Are you a homeowner with substantial home equity? Do you need cash? Property refinancing has become synonymous with wealth-building, improved cash-flow, and lower interest rates with more affordable monthly payments.
This might be a good time to refinance your home. Maybe you need cash to buy a car, pay for college tuition, or invest in a home improvement project. Or, you might have some non-mortgage debt, like credit card bills, with higher interest rates piling up and weighing on you. What does it take to refinance your home and get cash back in the end?
Which refinancing option is best?
When you start researching mortgage refinance, you might be surprised to learn that there are many types of refinances available to you. Cash-out refinancing is a popular choice for homeowners who want to take equity out of their homes in the form of cash.
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Here are some of the cash-out home loans on the market today:
- Conventional cash-out refinancing – You pay off your original mortgage plus add the balance of the new mortgage, and cash out the difference at closing.
- Home equity line of credit – A home equity line of credit (HELOC) gives you access to cash based on home value.
- Cash-out rental property – You can use the cash to purchase another property, pay down personal debt such as credit cards, stash away cash for a rainy day fund, pay off real estate loans, and make home improvements. Home equity lines of credit have variable interest rates; your interest rate could increase, and so are your monthly payments.
- FHA cash-out – You can take advantage of the government-backed FHA cash-out refinance even if your credit score is on the lower side. The good news is that you don’t need to have an FHA loan currently to take advantage of an FHA cash-out refinance.
- VA cash-out – VA mortgages have several excellent benefits such as zero down, no continuing mortgage insurance, and below-market interest rates. As a bonus, VA cash-out is the only mortgage option that allows homeowners to refinance up to 100 percent of the home value.
When is it a good idea to refinance your mortgage?
When mortgage rates fall, it may be a good idea to refinance your mortgage. Normally, refinancing is a way for homeowners to save money. Mortgage refinancing is also a good decision if you want to pay off your mortgage faster and build equity. With historically low-interest rates, even homeowners who have fairly new home loans may benefit from refinancing.
Consider refinancing your mortgage if you can lower your interest rate by one-half to three-quarters of a percentage point. Such a percentage drop in interest rate can significantly lower your monthly mortgage payment.
How many refinance quotes should I get?
Everyone tells you to compare interest rates before you refinance, but do you really have to? In the end, getting pre-approved by a couple of mortgage lenders and comparing costs can take a while. But taking the time to compare refinance quotes are proven to be worth it. In fact, you could possibly save hundreds of dollars every year on average by comparing rates from just a few lenders.
Combined with negotiating, your interest rate can get your monthly payments down even lower. Ultimately, you could save thousands by comparing interest rates — even tens of thousands, during the life of your mortgage.
What is a rule of thumb for refinancing?
Refinancing is a smart move for homeowners who want to lower their monthly payments. If interest rates have dropped since you bought your house, you can refinance with a lower interest rate mortgage. One rule of thumb is that refinancing may be worth it as long as the current interest rate is about one percent lower than your original home loan rate.
As an example, if you have a 30-year fixed mortgage rate of 4.5 percent and the current rate is 3.5 percent, refinancing might make sense for you. Another common reason people refinance their mortgage is a significant increase in credit score. A higher credit score can result in a lower interest home loan. If your credit score was on the low side when you got your original mortgage, it is possible that you were unable to lock in the lowest possible rate. And now, with a higher credit rating, you might meaningfully lower your interest rate.
Is it worth refinancing for .5 percent?
If you are going to maintain your mortgage for the next ten years or longer, it might be worth to refinance for half a percent. Remember, a lower interest rate means smaller monthly mortgage payments.
Let’s look at an example of refinancing for .5 percent. Let’s say the current loan amount is $200,000, with an interest rate of 4.5 percent with the origination year of 2010. If you would refinance your mortgage today with a rate of 4.0 percent (.5 percent lower than the original interest rate), you could save more than $96,000 during the life of a 30-year loan.
Is it worth refinancing for 1 percent?
A one percent interest rate reduction could mean significant savings for homeowners.
Let’s look at an example of refinancing for 1 percent. Let’s say the current loan amount is $250,000, with an interest rate of 4.5 percent with the origination year of 2010. If you were able to refinance your mortgage today with a rate of 3.5 percent (1 percent lower than the original interest rate), your monthly savings would be about $400. You could save more than $17,000 during the life of a 30-year loan. So, even with the cost of refinancing (about $6000), you would break even in about 15 months.
Are refinance rates still going down?
Mortgage rates are at a historical low, but that doesn’t mean they can’t go even lower. Keep in mind that mortgage rates may rise or fall. No one can really predict the direction interest rates will go. If you wait with refinancing, interest rates may lower or increase. You take a chance either way.
Can refinance fees be negotiated?
You can shop around if you want to lower your refinance closing costs. The catch with such a refinance is that you may have to pay higher interest on your mortgage. To save money on closing costs, you might pay more during the life of the mortgage. A better option is to try to negotiate for lower lender fees such as processing and application fees.
How often can I refinance a mortgage?
Even though there are no legal limits on how often you can refinance your mortgage, lenders set their own rules. Banks look for a “seasoning” period between mortgages, or a span of time between appraisals.
To refinance, you need home equity, and if the equity in your home has not increased since your last refinance, you may be unable to refinance. In other words, as long as it makes financial sense, you can refinance your home. So, refinancing is less about frequency and more about financial sense.
Can I refinance my HDB loan?
Yes, you can refinance your Housing & Development Board (HDB) loan with a regular bank mortgage. After you have refinanced your HDB loan with a bank mortgage, you can’t refinance it with another HDB housing loan.
Refinance versus Reverse Mortgage
A reverse mortgage is a very different concept from a refinance. Borrowing against the equity in your home is what we call a reverse mortgage. Unlike a traditional home loan, the reverse mortgage doesn’t require a monthly mortgage payment. With a reverse mortgage, the interest accumulates over time, and the full balance is paid when you sell your home, move out or pass away.
Unlike a refinance, there is an age requirement with a reverse mortgage. To qualify for a reversed mortgage, you must be 62 years old or older. And the property must be your primary residence, and you must own your home free and clear without an outstanding mortgage.
There is no credit score requirement to qualify for a reverse mortgage. But, to refinance, you generally need a credit score of 640 or above.
Can I refinance with a credit score of 650?
A very low credit score may be a roadblock to refinancing your mortgage. While credit is important, it is not the only critical factor considered during the loan approval process. Is a 650 credit score enough for a mortgage refinance? Although a 650 credit score isn’t great, it is considered a fair credit score. Credit scores under 630 are considered a much worse credit range.
If you have a credit score of 650, you might have to pay higher interest on your mortgage than someone with a much higher credit score. They say that credit scores above 690 are where “good” credit range starts.
How can I improve my credit fast?
The good news about the credit score is that you can always work on improving yours.
Consider the following options to boost your credit score before refinancing:
- Pay your bills on time, always. Paying late is a huge ding on your credit score, so avoid it at all costs.
- Visit your local bank or credit union to get a secured loan or a credit builder loan.
- Apply for a secured credit card. Using a secured credit card can improve your credit in as little as six months.
- Don’t close unused credit cards as long as they don’t have yearly fees.
- Don’t apply for too many lines of credit. Each credit application is a hard inquiry on your credit, and too many of them in the same time period can negatively impact your credit score.
- Look at your credit report and dispute any inaccuracies.
Let’s look at cash-out refinancing.
How to Refinance Your Home and Get Cash Back
Many people complain about low-interest rates when it comes to putting money into a savings account. But low-interest rates are a great reason to think about refinancing your mortgage. You are not likely to see a sizable return on investment, socking your money away in a low-interest savings account. However, low-interest rates make cash-out refinance an attractive option for many homeowners.
A cash-out home refinance is a fairly straightforward process. It is a great opportunity for homeowners to consolidate debt.
What are the ways to spend the cash from my refinance?
The short answer is that you can spend the cash as you wish. You could use the money to pay credit card debt or old medical bills. What if you just found out you have a bundle of joy on the way? With a refinance with cash-out, you could set up a quick nest egg for some expected or unexpected expenses. Want to take advantage of the current cash-out refinance rates with the equity you have in your home?
As you think about cash-out refinance, be sure to do your homework and contemplate your refinance options. Consider all the pros and cons before you make a decision. Think about a possible downturn in the housing market. How will reduced property value impact your refinance? Are you alright with possibly owing more money on your home in the future? Do you mind extending the length of your mortgage?
For some people, the potential benefits outweigh the risks. Consider your specific situation and consult with a professional. If you have significant home equity, good credit, an steady income, a cash-out refinance might be a good option for you.
How and when to refinance a rental property?
With mortgage interest rates at historic lows, there may never be a better time to refinance a rental property. Do you own a rental property with substantial equity? You could refinance your rental property and use the cash to make improvements. You could rent the upgraded property at a higher monthly rent.
When should you refinance your rental property?
If you want to take some cash out to purchase an additional investment property, you might consider refinancing. If you want to upgrade your rental, this might be a great time to refinance your rental property.
Two elements need to come together for a rental property to make sense for you:
- You need significant home equity.
- The mortgage interest rate should be low.
