all about How To : What Is a Mortgage Refinance? 5 Ways to Know If It’s a Good Idea

What Is a Mortgage Refinance? 5 Ways to Know If It’s a Good Idea My friend Teah, who lives in beautiful Washington state, says, “I’m considering refinancing our mortgage. We built our home 3 years ago and have no intention of moving or selling it for at least 15 to 20 years. Would you create an updated podcast episode about refinancing your mortgage?”

Thanks for this suggestion, Teah. It’s a great time to talk about refinancing because mortgage rates have been slowly creeping up.

If you’re a homeowner, your mortgage payment is probably your largest monthly expense. So it’s wise to stay alert for opportunities to refinance to a lower rate and cut your payment. Plus, your financial circumstances and needs today may be very different than they were when you originally got your mortgage.

In this post, I’ll cover what a mortgage refinance is, common reasons for doing one (in addition to saving money), and 5 ways to know if it’s a good idea for your situation.

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What Is a Mortgage Refinance?

Refinancing a mortgage is the process of taking out a new loan that pays off and replaces your existing one. The new loan can be with your same institution or with a different lender.

There are a variety of different refinance loans you can use to accomplish different financial goals. Here are 3 basic types to be familiar with:

1. Rate-and-term refinance – allows you to get a loan with a lower interest rate, a different term (length of the loan), or both. For example, if you have a 30-year, fixed-rate mortgage at 6%, you could refinance with a 30-year mortgage at 4.5%. That would reduce your monthly payments and the amount of interest you pay over the life of the loan.

2. Cash-out refinance – allows you to get a loan that’s larger than your existing mortgage so you walk away from the closing with cash. Let’s say your home’s market value is $200,000 and your mortgage balance is $100,000. If you need $25,000 to pay for college or to start a business, you could do a cash-out refinance for $125,000. After paying off the original mortgage of $100,000, you’d have $25,000 left over to spend any way you like.

3. Cash-in refinance – requires you to pay cash at the closing in order to pay off your existing mortgage balance. This is necessary when you don’t have enough equity to qualify for a refinance (more about equity requirements in just a moment), or you owe more than your home is worth. You also might want to do a cash-in refinance when having a lower loan-to-value ratio qualifies you for a lower mortgage rate or allows you to get rid of mortgage insurance premium (MIP) payments.

There are also government refinance programs, such as the federal Home Affordable Refinance Program (HARP), which gives you the ability to refinance to current mortgage rates, regardless of your loan-to-value ratio. It’s available until September 2017 for mortgages taken out before June 2009 that are backed by Fannie Mae or Freddie Mac. To find out if you’re eligible, click here.

If you have an existing FHA or VA mortgage, you may qualify for a “streamlined” refinance program that requires less paperwork than a typical loan. Check out the FHA Streamline Refinance and VA Streamline Refinance programs to learn more.

If you experience a financial hardship, there may be special government refinance programs designed to help you avoid foreclosure, depending on where you live. So be sure to do your homework and ask potential lenders about all the national and local refinance options you may be eligible for.

You may also need to refinance a mortgage if you want to remove a co-borrower, such as an ex-spouse, from your loan. But if one spouse doesn’t have sufficient income and credit to qualify for a refinance on his or her own, you best option may be to sell the property instead of refinancing.

Is Now a Good Time to Refinance a Mortgage?

Even though mortgage rates are still near historic lows, the staple 30-year, fixed-rate mortgage has risen to an average of 4.13%. That’s the highest we’ve seen in 2016.

Now that you have an overview of mortgage refinancing, you may be wondering if now is a good time to pull the trigger on one. Most refinances are rate-and-term loans—especially when mortgage rates are falling.

But what about when rates are going up? That’s the situation in the U.S. right now. Our economy is getting healthier because unemployment is down, personal incomes are up, demand for housing continues, and the dollar is getting stronger.

The downside of a strengthening economy is that mortgage rates typically go up. Even though they’re still near historic lows, the staple 30-year, fixed-rate mortgage has risen to an average of 4.13%. That’s the highest we’ve seen in 2016.

5 Ways to Know If You Should Refinance Your Mortgage

Here are 5 ways to know if doing a rate-and-term refinance is a good idea:

1. You have an adjustable-rate mortgage (ARM).

Buying a home with an adjustable-rate mortgage comes with lots of advantages like a lower rate, a lower monthly payment, and being able to qualify for a larger loan when compared to getting a fixed-rate mortgage. With an ARM, when interest rates go down, you feel like a genius because your monthly payments get smaller and smaller.

But when rates go up, you can feel panicked as your mortgage payment increases month after month. There are caps on annual increases, but your rate could double within just a few years if rates have a significant spike.

Instead of worrying about how high your adjustable-rate payment could go, consider refinancing to a fixed-rate loan. That locks in a reasonable rate that will never change. You’ll have a monthly payment that’s the same, no matter what happens in the economy. A stable mortgage payment certainly makes it easier to manage your expenses and stick to a spending plan.

2. You could get a lower interest rate.

If you bought a home when mortgage rates were lower than they are now, you’re sitting pretty and don’t need to refinance. But if you’re paying at least 1% to 2% more than the going rate—which, as I mentioned, is just above 4% right now—you’re in a great position to consider refinancing.

You need to do your homework, however, and understand exactly what it will cost. The total fees for a mortgage refinance could run as high as 3% to 6% of the outstanding balance, depending on the lender and location of your property.

The total fees for a mortgage refinance could run as high as 3% to 6% of the outstanding balance, depending on the lender and location of your property.

Fees go to a variety of professionals who participate in a refinance, such as the lender or mortgage broker, property appraiser, closing agent or attorney, surveyor, inspector, local government, and maybe others, depending on where you live. It’s rare, but you could also have to pay a prepayment penalty to pay off your current mortgage early.

If you can’t afford to pay closing costs upfront, you may be able to roll them into the new loan. But that increases the amount you borrow and may also increase your interest rate. Always ask potential lenders for a side-by-side comparison of the cost and terms for different loan options, so you can evaluate them carefully.

3. You don’t plan on moving for several years.

Once you know what a refinance will cost, you need to make sure you’ll own your home long enough to cover the expense, otherwise you’ll end up losing money. A good rule of thumb is that it generally takes at least 3 years to save enough money on a refinance to make it worthwhile.

However, you should do the math to know exactly how long it’ll take to break even. In other words, when do you move from being in the red to being in the black on the deal?

To figure how long you’d need to stay in your home to reach the break-even point for doing a mortgage refinance, divide the monthly savings into the total closing costs.

Refinance break-even point = Total closing costs / Monthly savings

For instance, if your closing costs are $5,000 and you save $150 a month on your mortgage payment by refinancing, it would take you 34 months or just about 3 years to recoup the cost: $5,000 total costs / $150 savings per month = 33.3 months to break even.

If you stay in your home at least that long, you’ll pass the break-even point and come out ahead. But if not, refinancing probably doesn’t make sense and you should keep your current mortgage.

Check out this Mortgage Refinance Break Even Calculator to help you crunch the numbers.

4. You have enough home equity.

When shopping for a mortgage refinance, another important issue that could make or break the deal is how much home equity you have. Equity is the difference between what your property is worth and how much you owe on it. For instance, if your home is worth $400,000 and you owe $300,000, you have $100,000 or 25% equity ($100,000 / $400,000 = 0.25).

The best situation for a refinance is to have at least 20% equity.

The best situation for a refinance is to have at least 20% equity. If you have less, you can still find lenders to work with you. However, unless your credit is excellent, you’ll typically pay a higher interest rate when you have low equity.

In addition, when you don’t have 20% equity, you’re on the hook for private mortgage insurance (PMI). Adding PMI to your new loan and paying a higher rate could cut your savings and give you a much longer break-even point.

If you’re not sure how much home equity you have, or know that you have very little, don’t let that stop you from inquiring about your options to refinance and save money.

5. Your finances are in good shape.

Unless you qualify for one of the government-backed refinance programs that I mentioned, a mortgage refinance lender typically evaluates you in 3 areas:

Your income and employment history
Your credit and payment history
Your assets and liabilities

The higher your income and credit scores, and the lower your debts, the lower your interest rate. So, if you’re unemployed or your credit took a dive due to a hardship, wait until your overall financial situation has improved before making a mortgage application. Good credit can save you thousands on your mortgage.

Best Places to Shop Your Mortgage Refinance

I recommend shopping a refinance with the lender who holds your current mortgage, plus one or two well-known companies, such as:

Let your mortgage company know that you’re shopping for the best offer. They may be willing to waive certain fees if some of the required work, such as a title search, survey, or appraisal is still current for your home.

If you investigate doing a refinance and decide that it’s not worth the cost, another strategy to save money is to ask your lender for a mortgage modification on your existing loan. If you’ve experienced a financial hardship, like job loss, medical bills, or owe more than your home is worth, you may be able to negotiate modified terms, such as a lower interest rate, without having to pay for a full-blown refinance.

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Rabu, 07 Desember 2016

What Is a Mortgage Refinance? 5 Ways to Know If It’s a Good Idea