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Refinance Mortgage Information

Overview

If you’re reading this, you probably know what a refinance mortgage is.  You probably know what it does.  This is good.  But there are many complexities wrapped up in this seemingly simple process.  Our detailed overview will provide you with all the refinance information you need to take control of your financial situation and make an informed decision about your mortgage.

Refinance Mortgage Information

In a refinance, you take out a new home loan secured against your home and use it to pay off your existing home loan.  You are literally “financing your home again.”  Just as with a traditional mortgage, you’ll have to qualify to receive the refinance mortgage and you’ll have to pay closing costs on the loan.  If there is an early repayment penalty attached to your current mortgage, you’ll need to pay for this as well.

The reasons one would incur these costs and go through this process however would be so you can better manage your wealth and home value.  Refinancing provides many long term benefits to homeowners.

Benefits of a Mortgage Refinance

Most homeowners think of refinance loans in terms of the benefits these mortgages provide.  In our culture, the term “refinance” has connotations of wealth and value.  This is not without merit.  Some of the primary refinance benefits are outlined below.

You can obtain a lower interest rate on your mortgage.  Depending on when you financed your current mortgage, the mortgage interest rates available today may be significantly lower than what you’re paying at present.  There are two reasons for this.

First, a lower rate reduces the amount of money you’re required to pay each month on your home loan.  Some homeowners are able to reduce their payments by 30% or even 50%, though such reductions are rare.  Still, you could save anywhere from $40 to $400 each month with a lower mortgage rate.  Check out current refinance rates to determine whether you’re likely to save money.

Second, a lower rate can allow you to pay your mortgage off faster, reducing the total amount of interest you’ll pay on your loan.  This can save you tens of thousands of dollars, depending on the difference between your current rate and your new rate.

Many homeowners believe that getting a lower rate mortgage is the only purpose of a refinance.  While it’s definitely one of the most financially advantageous elements, it’s not the only motivator you should consider.

You can access your home equity and take out cash.  Another common reason to refinance is to access home equity.  Homes are great wealth builders.  Many homeowners have earned significant income and gained net worth simply through home ownership.  This is all well and good, but you can’t take a house to the store and buy milk.  Real property is illiquid, meaning you can’t readily spend it.

The cash out refinance option is designed to convert equity into spendable cash.  It’s a simple process.  There are three steps involved.

• Get your home appraised.  The value of your home minus the outstanding balance on your current mortgage will determine how much equity you do in fact own.  Home values change over time.  You may have had equity a year ago, but a drop in home prices in your neighborhood may have diminished your equity.  The reverse is also possible.  Maybe your home has increased in value since you last had it appraised.  Either way, you need to find out the actual value of the property before you begin the refinance process.  
• Find a lender.  Different lenders offer different rates and terms on their refinance loans.  Contact several lenders or brokers in your area and ask them for rate quotes.  The rate is arguably the most important element of the mortgage, though you’ll need to pay close attention to closing fees as well that can eat into your available equity.  Some lenders prefer to charge higher fees on cash out refi loans than standard refi loans because the money is already there, in a sense.
• Close the loan.  If you made it through the first two steps, this one shouldn’t be an issue.  Turn in any paperwork your lender requests, including payment documentation for your current loan.  You’ll need to prove your income and credit score, just as with any other loan.

You can use a cash out refinance to pay for anything.  Yes, anything.  Many homeowners have wasted their home equity on insignificant purchases, such as shopping sprees and fancy cars.  Put the cash you get out of your home into something meaningful.  Ideally, you shouldn’t refinance at all until you know exactly what you need to spend the money on.

One of the best uses for cash from a refi is home improvement.  In this case, you’re adding to the value of your home and, in a sense, putting your equity right back into your property.  Some homeowners use cash to purchase investment properties.  This can provide you a source of residual income and allow you to build even more equity.

You can also use money from your cash out refinance to consolidate expensive debts.  What’s the benefit of using a mortgage to pay back other loans?  It’s simple.  A refinance mortgage is secured by your home.  Comparatively, refinance loans have extremely low interest rates.  Paying off credit card debt through a cash out refinance is often a wise idea.

You can also consolidate home equity loans and second or third mortgage with a refinance.  Again, you’ll likely save money on the interest.  Rates on home equity loans, in particular, can leap up to unbearable levels very fast, if you’re not careful.  It’s best to keep as much of your debt as possible secured against your home in a fixed rate refinance mortgage.

You can eliminate an ARM loan or obtain better terms.  Adjustable rate mortgages (ARMs) are highly unstable and volatile once they’ve passed the initial introductory stage.  Your monthly payments on these loans rise and fall with the market, which means you could be paying $1,100 one month and $1,500 the next.  This destroys any trace of financial stability.

Most economists recommend that homeowners get out of ARM loans as fast as possible.  A refinance is the best way to accomplish this.  An ARM refinance can get you a comfortable, stable, fixed rate mortgage with a lower interest rate than your current fluctuating adjustable mortgage.  You’ll have to pay for closing costs, but in the long run, the savings will likely be more than worth it.

Refinance Qualification Requirements

It’s not difficult to get a refinance, but it’s not as simple as just asking your lender for a new loan, either.  There are three things you need in order to successfully qualify for and complete a refinance.

• You need a high credit score.  The higher, the better.  If your credit needs fixing, work on this before trying to refinance.
• You need good income.  Income is a primary qualifying factor when applying for any financial product.  Refinance loans are no different.  Your current income level may have gotten you the mortgage you have now, but today’s tighter lending standards may prevent you from qualifying if you don’t make enough money.
• You need to have equity in your home.  These days, this is the hardest thing to come by.  The recent financial collapse burnt up millions of dollars of home equity across the nation, leaving many homeowners underwater.  If you don’t have equity to tap into or secure your new loan, you may not be able to refinance.

Of the three of these, the last one is the easiest to work around.  There are government programs in place to assist underwater homeowners who are current on their payments but unable to refinance. The specific program that will remove equity requirements is harp 2.0 program which helps many borrowers with low equity be able to qualify for refinancing.

The important thing to remember is that qualifying for a refinance is not unlike qualifying for any other mortgage type.  Don’t avoid a refinance because you’re not sure if you’ll qualify.  Talk to a lender in your area who is familiar with properties like yours and get professional counsel.

Mortgage Refinance Rates

As mentioned earlier, one of the most important aspects of your refinance loan is the rate you receive.  This is critical.  There are two ways to obtain the lowest refinance mortgage rates.  First, the lowest rates always go to the most qualified borrowers.  If you want to save more money, you need to make sure your application is strong.

Second, different lenders offer different refinance rates.  One of the best things you can do to save money on your refinance is get multiple rate quotes from at least four or five different lenders in your area who are familiar with the loan you need.  Compare the lowest refinance rates in the nation before you decide on a lender to work with.

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