater loans qualify for refinancing help from the federal government, through the Home Affordable Refinance Program (HARP). Those who qualify for this refinance might slash three or four hundred dollars per month from their mortgage payments. Needless to say, a decrease of that amount could make all the difference in being able to keep current on mortgage payments.

However, the qualification parameters for this refinancing option are rather restrictive. First of all, the homeowner must be entirely up to date with the mortgage payments. There must be no more than one missed payment in the previous year, and the last six months must be paid in full. These requirements, of course, eliminate any homeowner who is already on the road to home foreclosure. Arguably, the people who most need assistance are automatically disqualified from this particular program.

If the homeowner does meet this first requirement, there is a second condition that also must be met. The mortgage must be held by either Freddie Mac or Fannie Mae. Application details can be found on the government’s HARP website.

The Home Affordable Modification Program

Homeowners whose payment history disqualifies them from HARP aid might still find relief in another federal program; the Home Affordable Modification Program (HAMP) has less restrictive parameters. A homeowner with an underwater mortgage and missed payments can apply for this assistance if their mortgage is held by Freddie Mac or Fannie Mae, or by another lender who has signed on with the HAMP offer.

A homeowner who is unsure of who holds the mortgage can place a call to their lender and inquire whether they are participants in the government’s HAMP agreement. The homeowner must provide documentation that shows a financial hardship and proves the ability to make payments—and therefore the mortgage itself—is under threat.

The HAMP approach is not an actual refinance; instead, it alters the terms of the existing contract. The new terms can provide reduced payments for as long a period as five years. After five years, the monthly payments may increase again, but the increase is restricted to one percent a year, and will be capped when it reaches whatever was the market rate when the HAMP agreement was signed and enacted.