Mortgage Refinance

• First, refinancing allows a home owner to lower their existing monthly mortgage payments.
• Second, refinancing is also a great way for a home owner to consolidate their debt and save valuable money in the long term.
• Finally, home owners can benefit from a lower refinancing rate by freeing up cash that can be used on much needed expenses.

What is refinancing?
It gives you the chance to replace your current mortgage with a new loan having favorable rate and terms that you can afford to manage. The new loan is offered against the same property as the collateral and may or may not exceed the current loan balance. The new loan funds are used to pay down the current mortgage while any remaining cash can be used to your best advantage.

For example: Mr. X and Mr. Y both took a mortgage loan worth $400,000. After 4 years, both of them paid off $200,000. Mr. X then took another home loan worth $200,000 in order to repay the existing balance on the loan. On the other hand, Mr. Y opted for a second home loan worth $300,000 in order to repay the unpaid loan balance which is $200,000. Mr. Y could use the remaining balance in order to fulfill other financial obligations.

The first scenario is regarded as mortgage refinancing and the second scenario where the new loan amount is higher than that of the existing loan balance is cash-out refinancing.

6 Reasons why you should refinance
If you're thinking "Should I refinance my house?", check out the 6 reasons as to why you may take such a decision.

You want to save more:
Your monthly payments will be reduced if you get a low rate or when your loan term is extended. However, with an extended term, your monthly savings will increase but you'll be paying more in total interest for the life of the loan.

You want to pay down your mortgage quickly:
You can shorten the length of your mortgage by reducing the loan term. Monthly payments will no doubt go up, but you will be able to save more in the overall interest payment. Moreover, you'll be debt free in a shorter time.

You need extra cash to pay off credit cards:
If you have enough home equity, you can borrow more than the current loan balance. With the extra cash, you can pay off high interest debts such as credit card balances or installment loans. You gain out of it as the interest on such debt is not deductible unlike mortgage interest.

You wish to consolidate 2 loans into one:
If there's enough equity (due to high appreciation), you can consolidate first and 2nd mortgages and refinance into a single first mortgage. The monthly payment on the new loan is likely to be lower than the combined payments on the first loan and the second mortgage.

You want to convert an ARM into FRM:
This allows you to lock in at a low rate. You can thus repay the loan with stable monthly payments rather than variable payments over the loan term.

You want to get rid of PMI:
If your current loan balance is below 80% of the new appraised home value, you can go for a home refinance and stop paying the PMI.

Tips on when to refinance a mortgage
"Should I refinance my house now?" – This is what most people ask when they're willing to reduce their mortgage payments by taking advantage of low rates. To find the answer, check out the mortgage refinance tips given below.

Build up equity:
It is feasible to go for a refinance when you have built up at least 10% equity in your home (For Fannie Mae owned mortgages, the value is 5%). It is also possible for you to choose the option if your equity is less than 5%, but you may have to pay a certain amount of cash in order to make up for the difference in equity.

Check if mortgage refinance rates are low:
It's better to follow the 2% Rule which suggests that you can enjoy the benefits of a home refinance if your mortgage refinance rate is 2% lower than that on your current loan. The interest savings will help you recoup the costs you've paid for the new loan provided you stay in the property for a certain period of time (break-even period). However, there are no-cost as well as low-cost refinance loans wherein the costs are included into the loan. But you can expect comparatively higher rates on such loans. Moreover, these loans are limited when the market is in a credit crunch.

It is advisable that you compare mortgage refinance rates offered by different lenders in order to find the best rate that you can afford. This will help you save more in interest over the life of the loan.

Pay off any late payment:
There is no such limit on the number of times you can go for home refinance loans. Most lenders prefer that you have no late payment for the past 12 months before you switch over to a new loan.

Remove negatives and improve credit score:
Pull your credit report from the bureaus and review it for any negative items (late pays, collections etc) and inaccurate detail. Try to dispute negative items and remove them from the report. If required pay off any unpaid debt. Otherwise, you won't get a low rate and may not even qualify. Of course there are lenders in the subprime market who may offer you a bad credit refinance loan, but it's better to avoid them as they'll possible charge higher rates and fees.

When not to refinance

Refinancing does not make sense under the following situations:

Your property value has gone down:
If your property value reduces and you refinance up to 80% of the reappraised value, your original mortgage amount may be higher than this amount. Thus, the new loan will not be sufficient enough to help you pay down the existing one.

You are paying off the first loan for a long time:
If you are making payments on a long term loan, say, 30 year mortgage for the past 10 to 20 years, then refinancing to another 30 year loan will not be a good option as it may increase your overall payment.

You have used up enough equity:
Refinancing may not be that useful if you have already used up 90% or more of your home value in taking out a mortgage or any home equity loan. You won't be able to get the best rates available in the market as when you refinance a 90% LTV loan, you will probably require a loan of that value or higher. This will be quite closer to being a 100% financing option and hence mortgage refinance rates will be comparatively higher. Moreover, 100% loans are hardly available in times of mortgage market crisis.

You have a few years left on the current loan:
If there are only a few years left on your current loan, it's no use refinancing with a long term loan. You may need extra cash but with a long term loan, you'll end up paying more for the entire loan term.

Refinancing will make sense if you are into it for the right reasons and at the right time. You need to decide whether you'd go for a simple refinance or take out extra cash too.

Which Refinancing Option suits your situation?

Most people choose to refinance either to get a lower rate compared to what they have received on their existing mortgage or to modify the term of the loan. Besides, they often require extra cash for a variety of purposes and here's where refinance can help them to cash out their equity.

5 Ways to refinance your loan

Rate and Term Refinancing
This allows you to borrow enough to clear your current mortgage balance. You can either modify the interest rate on your loan or change the loan term or you may adjust both. For instance, you may change to an FRM when the rate on your ARM is expected to move upwards within a short time. Or else, you may switch over from an FRM to a hybrid ARM if you plan to move out within a period of 2 to 3 years.

Cash-out Refinancing
This option leaves you with excess cash amount after you have paid off the current loan balance. You can thus extract cash proceeds from your home equity.

Streamline refinancing
Streamline refinancing refers to the documentation and underwriting carried out by a lender in order to find out if the borrower would qualify for a refinance loan. This is a kind of loan program does not require any credit verification. But it may or may not require an appraisal. There are two types of streamline refinances - one offered by the FHA and the other by the VA.

Mobile home refinance
You can avail mobile home refinancing loans in case you wish to in order to get a lower interest rate on your mobile home mortgage loan and enjoy making some savings out of it. You can opt for a Title I loan program provided the mobile home is your primary residence. There are some criteria which you need to fulfill in order to get a mobile home refinance loan. Know more about the eligibility criteria.

Low Credit Refinance
You may have a number of loans including credit cards, personal loan or even a mortgage and are not able to pay them off in the right time. This is when your credit score starts going down and now if you look forward to a refinance, you may be perceived as a low credit borrower.

However, inspite of low/bad credit, it is possible to qualify for a mortgage. But there are lenders who may require you to pay a higher rate of interest on the refinance loan compared to what you had to pay had your credit score been a favorable one. However, bad credit loans provide you with an option to rebuild your credit while you make regular payments on the refinance loan. At times, you do need these loans in order to consolidate and eliminate other debts, provided you take out extra cash through the refinance - the process being known as cash-out refinance.

How to refinance your current mortgage

Refinancing is a good option that can help you to get rid of high interest debts. But you can only benefit from it if you can secure a lower rate on your loan and also pay minimum costs to the lender. You can try shopping for some of the best rates and costs while you are into refinancing. Besides, an awareness of the entire loan process also helps you get though the deal easily. This article contains an overview of the refinance process in simple steps so that it will be easier for you to interpret what the process is all about.

6 Steps to your Refinance loan

1. Decide how long you are going to stay in the property.

2. Contact your first lender and find out what he has to offer. Otherwise start shopping with other lenders.

3. Get pre-qualified for the loan

Decide upon the type of mortgage

Check out the factors that may influence the interest rate on your loan. These are:

1. Your credit score.
2. Loan amount.
3. Number of points paid.
4. Lock-in-rate.

4. Compare the interest rate on offer with that of your existing loan.

5. Get pre-approved with a lender.

Calculate the monthly loan payments

Subtract new payments from current monthly payments. The difference gives you the savings that you can earn by getting a low rate.

Divide the monthly savings by the total closing costs. That gives you the number of months within which you can recover the closing costs. This time period is known as the Break-even period.

Compare the months obtained with the time period you're staying in the house. If it exceeds the time period, then refinancing may be a good choice.

6. Follow the simple steps that will take you to loan closing, that is, towards finalizing the deal.

7. At closing time you'll have to sign the loan documents and the mortgage note. Besides, you will have to pay for the closing costs and prepayment penalty.

Other Mortgage Options:

- Home Equity Loans

- Debt Consolidation Loans

- New Home Purchase Loans