5 Questions to Ask Before You Refinance Your Mortgage

refinancing

By: Angela Colley

Homeowners typically refinance their mortgages to save money, but it doesn’t always work out that way. If you’re not sure that you’re getting the best deal, that your home will appraise highly, or if you’ll even qualify, you may end up wasting time and money.

Ask yourself these questions before you consider refinancing:

Will You Qualify?

Requirements to qualify for refinancing can be just as tough as getting an original loan. Have you recently gotten a new job, a raise, or an additional source of income? Then “it’s a good time to be aggressive,” according to Gloria Shulman, a California-based mortgage broker and founder of Centek Capital.

However, if your income is unstable or you’re about to get a promotion with a raise, you might get better terms if you wait to refinance.

Is Your Home Ready?

Before you can refinance, you’ll have to get your home appraised. If your home isn’t in great shape before the appraisal, you could see a “low-ball” estimate that might force you to pay thousands in closing costs, Shulman said. “Problems like a small crack in a pool or a leaning fence can sometimes kill the entire application.”

Before you start filling out applications, “approach refinancing as you would a sale and make your house look great.” Fix any small problems around your house, clean up your space and make your home shine for the appraisal.

When Will You Break Even?

When considering refinancing many homeowners simply subtract the monthly refinanced payment from their current monthly payment to see how much they’ll save. While this is a good indicator of the kind of monthly savings you can expect, it isn’t the whole story.

When you refinance, you’ll pay a number of different costs such as appraisal fees, application and loan origination fees, attorney fees, title insurance and underwriting costs. All of these fees will add to the total cost of your mortgage. As a result, it may take a while before you break even on the deal.

For example, say you’ll save $150 a month by refinancing. If it costs you $3,500 to refinance your mortgage, it would take you about two years to break even. If you sell your home before you break even, refinancing may not have been worth it.

Are You Getting the Best Deal?

The lender with the lowest rate may not be offering the best deal. “Less reputable lenders occasionally try to sneak in extra fees as part of the principal,” Shulman said. She recommends dealing with a “local, reputable source who knows your area. If you think the lender is tacking on unnecessary fees, ‘shut down the deal right away,” Shulman said.

Are You Underwater?

If you owe more on your home than it is currently worth, traditional refinancing may not be an option for you. Many lenders see underwater mortgages as too high a risk to offer refinancing. However, you may still have options through the government-backed Home Affordable Modification Program. Under HAMP you can refinance your underwater mortgage into a mortgage with a lower monthly payment. If you’re underwater and need to refinance, talk to your lender or contact a housing specialist through the government-sponsored Homeowner’s HOPE hotline.

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Can Consolidating Your Mortgages Save You Money?

mortgage consolidation

By: Credit.com

Combining your first and second mortgages into one can save you money if you do it right. Here are some smart, money-saving tips to be aware of when you submit a loan application to refinance and consolidate your mortgages.

When you apply to refinance your home with the intent of financing more money beyond the balance of your first mortgage, your total loan amount could fall into being categorized by your lender as a cash-out refinance, even if you are not pulling funds at the closing table.

The reason consumers should pay attention to this is because when you do a cash-out refinance, the loan costs more.

There are two types of refinances: rate and term refis and cash-out refis. If your goals for refinancing include shortening your repayment term and/or reducing your mortgage payment, then your loan is generally considered to be a “rate and term” refinance. However, if you are cashing out any equity (including a second mortgage you obtained after you bought the home), paying off debt, or pulling funds out for any other purpose, your loan will viewed as a “cash-out” refinance.

Cash-out refinances cost .375% more in loan pricing, which can affect fees and terms and have tighter equity requirements. For a cash-out loan of $400,000, for example, a .375% adjustment to the pricing would mean your $400,000 loan would cost more. Specifically, $1,500 more based on the loan amount ($400K X .00375) than if your purpose was rate and term.

(Mortgage pro tip: You can always change the structure of your loan during the loan process, meaning you can go from a rate and term loan to a cash-out option or vice versa.)

Here are four ways to get a cheaper refinance.

1. You had more than one mortgage when you originally financed

If you bought your home with both a first and second mortgage—for example, with an 80/10/10 loan where you put down 10%, got an 80% first and 10% second mortgage—as long as the first and second mortgage were used to specifically acquire the home and you are now looking to refinance the first and second mortgage into one, that loan will always be considered a rate and term loan as long as your intention is to not extract additional monies out beyond the debt owed.

(Mortgage pro tip: Financing closing costs do not make your loan cash out. You can finance the fees, and the loan will still be rate and term.)

2. You want to use an FHA loan

The Federal Housing Administration will allow you to combine a first and second loan into one as a rate and term refinance and will finance up to 97% loan to value on big loan amounts. In Sonoma County, CA, for example, the max FHA loan limit is $554,300. Depending on your financial circumstances, this could be a savvy approach to take, especially if your equity is limited.

3. Your combined loans are greater than $417K

In most U.S. counties, $417,000 is the conforming loan limit. If your first and second mortgage total is bigger than $417,000, and is considered to be a cash-out refinance because the second mortgage was used for some purpose other than buying the home, you will generally need at least 30% equity in your home (in some cases more depending on your credit score and property type). You can check your credit scores for free on Credit.com to see where you stand.

However, there are some jumbo investors in the market that will do a rate and term refinance all the way down to a loan size at $417,000 or bigger. This can minimize the impact a cash-out refinance could create depending on your equity position and financial profile. Be sure to check with your mortgage company for specific jumbo investor guidelines.

4. You haven’t taken money out on the second mortgage recently

Many lenders will combine a first and second mortgage into one as a rate and term refinance even if the second mortgage was taken out after the original loan was made (for home improvements, etc.) as long as the second mortgage has no draws in the past 12 months. If you fit that requirement, the needed equity position drops to 20%. The devil is in the details. No draws in the past 12 months on your second mortgage could make all the financial difference for you.

Not sure if your loan will be considered? Talk with a mortgage company. You might find a lender, a bank, and a credit union to be far different from one another in terms of what can or cannot be done. If you’re looking to save money, you owe it to yourself to check on this continually, especially if you’ve been turned down in the past. Check every few months. You might just find you actually can get your loan done after all.

 

 

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Should You Refinance Even If You Plan to Sell Your Home?

refinance if selling

By: Credit.com

Are you interested in refinancing your mortgage, but hesitant to do so because you’re thinking of selling your home at some point? Believe it or not, refinancing could still make sense. Here are several reasons why you might want to consider refinancing anyway.

Your financial circumstances could change

Let’s say you plan to sell your house in five to seven years. No matter how well you plan for the future financially, things happen. Job loss, illness, death—life inevitably gets in the way of your financial plans. Focus on the here and now, as long as you can financially justify refinancing your mortgage. The longer the horizon of selling the home, the more chances life has of getting in the way. If refinancing can save you money in the meantime, it may just make sense.

Because financial circumstances can change over time, for better or worse, it can be a good idea to calculate how affordable your house really is for you. This free calculator can tell you how much house you can afford.

You could take advantage of lower interest rates

At publishing time, 30-year mortgage rates have edged their way up and are hovering just over 4%. The new outlook for mortgage rates points to continual increases, bringing the cost of debt up. Picture this, if you don’t sell the property or if there is a market correction—and you do not refinance for whatever reason—is your current loan rate and payment something that you can afford to carry for the long haul? If you could save money or better your financial position, it is probably worth investigating. Rates are even better on jumbo mortgage loans, as more investors are pouring into this particular market niche. So if you have a big mortgage on your home, you may want to consider refinancing.

You’re facing a higher rate on your ARM or HELOC

With the increased likelihood of interest rates going up in fall 2015, the subsequent recasting of adjustable-rate mortgages and home equity lines of credit will affect millions of homeowners. Most adjustable mortgage loans were tied to the London Interbank Offered Rate, which closely trails the Fed Funds Rate, the rate at which the Federal Reserve uses to control the U.S. economy. If the Federal Reserve hikes interest rates, LIBOR will soon follow suit, and any homeowners within their adjustment period will experience a higher payment or a future higher payment when their adjustable-rate loans reset.

A HELOC works in a similar fashion to an ARM with a fixed period for the interest rate, followed by a rate reset. For a HELOC, payments are interest-only for the first 10 years of the 30-year term. After 10 years, the loan resets, and for the remaining 20 years the loan payment is principal and interest, so at the end of 30 years, the loan is paid off in full. The payment shock will happen after the first 10 years.

If you have a first mortgage on your home with a HELOC, it very well might make sense even if you plan to sell the home down the road, to roll the first mortgage and HELOC into one, saving money and continuing to make a manageable mortgage payment until you sell.

Mortgage tip: If you have not taken any draws on the HELOC in the past 12 months, you may be eligible for more mortgage programs as the HELOC may be considered a “rate and term,” which allows you to refinance up to 80% of the value of the home.

You want to rid yourself of this dreaded mortgage cost

The one mortgage cost consumers love to hate is private mortgage insurance. PMI is an extra portion of the mortgage payment that not only drives the housing expense higher, but it also doesn’t do anything beneficial for the consumer. PMI benefits the bank to protect against payment default. If you can rid yourself of PMI because you have 20% or more equity in your home, or can qualify for a special mortgage loan program such as lender-paid mortgage insurance, you’ll save money. PMI can average up to several hundred dollars per month in most instances. If you have the 20% equity needed to refinance a new non-PMI loan and are creditworthy, but simply choose to not refinance because the paperwork is too daunting, you’re throwing money away.

If you’re not sure where your credit stands, but you want to refinance, it’s a good idea to check your credit sooner than later. You can get two of your credit scores for free on Credit.com, and they’re updated monthly so you can watch for changes.

How quickly will you begin saving money?

No one should refinance unless the time frame it takes to recoup the closing costs on a refinance is sooner than the time in which they plan to sell the home. The most common form of determining how quickly you can recoup your money when refinancing is performing a “cash-on-cash” calculation. For example, if your closing costs are $2,800, and you’re saving a proposed $300 per month on a refinance, that’s a nine-month recapture. Fees divided by benefit equals recapture.

If you can benefit by refinancing by payment reduction, by cashing in on equity, or by interest savings or any combination of these benefits, remortgaging your home very well could make sense. Consider the following scenario: If you can recoup the refinance costs in under two years, and you don’t plan to sell for five years, you’re three years ahead, and the rewards are yours, no matter the future. Ultimately, weighing the pros and cons of a possible refinance in conjunction with selling the home is your decision. A good mortgage professional should be able to suggest mortgage options in alignment with your financial goals and objectives.

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