Should I refinance? That’s a question you may be asking yourself as you look at options to modify your mortgage. Everyone’s situation is different. Knowing when it makes sense for you to pursue home refinancing could depend on how much you owe on your home, what your home is worth, home mortgage interest rates, and other factors.
Here are five reasons that might prompt you to explore a mortgage refinance.
To Get A Lower Interest Rate
Perhaps interest rates have dropped since you purchased your home. Or maybe your credit score or other qualifying factors have changed, indicating you might be able to secure a lower interest rate if you refinance. Whatever the reason, getting a better interest rate is one reason you might be interested in refinancing your house.
Even what seems to be a small decrease in your interest rate could really add up – lowering your interest rate as little as 1 percent could end up saving a lot of money over the life of your mortgage.
To Shorten The Length Of Your Mortgage
Another reason you might consider a refinance involves shortening the length of your mortgage.
Depending on your situation, you might be able to refinance your 30-year mortgage into a shorter-term loan without a significant increase to your monthly payment. Refinancing a 30-year mortgage into a 15-year mortgage could help you pay off your loan years sooner.
To Consolidate Multiple Mortgages
In some cases, you might be able to lower your monthly payments by consolidating a first and second mortgage. If you qualify, you could consolidate the first and second mortgage into a single home loan, one loan, and one payment.
Some homeowners take out a second mortgage or equity line of credit on their home to finance special projects, like a kitchen remodel or family room addition. These mortgages might have higher interest rates than your primary mortgage. By refinancing and consolidating your loans, you might be able to lower your total monthly payments.
To Use Home Equity As Cash
Do you have substantial equity built up in your home? If so, you might consider refinancing your mortgage to free up some of that untapped money in what’s called a “cash-out refinance.”
Mortgage lenders have helped thousands of customers with cash-out refinance. Robert from Boise, for example, at the time of the refinance, had a home valued at $200,000. He had equity of $88,964 and a loan balance of $111,035. He also had $23,634 of credit card debt at about 18% interest. By refinancing, Robert consolidated his credit card debt and is now paying $538* less per month.
Another homeowner, Charlotte in Austin, likewise found refinancing helped her with $35,932 in credit card debt at about 21% interest. With her home valued at $250,000, she had $96,268 in home equity and a balance of $153,732 on her home mortgage. The mortgage broker helped her refinance, and she was able to consolidate her credit card debt – and she is now paying $562* less per month.
To Convert An Adjustable Rate Mortgage To A Fixed Rate Mortgage
Both fixed-rate mortgages and adjustable-rate mortgages, or ARMs, have their advantages. With a fixed-rate mortgage, your mortgage interest rate is set at the time you take out your house loan. With an ARM, your interest rate could go up or down. What you might find is that your interest rate with an ARM starts out lower and then increases after a while.
Some homeowners might take an ARM when they purchase their home and then refinance with a fixed-rate mortgage when the interest rate on their ARM increases. If you have an ARM, you could benefit by checking to see if your interest rate is due to increase. If it is, you might save money by taking out a new fixed-rate loan.
What are the steps to refinance your mortgage?
Ready to refinance your mortgage? We’re here to help you through the five steps of refinancing. The process isn’t too different from when you got your first mortgage. If you’d like a refresher, here’s what you should know about refinancing your mortgage.
Determine if Refinancing is for You
First, determine what type of mortgage you want to replace your current mortgage with. Do you prefer a cash-out refinance? Or, do you want to change the rate-and-term of your mortgage? Are you looking for a fixed rate or adjustable interest rate mortgage? Consider what term mortgage you prefer. Do you want a 15 or 30-year term loan? Do you want to use discount points to lower your interest rate?
The best approach is to consult your lender as you think about your refinance options. Your lender can help you come up with the best plan for your needs and finances. Here at Mr. Cooper, we can help you answer any home loan-related questions.
Lock Your Interest Rate
Once you’ve decided what kind of loan you want, it’s time to lock in your rate. Since mortgage interest rates change day-to-day, locking in your rate means that you won’t have to worry about your interest rates going up throughout the process. During loan underwriting and loan processing, rates can fluctuate enough to potentially cost or save you thousands of dollars over the life of your mortgage.
Don’t worry. Mortgage lenders allow home buyers to make modifications to the loan after an interest rate lock. During the process, you could change your loan amount or term. Optionally, you might pay for points to reduce the interest rate of your mortgage. Additionally, mortgage brokers might honor market rates if they significantly drop. Check with your lender on these details before rate lock.
Gather and Submit Loan Documents
Once you have locked in your refinance interest rate, it is time to move forward and submit your documents. Refinancing your mortgage requires several documents, including bank statements, tax returns, a list of your debts, W-2’s from your employer, a list of assets, your credit report, signed sales agreement, and additional documents as requested, such as pay stubs. Your mortgage broker will give you a list of all of the required documents.
Your lender needs proof that you can afford the mortgage, by having a steady income, sufficient savings and a good credit history should help you get approved.
Review and Final Mortgage Approval
Now that your documents are submitted, it’s time for the mortgage underwriter to review your application. During the review process, among other things, the underwriter might verify your savings, check your employment history, and look over your bank statements to check deposits. If the underwriter has any questions, she might ask your loan officer to contact you for answers.
Mainly, the underwriter wants to make sure that the loan you want is affordable for you. If everything looks good, the mortgage underwriting process might take a few days, but it can take as long as several weeks. The timeline varies because every borrower’s situation is different. If your underwriter needs additional information, the review process will take longer.
Your home loan can be approved, denied, or suspended. If it’s approved, that’s great! You are one step closer to closing. If it’s suspended, it means that the underwriter needs more clarification about something. And if your lender denies you, that doesn’t mean you should give up. You might have to change the conditions of your loan, whether it be a smaller loan or a bigger down payment.
If everything looks good, your lender will notify you, and it will be time to close. Just like with an original mortgage, work with your lender to find out closing costs. Your original mortgage will be paid off, and you will begin paying off the new loan. If you choose cash-out refinancing, you would likely receive your money by check or wire transfer.
By following the five steps above, you will be on your way to start refinancing your mortgage.
Do You Have Enough Home Equity To Refinance?
Have you ever wondered what it would take to qualify for a mortgage refinance? One of the key metrics used to see if you qualify is the amount of home equity. Home equity is the current value of your home minus the amount that you still owe on it. You can grow home equity in two ways: the first is by chipping away at the principal of your mortgage, and the second is by seeing the market value of your home increase over time. If you are interested in refinancing, it helps to have significant home equity. There are multiple metrics to help you understand the relationship between home equity and refinancing. One of them is the loan-to-value (LTV) ratio.
What is the LTV ratio?
Before a lender loans money or approves mortgage refinancing, generally several numbers are crunched to assess and evaluate the risk involved. One of the numbers used is the loan-to-value ratio, or LTV, to quantify risk. LTV ratio is one of the most important loan metrics.
To calculate the LTV ratio, divide the mortgage amount by the appraised value of your property. So, as an easy example, let’s say your mortgage is $80,000 after you have put down $20,000 upfront, and the appraised value of the home you are trying to buy is $100,000. The LTV ratio would be 80% ($80,000/$100,000=0.80).
Your LTV ratio is like what you want for a golf score. The lowest score wins. The LTV ratio is a tool for evaluating risk. The theory goes that if you have a low LTV ratio, you are considered less of a risk by lenders. The greater the LTV ratio, the higher the risk to lend. A loan with a high LTV ratio may require the borrower to buy mortgage insurance.
The downside of High LTV Ratio
What are the disadvantages of a higher LTV ratio? As a rule of thumb, an 80% LTV ratio or lower is ideal for mortgage refinancing. A higher LTV ratio is generally accompanied by additional expenses like private mortgage insurance that provides a layer of protection for the lender. Private mortgage insurance can make your monthly payment higher. Once you get to 80-percent or below, you might be able to refinance to eliminate the mortgage insurance and reduce your monthly payments.
Another common side-effect of a high LTV ratio is the difficulty of getting a loan to be approved altogether. Each lender is different and can decide how much risk they are willing to take. You can also find yourself paying a higher interest rate with a less than optimal LTV ratio. Be sure to speak with an expert mortgage professional and ask about the details for refinancing.
A possible avenue to go down if you have built up substantial equity in your home is cash-out refinancing. Cash-out refinancing is when you refinance your existing mortgage into a new home loan and cash-out some home equity at the same time. You can use the money from the cash-out refinance to consolidate high-interest non-mortgage debt, finance a home remodel, or use toward college tuition.
So, if you have enough home equity and need some extra cash, you might want to consider a cash-out refinance. Remember that when you refinance into a new mortgage, the terms and interest rates may change, so make sure you know what the changes will be before you go through with a cash-out refinance. Contact your mortgage broker to find out more about cash-out refinance.
It should be noted that the LTV ratio is not the end-all-be-all factor of mortgage refinancing. While it is an important metric, there are other important factors considered when a lender is making a decision. Among other things, lenders consider your credit score, income, debt, savings, and the appraised value of the home you want to refinance.
In short, having sufficient equity in your home is an important factor for refinancing. Metrics, like the LTV ratio, are important when a lender considers you for a refinance.