Are you waiting for rates to drop so you can refinance your home? You’re not the only one! Refinancing allows you to replace your existing mortgage with another one with a different rate or conditions, and there are different types of refinances to choose from depending on your financial goals.
Rate and Term Refinance
When you think about refinancing, you likely have the rate and term kind in mind. Rate and term refinances are very popular, especially when mortgage rates drop. It can be a smart choice if you want to do any of the following: reduce your interest rate, lower your monthly payment, change the loan type (like adjustable-rate to fixed-rate), or get rid of private mortgage insurance (PMI). Note that if you want to lower your monthly payment, your loan term will be extended, while opting to refinance to a shorter term will often result in a higher monthly payment. Though each lender has different requirements, it’s best to have at least 20% in home equity with a debt-to-income (DTI) ratio of no more than 50%. The interest rates for rate and term refinances tend to be lower than that of other refinances since it’s less risky.
Building equity is one of the many benefits of homeownership, but you don’t have to wait until you sell to benefit from the equity you’ve gained! A cash-out refinance allows you to transform your home equity into funds that you can use for pretty much anything. Your first mortgage is replaced with one that’s more than the remaining balance, and you receive the difference in cash. The money isn’t taxable and can be used for a number of purposes, including financing home repairs, a vacation, college tuition, or debt consolidation.
Most lenders will let you borrow up to 80-85% of your home’s appraised value, as long as you retain at least 20% equity. Since your new mortgage will be more than your initial one, expect the interest rate and your monthly payment to be higher. The rates for cash-out refis tend to be slightly higher than for rate and term refinances since they carry more risk. Cash-out refinances are available for conventional mortgages, VA, and FHA loans, with varying seasoning or waiting periods. For conventional loans, you’ll need to have owned your home for at least 6 months and have your current mortgage be seasoned for 12 months. VA loans have a 210-day seasoning period, and FHA loans have a 12-month requirement for primary ownership and occupancy before applying for a cash-out. FHA refinances also have mortgage insurance premiums (MIP). If home values in your area have risen greatly, a cash-out refinance can be an excellent way to get in on the appreciation boom!
Homestyle Renovation Loan
Do you still love your home but feel it could use some upgrades? The FannieMae Homestyle Renovation Loan, FHA 203(k), and the Freddie Mac Choice Renovation loans all blend the perks of a rate and term refinance with the capital needed to repair or update your home. Renovation loans are especially convenient because the refinance of your current loan and repair costs are combined into one loan; it only has one closing and interest rate, and it provides flexibility when it comes to what can be updated. Unlike a home equity line of credit (HELOC), second mortgage, or cash-out refinance, which all use the home’s current value to determine the amount that can be borrowed, the renovation loan is based on the home’s after improved value. To determine the after-improved value, your contractor must submit a detailed plan of what’s to be fixed and how much it will cost. The appraisal is then completed using the contractor’s bid to determine what your home will be worth after the renovations are completed. Renovation loans are ideal for projects like building an addition, improving kitchens and bathrooms, and updating your home’s utility systems.
Who says refinancing has to be a hassle? If you have an existing FHA, VA, or USDA loan, you may have the option of going with a streamline refinance. Streamline refinances are just what their name implies—they’re a simplified refinance that speeds up the process. With this kind of refi, it’s common for income documentation, home appraisal, credit requirements to be absent or very relaxed. Each of the three varieties of streamlined refinances has unique traits:
The FHA streamline refinance doesn’t require a credit check, appraisal, or income verification and has flexible loan-to-value (LTV) and debt-to-income (DTI) requirements, making it an attractive option. If 210 days have passed since closing on your first mortgage and you’ve made at least six mortgage payments, you’ll be ready to look into an FHA streamline refi. Like the normal FHA loan, the streamline refi involves paying a MIP for the life of the loan and a one-time upfront mortgage insurance premium (UFMIP).
Also called an interest rate reduction refinance loan (IRRRL), the VA streamline refinance has no appraisal requirements or employment verification. Be sure to budget for the 0.5% funding fee and closing costs. You can apply for an IRRRL if you’ve made 6 monthly payments to your first mortgage and 210 days have passed since the initial closing. The borrowing limits are very generous and allow you to refinance up to 120% of your loan’s value. The IRRRL is only available to use for a rate-and term refinance, cash-outs are not allowed.
A USDA streamline refinance loan lets you refinance without going through a credit check, DTI verification, home inspection, or appraisal. To be eligible, you’ll need to have made at least 12 on-time payments towards your first loan. Like the IRRRL, the USDA streamline can only be used to obtain a rate and term refinance.
People refinance for a number of reasons, so it makes sense to have a variety of refinance options available to help you achieve your financial goals. Working with an experienced loan originator and choosing the right refinance for your needs will help ensure you’re getting value out of your home purchase for years to come.
If you have any questions about refinancing, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!
For informational purposes only. Refinancing an existing loan may result in the total finance charges being higher over the life of the loan. Veterans Affairs loans require a funding fee, which is based on various loan characteristics. LTVs can be as high as 96.5% for FHA loans. FHA minimum FICO score required. Fixed rate loans only. W2 transcript option not permitted. Minimum required credit score of 620 for conventional loans.
When interest rates are low, it seems like everyone is refinancing their home. If you’re already a homeowner, refinancing can be a great way to lower your monthly payment, make home repairs, or pay off your mortgage faster. Here are 7 things to know about refinancing.
When you refinance your home, you’re replacing your original mortgage with a new one. Oftentimes, the new mortgage will have a lower rate or term than your previous one, and in some cases that’s required. In some ways, refinancing can be easier than buying a property since you’ve already bought your home, but has its own unique considerations.
Just like when you were buying your home, your credit score will be a significant factor when you decide to refinance. It’s best to have a have a credit score within a healthy range, though credit requirements will vary depending on your lender and the loan program you choose. Take steps to improve your credit score so you can be in the best position when you refinance. Your lender will also look at your debt-to-income ratio, or DTI. The lower your DTI, the more reliable you’ll appear to lenders since your debts don’t exceed your pre-tax income. A DTI at or under 36% is generally favorable, but the requirement will differ between lenders. Paying down large debts can help you reduce your DTI in preparation for a refinance.
Refinancing is attractive for people who are already homeowners, but not everyone refinances for the same reason. Some common refinance goals include changing the loan’s rate and term or getting rid of PMI. The refinance process will vary depending on what your objective is, so knowing what you want out of your refinance will help you prepare accordingly.
Collecting all the needed documentation for a refinance can be tedious and time consuming, so having an understanding on what to provide can make your refinance smoother. To verify income and employment, bring the last 2 months of pay stubs and 2 years of tax returns/W-2s to show your lender. Note that Social Security payments, pensions, disability, alimony, and child support are considered sources of income. You’ll also need to bring statements outlining all your assets and debts. Don’t forget to show proof of home insurance, as most lenders require that you have it when refinancing. Be sure to stay in close contact with lender in case there are other documents you need to provide or explain.
One of the most common questions homeowners have about refinancing is. “Is it worth it?” Although each situation is different, calculating your break-even point can help answer this question. The break-even point is when you begin to save money after the refinance. You can calculate the break-even point using a calculator, or by dividing the total cost of your refinance by your monthly savings to get the number of months needed to recoup your money. You should also consider how long you plan to stay in your home. For example, if you’re thinking of moving in the near future, refinancing might not make much sense. After you have an estimate of your break-even point, consult with your lender. Nothing beats meeting with a Loan Originator (virtually or in-person) to discuss the best refinance plan for you.
Even though refinancing can save you money in the long run, there are still some immediate expenses to consider during the process. Closing costs aren’t just for buying a home, they’re part of refinancing, too. Closing costs can include an appraisal fee (if you have one), origination fee, title fee, and the lender’s attorney. You can expect 2-5% of your refinancing costs to go towards closing, so be sure you have enough money to account for them. Your lender may allow you to have a no-costs closing where the closing costs are rolled into your refinance. In a no-costs closing, your closing fees are either added to the principal or exchanged for a higher interest rate.
Locking in an interest rate is a smart move, especially when you’re refinancing. If you come across a low rate, locking it will prevent it from fluctuating, potentially saving you a lot of money as you pay off your refinance. If you want to lock your rate but are concerned about missing out on an even lower rate, ask your lender if a float-down option is available. When current rates are low, you don’t want to miss the opportunity to protect it.
A home appraisal helps your lender know your home’s current value and informs them how much they are reasonably able to loan you. An appraiser from a third party will visit your home and make note of its condition, along with comparative data from your local area. Then, they send a report to your lender who will consider the information when processing your application.
COVID-19 has caused many home appraisals to be done with software instead of physical visits, but you should still be prepared to have your home appraised. If you’re having a virtual appraisal, treat it like you would an in-person appointment. Take time to do some cleaning, repair and replace fixtures as needed, and tidy up your yard to give it curb appeal. Some lenders may be willing to offer an appraisal waiver; it doesn’t hurt to ask if it’s an option.
Much like applying for a mortgage, there is no one-size-fits-all way to refinance. Knowing your reason for refinancing and getting in shape financially will help you have a successful and smooth refinance experience.
If you have any questions about refinancing your home, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying or refinancing process, click here to get started!
*NFM Lending is not a credit repair company. Please contact a credit repair company for more information on how to improve your credit score. Refinancing an existing loan may result in the total finance charges being higher over the life of the loan.