If you’re new to the world of home loans mortgage refinancing can be a complicated and confusing process. No one wants to overpay for his or her home loan and while refinancing is supposed to save you money it’s easy to blow it at closing. Here’s the only beginners guide to getting the best mortgage refinancing deal you’ll ever need.
Mortgage Refinancing Means Re-Verifying
The end goal of mortgage refinancing is to save money. You accomplish this by taking advantage of today’s low refinance rates to get a new home loan to pay off and replace your existing mortgage.
The problem with mortgage refinancing is that every home loan has fees and if you’re not able to offset your out-of-pocket expenses from your savings (in the form of a lower payment) you’re losing money no matter how great your refinance rates.
Mortgage refinancing gets you a brand new home loan with new terms and a new loan contract. You’ll undergo the same approval process you went through when you first purchased your home. Mortgage approval and the underwriting process that gets your home loan funded is going to cost you money. The less you pay going through this process, even if your fees are being bundled into the balance, the better off you’ll be.
What do lenders look at when approving your mortgage refinance application?
- Your Credit: Specifically, Your Credit Score & Mortgage Payment History
- Your Employment History & Income
- Financial Assets Including Cash & Debt Balances
In addition to your credit, income, employment and assets your home’s value will be appraised for it’s most recent value. (With a few exceptions, mainly the government refinance program HARP 2.0)
Different lenders have different standards for underwriting so if one denies your mortgage refinance application, another lender could approve you. Remember once your application is approved and completes underwriting you’re getting a brand new home loan.
There are three categories of mortgage refinance transactions; rate & term refinance, cash-in refinancing, and cash-out refinancing. The type of transaction you refinance your home with depends on your needs and personal situation.
Rate & Term Refinancing
If you choose a rate & term refinance transaction the only difference between your original mortgage and the new one are the refinance rates and term length. Term length is the duration of your home loan and along with your refinance rates determines your payment amount. One of the most common term lengths for rate & term refinancing is 15 years.
If you elect a rate and term refinance for your next home loan you cannot cash out equity in your home for more than $2,000. You will have the option of rolling your closing costs including the loan origination fee into your mortgage balance.
With a cash-out mortgage refinance, your new home loan could have a lower interest rate and a shorter term length than your original loan. The difference with cash out refinancing is that the loan balance is higher because you’re getting cash from your home equity at closing. This cash can be used for any reason and will be higher than $2,000, depending on how much home equity you have.
Cash out mortgage refinance loans are risky for lenders and come with higher interest rates and underwriting standards than rate and term refinancing. You might have your rate and term refinance application approved but find the same lender denies cash out mortgage refinancing.
The risk for homeowners from cash-out refinancing is that you’ll find yourself underwater in declining home markets. Being underwater means you owe more than your home is worth and often closes doors when it comes to your credit.
Cash-In Mortgage Refinancing
Cash-in refinancing refers to paying down your loan balance at closing. There are situations where you’d want to do this as well as situations where a cash-in refinance doesn’t make sense. Cash-in refinance transactions may have low refinance rates and shorter term lengths. The most common reason for electing a cash-in refinance transaction is to take advantage of low refinance rates when you have a less than favorable loan-to-value ratio.
This type of mortgage refinancing only makes sense if you’re close to an 80% loan-to-value ratio. Any more and the cost outweighs the benefit especially when government refinance programs like the Home Affordable Refinance Program (HARP 2.0) can get your mortgage refinance approved without paying out-of-pocket.
Government Refinance Programs
There are other options for mortgage refinancing depending on your situation. If you have an FHA backed home loan consider an FHA streamline refinance. If you have a VA home loan the VA’s Interest Rate Reduction Refinance Loan (IRRRL) works just like a streamline refinance.
Streamline mortgage refinancing has easier qualifying standards and reduced paperwork allowing qualified homeowners to take advantage of low refinance rates with minimal effort.
Finally, if you’re underwater (meaning your loan-to-value ratio is above 80%) you might qualify for the government’s Home Affordable Refinance Program (HARP 2.0). The problem with a HARP refinance is that Fannie Mae or Freddie Mac must back your mortgage before June 1st, 2009. If a bank like Wells Fargo privately holds your mortgage loan unfortunately you’re not eligible for HARP.
If you’re with Fannie Mae or Freddie Mac and have been making your payments on time you’re ready to begin shopping for a HARP lender.
Not HARP 2.0 eligible because your home loan is privately held? Rumors are that HARP 3.0 will remove the Fannie Mae, Freddie Mac requirement entirely. Stay tuned for more on HARP 3.0 as it makes its way through Congress.
How to Pay Less For Your Next Home Loan
The test of how good of a deal you’re getting on your mortgage refinance comes not from the refinance rates you’re getting but how much it’s costing you to get that lower rate. Closing costs will make or break the deal you’re getting every time. Pay less at closing and you’ll benefit more from today’s low refinance rates.
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