Home refinance loans allow you to get a new mortgage to replace an existing one to obtain better interest rates and terms. These loans also give you the ability to access cash from the accumulated equity in your home. Therefore, you can tailor the new mortgage terms to suit your needs. Refinancing can give you a higher loan amount, different year terms, and a lower interest rate and payments. Also, the ability to cancel private mortgage insurance, or access cash from your equity to use for home projects or personal expenses.
Consider this before refinancing your mortgage
During a refinance your mortgage it is paid off. As a result, allowing a second mortgage to be created. There are many reasons why you may benefit from refinancing your home. It comes down to what makes the most financial sense. Additionally, what will save you the most money each month and over the life of the loan.
Each situation is unique, together we will discuss your financial goals and abilities. Positively, every case is different. We will guide you through the benefits and costs that a refinance can have for you at this particular moment in time.
Ignorance is the biggest risk when refinancing. Therefore, without the right knowledge, it can actually have a negative impact on your finances. Certainly, we will guide you to reach the best deal and make an intelligent financial decision. Relying on a professional that can guide you through the numbers can bring you a lot of peace of mind when making your decision. We care deeply about the financial well-being of our clients. Advice to refinance will only be given if it makes sense.
Without a doubt, we keep a close eye on current market conditions. In addition, we consider various lenders before suggesting to clients to commit to a specific loan.
When is it a good time to refinance your mortgage?
To reduce your monthly payments, lower the overall long-term cost of the loan, and obtain cash out of your built equity refinancing is a smart option. Other reasons to refinance include to change mortgage companies or remove private mortgage insurance (PMI).
Your individual circumstances determine if this is the right time to refinance. As opposed to changes in the current market’s mortgage interest rates. Hence, you can rely on us as your financial advocates to determine if it makes sense to refinance your home.
Points to consider when thinking about refinancing
1. Home Equity
One point to consider for a refinance is the equity in your home. Equity is the difference between the home’s fair market value and the remaining balance of the mortgage.
According to the chief economist of Freddie Mac, present home values have been on the rise. This is very good news for homeowners. However, that’s not the case for everyone, some people have little or no equity in their home. Government programs exist for these types of borrowers who are unable to refinance with conventional lenders.
As a result, if you have at least 20% equity in your home it will be easier to qualify for a new loan. We will help you determine which programs for which you could qualify. This is done by checking with different lenders and discussing your individual needs.
2. Credit Score
Firstly, the higher your credit score, the lower the interest rate a lender will offer you. If you have a lower credit score, you may still be able to qualify for a loan, but you’ll probably have to settle for a higher interest rate or more expensive fees. This is the way lenders compensate for higher risk deals.
3. Lenders also consider your debt-to-income ratio. Having a high income, stable employment and payment history, along with significant savings contribute to a strong financial profile. However, lenders want to be sure that your monthly expenses will be covered comfortably.
Therefore, the norm is keeping the monthly housing payments under a maximum of 28% of your gross monthly income. Your overall debt-to-income ratio should be 36% or less. However, with other strengths in your favor, some lenders even go up to 43 percent. We will confirm all the current set parameters with you as they change at times.
If you don’t meet these debt-to-income ratio requirements, you may need to pay off some debt before you can qualify for a refinance. Absolutely, we will be sure to provide many options, there is always a way to achieve your home purchase.
4. Costs of Refinancing
The cost to refinance is usually 3-5% of the loan amount. Nonetheless, we can help you find ways to reduce this cost or roll it into the loan. Our mortgage specialists will shop around with different lenders. They will also negotiate on your behalf to find reduced or no refinance fees. If you have enough equity, refinance costs can be rolled into the loan by increasing the principal. Undoubtedly, there are creative ways to cover upfront expenses.
5. Rates vs. Term
The term of the loan is as important as the interest rates. It all depends on what you’re trying to accomplish. First, we need to establish your financial goals and needs.
These are a few examples:
If your goal is to pay off your mortgage the quickest way, you’ll want the shortest term, but with a comfortable monthly payment.
If you need to reduce your monthly payment as much as possible, you will need a loan with the lowest interest rate for the longest term.
If you want to pay less interest over the life of the loan, then you’ll need the lowest interest rate available with the shortest term.
In conclusion, it is important to consider both the interest rates and length of the loan. This will give you the results you are looking to achieve. We’ll be sure to take you through different scenarios so that you fully understand what to expect and how to get to where you want to be. Definitely, each case is completely different. We will uncover what makes the most sense for your situation.
When considering interest rates, you’ll have to understand that points are directly related. Indeed, mortgage points are also called discount points. These are fees paid to the lender in exchange for a lower interest rate. They can be paid at closing or added to the principal of your new loan.
You can essentially “buy down the interest rate” by paying points upfront and have a lower monthly mortgage payment over the life of the loan. One point costs 1% of the loan amount. However, you can also see it as paying $1,000 in fees for every $100,000 borrowed.
When it comes to points, not all lenders work the same. Consider these factors:
- The reduction on interest rates varies according to the lender and the marketplace.
- You may receive a tax benefit from buying points. Our tax knowledge will help you consider your tax benefits.
- Points for adjustable-rate mortgages (ARMs) reduce the interest rates only during the initial fixed period.
- If you’re choosing between buying points or making a 20% down payment, we will run the numbers and show you how that can affect your private mortgage insurance expense.
You also have to consider the cash you have available to cover upfront costs. These expenses include the fees for points, the down payment, closing fees, and reserves. Take into account the time you plan to stay at the home, if long-term, it makes sense for you to pay points to reduce your interest rate.
After calculations we will give you an exact idea of how much you can expect to pay and your long-term financial benefits. This brings us to our next consideration, the break-even point.
7. Break-even Point
It’s crucial for you to understand an important calculation in the decision to refinance, the break-even point. We will make sure you clearly understand the benefits versus the costs.
The break-even point indicates how long it takes to recoup the costs of buying points. To calculate this, you’ll divide the cost of the points by how much you will save on your monthly payment.
Buying points makes sense if you plan to own your home after the break-even period and you choose a fixed-rate mortgage.
8. Private Mortgage Insurance (PMI)
You’ll be required to pay PMI if you have less than 20% of equity at the time you refinance. If private mortgage insurance is something you haven’t needed to pay in the past, you’ll have to consider this new expense. You will have to determine if the reduced monthly mortgage payments will be enough to offset the additional cost of PMI.
Types of Refinance Loans
Let’s take a closer look at the variety of reasons why you may need to refinance your mortgage. There are several types of refinance loans.
1. Rate-and-Term Refinance Loans
The rate-and-term refinance loan is the most common. It is used to payoff the existing mortgage and replace it with the new one. This loan will help reduce your monthly payment amount, reduce costs paid for interest, or lessen the time it will take to payoff the loan.
2. Adjustable-Rate Refinance Mortgage Loans
An adjustable-rate refinance loan has an initial period of about 5-7 years in which the interest rate is fixed. Therefore, it then fluctuates according to market conditions. This type of loan has a cap on the interest rate which limits the amount the rate can increase. This is a great option if you’re planning to refinance again in the near future.
3. Fixed-rate Refinance Mortgage Loans
You’re protected from fluctuations in the market that change your interest rate and affect your monthly payments when on a fixed-rate mortgage loan. This type of loan sets a monthly payment and interest rate for the life of the loan. This feature makes it very predictable.
4. Cash-out Refinance Loans
If you have the need for extra cash, this type of loan is ideal. You may use pocket money to cover other expenses in your life, pay for education costs, or put the money back into the property. You can also increase its value with a renovation project.
5. Cash-in Refinance Loans
Although rare, there are some cases where the borrower has extra cash they want to bring into the property to lower the mortgage balance and future interest payments. Cash-in refinance loans allow you to reach the 20% equity point and save you a lot of money on future insurance payments as well.
6. Home Affordable Refinance Program (HARP)
Sponsored by HUD, the U.S. Department of Housing and Urban Development, this loan assists low-income homeowners to refinance. With this program, you can refinance up to 125% of the home’s value. You will have to meet HARP eligibility requirements.
Not all refinance deals are created equal. You’ll have to consider if refinancing really is a smart choice for you. We will help you figure out the best solution considering your specific needs.
You will feel in good hands knowing that my financial background will cover all corners. Like all financial transactions, due diligence is required. We will act in your best interest utilizing our experience in tax law and to navigate your mortgage refinance options.