Refinancing means you’re essentially replacing your current mortgage loan with a new one. The new one will usually have a lower rate, a different term or both.
Three Types of Refinance Loans
Refinances will come in primarily three different types – cash-out refinance, cash-in refinance, and the rate-and-term refinance.
Cash-out refinances are for homeowners looking to pull out some of the equity on their home. These loans were more popular pre-2009 before the housing bubble burst, but these loans remain popular for folks looking to use some of their home’s equity for home renovations, college tuitions, down payments for investment properties, etc.
Cash-in refinances are for homeowners are want to lower the amount owed on their home, increasing their equity position. A common reason for a cash-in refinance is so that the loan-to-value ratio is reduced in order to eliminate PMI (Private Mortgage Insurance).
Rate-and-term refinances are the most common refinance loans. These refinances are for homeowners who want to replace their existing mortgage with a new one that has a new rate and set of terms. Many homeowners will refinance their adjustable rate mortgage (ARM) into a new 30-year fixed loan. Others may just want to take advantage of low interest rates and reduce their term in the process.
FHA Vs. Conventional
Many homeowners may opt for a Federal Housing Administration refinance because it allows for just 3% equity in your home. However, the already costly FHA MIP (Mortgage Insurance Premium) fees that are added to your loan continued to increase in 2013. As FHA mortgages insurance costs rise, some homeowners may want to consider a conventional loan. Which is best for you? It all depends on your current scenario. Consult with a knowledgeable mortgage professional (like me) to find out which loan best suits your needs.
Credit Scores Matter
This is especially true when you’re trying to get a Conventional mortgage loan. Credit standards for all mortgage loans remain tight. Underwriters want to see a near spotless credit history of at least a year on your credit report.
For Conventional loans, you’ll typically need a credit score of at least 740 to get the best rate. Borrowers with a credit score of 680 or more can still get a good deal, but the lower your score, the harder it will be to get approved.
You may want to review your credit report before you apply for a mortgage. Sometimes, paying down credit card balances can boost your credit scores quickly. Generally, if you are using more than 30% of the available credit on your cards, you may be hurting your score. Also, check for credit errors and have them corrected before you apply for a loan.
Pay Off Your Mortgage Sooner
Paying off your mortgage quicker can save tens of thousands of dollars. Now may be an ideal opportunity to refinance your 30-year mortgage into a 15-year, or maybe even 20-year loan.
What if you could refinance to a lower rate, reduce your term, and keep your payments within a comfortable amount all at the same time? This may or may not be an option but there’s no better time to check than right now.
Underwater? There’s Hope
If you owe more than your home is worth and have tried and failed to refinance, you may want to give it another shot. The Home Affordable Refinance Program (HARP) as well as HASP (Home Affordability and Stability Plan) were revamped to allow homeowners to refinance regardless of how deeply they are underwater.
Guidelines are constantly changing, not all of them in a bad way. Many who couldn’t qualify previously due to having PMI, being too far underwater, or other reasons are now able to qualify. Even if you been previously turned down, you may want to try again.
If You’ve Been Approved For a Mortgage, Leave Your Credit Alone
Most lenders will often pull a second credit report for the borrower a few days prior to closing. Don’t open new accounts or charge up your credit cards while waiting for your closing. New credit lines and maxed-out cards will hurt your credit scores. If you were on the edge when you qualified, your mortgage loan could be rejected at the last minute.
Refinancing Isn’t Complicated
Refinancing isn’t necessarily a complicated process, but it’s not always going to be an easy process either. After submitting your mortgage application and locking a rate, the race has actually just begun.
Do your best to submit any documents requested by your loan officer within 24 hours. Any delays in responding to the lender or in letting the appraiser into your house are wastes of valuable time.
Lenders will remain overwhelmed with the large volume of refinance applications at least through the first few months of 2013. It doesn’t take much more than lost paperwork or last-minute requests from your lender to delay your closing. If that happens, you risk losing the locked rate.
Time To Get Off The Fence
Have you been sitting on the fence, waiting for the best time to refinance? Think of 2015 as another chance before the window closes.
If you have decent credit and a little patience, you can still grab a phenomenally low rate — even if you are underwater on your loan. If you have refinanced recently, there’s a chance you’re still paying a higher interest rate on your mortgage than you should.
Take advantage of today’s currently record-low interest rates while they last. Rates are expected to remain low during the first part of the year, but they are likely to gradually increase as the year progresses. When they do, many homeowners may regret having missed the opportunity to grab some of the lowest mortgage rates in history.
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