Mortgage Refinance

"A new loan could save you money"

You may consider refinancing your home loan for a number of reasons. You may want to reduce your monthly payments by getting a lower interest rate or extending the term of your loan, or maybe you want to borrow more against the equity of your home to buy. Buy luxury or renovate. Whatever your reason, here are your options and the pros and cons of each.

KEY POINTS TO REMEMBER

* To qualify for a home loan refinance, you need to have enough equity to meet the lender's loan-to-value (CLTV) requirements, good credit, and good credit. enough income to pay off the loan ready.

* You can refinance a home loan by replacing it with a new home loan or home equity line of credit (HELOC) or by refinancing into a first mortgage. New, bigger.

* If you do not qualify to refinance your home loan, loan modification may be an option.

How to qualify to refinance your home loan

Refinancing a home loan is not the same as refinancing your first mortgage, the loan you used to buy your home. Lenders will look at your income, expenses, debts, and home value to see if you qualify. You'll need to provide documents like pay stubs, W-2 forms, bank statements, and tax returns (or temporarily grant your lender secure access to your online account) to demonstrate that you can repay the loan you are applying for. .

You will also need to pay for a Full Home Assessment, Drive In or Automated Valuation Model (AVM) Assessment. Lenders will use the appraised value of your home to determine the equity in your property.

You will be eligible for the lowest interest rate if your FICO score is rated as "very good" or "excellent", which will be between 740-850.

You may still be eligible to refinance your home loan with a lower score, as low as 620, but you'll pay higher interest rates and may need to borrow less than you can with higher score. You may also find the pool of available lenders a bit shallow.

The lender will also calculate your total available monthly debt payments plus the monthly payment on the loan you're applying for to make sure it doesn't exceed 50% of your gross income. Such a calculation is known as the debt-to-income (DTI) ratio.Such a calculation is known as the debt-to-income (DTI) ratio. You may not qualify for such a high DTI unless other aspects of your finances are very good and some lenders have lower limits, such as 43%.

Ultimately, you'll need to have enough net worth after taking out a new loan to meet your lender's guidelines for the combined loan-to-value (CLTV) ratio. It's the percentage obtained by dividing the total amount you borrowed to buy your home by the fair market value of the property. Some lenders will allow homeowners with excellent credit to borrow up to 100% of their home's value. However, you are more likely to only get 85% to 90% of the loan.

Home equity loan refinance example

Let's say your house is worth $250,000, your first mortgage balance is $165,000, and you have a home loan balance of $25,000. Your debt adds up to a total of $190,000 that you borrowed to buy your home. To get your CLTV rate, divide $190,000 by $250,000. The result is 76%, which means your home ownership rate is 24%. The less equity you borrow, the lower your interest rate will be. With some lenders, you may need a CLTV of no more than 60% or 70% for the lowest interest rates.

Option 1: Refinance into a new home loan

How it works

You can replace your existing home loan with a new one of the same size or larger, if you have enough equity. You will get a new interest rate and a new loan term.

Pros

With lower interest rates and/or longer loan terms, you can reduce your monthly payments or borrow more without a significant increase. Many lenders will pay most or all of the closing costs of your home loan unless you pay it off in advance, within the first 36 months. In this case, you may have to repay the lender a portion of the closing costs they paid on your behalf.

Cons

If you extend the term of your loan, you may pay more interest in the long run, even if you receive a lower interest rate. If you take out a larger loan, you increase your risk of losing your home if your financial situation deteriorates.

Option 2: Refinance of Home Equity Line of Credit (HELOC)

How it works

You can use a home equity line of credit (HELOC) to pay off your home loan.

Pros

During the HELOC withdrawal period, which is typically 10 years, you will typically have an interest-only payment option.

Refinancing your home loan with HELOC can give you a significantly lower monthly payment.

Cons

Home equity loans typically come with a fixed interest rate, while HELOC has a variable rate.

So you would trade a predictable monthly payment for an unpredictable one, and you could end up paying more interest in the long run if interest rates go up.

Option 3: Refinance into a new first mortgage

How it works

Instead of just refinancing your home loan and continuing to have two mortgages, you can refinance both your home loan and first mortgage into one loan without increasing the amount you borrow. . You will get a new interest rate and a new loan term. Think of it as loan consolidation combined with interest rate and term refinancing.

Pros

Your first mortgage interest rate may be lower than your home loan rate, so you can save money.

If you refinance your fixed-rate mortgage, you'll enjoy steady monthly payments and predictable borrowing costs.

Cons

If your current first mortgage has a lower rate than lenders are currently offering, this option won't make financial sense. While you can get a lower interest rate through refinancing, first mortgages can come with much higher closing costs, which can total from 2% to 5% of the loan amount. Contrast that with the fact that many lenders will actually pay the closing costs of your home loan or HELOC.

Do I need cash refinancing to pay off my home equity loan?

Cash refinance can be a good way to refinance a home loan if you also want to refinance your first mortgage and borrow more money. In general, withdrawal refinances have a better interest rate than a home loan, but not as good as interest rate and term refinance rates.

Either way, the rate will depend on your combined loan-to-value (CLTV) ratio and your creditworthiness.

Be careful when increasing the amount you owe on your home. Will you be able to cover your monthly payments if you lose your job, have your pay cut, or have to work less due to illness or serious disability? You could lose your home to foreclosure if you make your payments too late.

Is it worth paying the closing costs to merge my first mortgage and first home loan?

You will need to calculate your breakeven time and see how many months it will take you to get a new loan before you have the money after paying closing costs. The shorter the payback period, the better. Your lender may allow you to finance closing costs, which reduces the impact of these additional costs in the short term. However, by building closing costs into your loans, you'll have to pay interest on them for years to come.

Another way to pay closing costs is to pay a higher interest rate. However, since you may be trying to get a lower interest rate by refinancing, this is not the most promising strategy.

Do I have to refinance my first mortgage when I refinance my home loan?

Your answers to the following questions can help you decide if you would benefit from refinancing your first mortgage:

* Do you have an adjustable-rate mortgage that you want to replace with a fixed-rate mortgage because interest rates are going up?

* Do you have a fixed rate loan with a higher interest rate than you can get today?

* Do you have a Federal Housing Administration (FHA) loan? If so, a regular loan may be cheaper if your credit improves and your home equity increases.

What if I am not eligible to refinance my home loan?

If you are unable to refinance your home loan and the payments cannot be made, contact your loan officer as soon as possible to request a loan modification. If you have financial difficulties, your agent can work with you to modify the terms of your loan so that the payment fits your budget.