Refinancing a mortgage is the process of acquiring a new loan to pay off an existing lender. The most common programs used to refinance today are the FHA Streamline, HARP Home affordable Refinance Program, and standard conforming refinancing.
Four Possible Reasons To Refinance
A mortgage is generally the largest debt most homeowners have to manage, and it is a good idea to give your personal real estate finance portfolio a check-up at least once a year.
Since there are several reasons a homeowner may choose to refinance, we’ll take a look at the top four circumstances.
A drop in mortgage rates, lowering current mortgage payments, debt consolidation or changing mortgage programs are four possible reasons to choose a refinance.
Calculating The Net Benefit Of A Refinance
Calculating the net benefit of refinancing can be a challenging task if you do not understand what to calculate.
We are going to focus on the net benefits of refinancing from the standpoint of lowering your interest rate.
Although there are several reasons to refinance, lowering your mortgage rate to save on interest payments over the term of the loan is the most popular.
Calculating the actual savings can be a tricky chore unless you know the difference between cash flow savings and interest savings.
Should I Get A Home Equity Line of Credit or Cash-Out Refi To Make Home Improvements?
For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit (HELOC), or do a cash-out
A Home Equity Loan is similar to the line of credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed.
Both a Line and Loan would hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage.”
Since second mortgages are paid after the first lien holder in the case of default foreclosure or short sale, interest rates are higher in order to justify the risk.
Fees, Interest Rate, and Timeline are the three main factors to consider which option to choose in order to pull equity out of a property.
Frequently Asked Questions:
Q: Is there such a thing as a “No Cost” mortgage?
Technically speaking, there are always costs involved with any mortgage transactions. Appraisal, inspection, underwriting, prepaid taxes, insurance, interest…. the list can go on.
However, there is a way to structure a closing cost and interest rate scenario that will decrease the amount of fees, or how a borrower pays them.
Basically, the costs to produce the new mortgage are either financed into the loan amount, or covered by the lender in exchange for a slightly higher than market interest rate.
Deciding on the best option involves weighing the difference in cost up-front vs the increased monthly payment over a set period of time.
Q: How long do I have to wait to refinance after a purchase transaction?
The rule-of-thumb is 6-12 months, but there may be exceptions. It’s important to check with your lender at the time of initial application to make sure there aren’t any short-term penalties for refinancing withing the first year.
Another thing to consider is the cost of refinancing. If you’re watching the market and may want to lock in a lower rate in the near future, it may be more cost effective to pay a discount point for a lower rate vs paying for a full refinance a few months later.
Q: I heard that I should only refinance if I drop 1% on my mortgage is that true?
Some people say ½ % , 1% to never. Every mortgage is different.
For Example: A no cost loan can have a 1 month break even point with only a .25% drop in interest rate. Now that you know how to calculate your net benefit you are able to figure out what is best for you.
Q: Why can’t I just compare my current payment to the proposed payment and figure out my net benefit?
You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations. Let’s say you have a 15 year mortgage currently and you are comparing to a 30 year mortgage.
If everything else is the same interest rate, loan amount ect. except for the amortization your interest savings per month would be $0 but, you are going to show a cash flow savings because of the longer amortization.
Q: Do I have to refinance with my current mortgage company?
No, you may choose any company you wish to refinance your mortgage since the new loan will replace the old mortgage. Many lenders assume they have your trust and capitalize on charging higher rates and fees. If you are underwater don’t let the lender charge higher than normal fees on underwater refi programs like HARP and FHA Streamline.
Q: Is it easier to refinance with my current mortgage company?
Sometimes your current company can reduce the documentation that is required, but this usually comes at increased costs and interest rate. Make sure that you check to make sure you’re getting the best deal. When borrowers are under water they think they must obtain a HARP loan or FHA Streamline from the existing lender, but that’s just not the case.