Lots of homeowners will make the all-important decision to refinance their home loan after taking title as owner due to multiple reasons. Most often it is because of home appreciation. This is especially true in California where home prices have risen on average by 20% since 2015.
A homeowner may refinance their first and second mortgages into one loan in order to have one single payment. Some of the benefits include reducing your monthly mortgage payment by obtaining a lower interest rate, paying off other debt much faster and taking out equity for home improvement projects and more. If you are wondering what do you need to do to begin the process, read more below.
Determining if You Can and Should Refinance
The first thing you should do is know what your existing loan terms are, such as the interest rate, balance owing, and years left. If you will be refinancing a first and second lien, compare all of the terms together not excluding fees. A lot of loan programs which have great rates demand that you have a minimum of 20-percent equity in your home or 80-percent loan-to-value (LTV).
This means you’ll need to review your property’s current value to see if you meet this condition. Sometimes homeowners feel their property is worth more and later discover that they need to have more equity, have to come bring in more cash to close, or use a loan program that allows refinancing over 80 LTV and there are plenty that do.
• Your Credit Score
Similar to buying a home, your credit score is an important factor when refinancing a mortgage. A credit score of 620 is the standard to refinance your home or else the rates are higher than expected.
If you are refinancing an FHA loan, only a 580 credit score is needed and you still get attractive rates. If you are wanting to get cash out, the credit score minimums is typically higher at 660 or more.
• Length of Time for the New Mortgage
Do you really need to refinance into a 30 year fixed rate if you only plan on staying in the home for five or seven years? A 7- or 10-year adjustable rate mortgage (ARM) usually has a lower interest rate amortized over 30-years and stays fixed for seven or ten years. After that, it will adjust up or stay at the floor rate based on what the market is doing.
Don’t automatically assume the 7 or 10-year fixed is lower than the 30-year fixed. Mortgage lenders sometimes have products where the rate on the 30-year is the same as the 10-year and only .125% more than a 7-year fixed ARM.
This will vary with which mortgage company you get your loan from. If your plan is to only stay in your home for two years or less, it’s probably not going to be worth refinancing unless you get a no-cost refinance at a lower rate and similar payoff term.
• Closing Costs for a Refinance
The fees to refinance are usually less expensive than if you were buying a home, yet they can still be substantial and turn some borrowers away. When talking to lenders about loan options, ask what the closing costs are to complete the process and compare it with other lenders.
Some lenders will offer you a no-cost refinance. Understand that if you paid for closing costs out of pocket, the interest rate is lower. While a no-cost refinance sounds good, the downside is the lender will usually offer you a higher interest rate or put the closing costs into the new loan amount with a lower rate.
Depending on your situation, one of these options to refinance may sound like the right loan for you. Everyone has a different situation or objective. For people who bought homes in competitive markets which includes major cities of California with quick financing terms like a bridge loan, the payment should drop considerably if they want to refinance a short term loan into a conforming or jumbo loan.
Switch Your Loan Terms
Refinancing your home loan provides you the amazing ability to change your loan term. Let’s say, a homeowner who initially got a 30-year fixed loan five years ago, now wants to apply for a 25-year loan term to keep the same loan balance and payoff period. Some loan programs will allow 25-year, 20 year, or 15 year mortgage terms. Some companies even let you pick your mortgage term,where it can be 23, 17 or any annual terms of 30 and below.
If you want to pay off the debt as quickly as possible many opt for the traditional 15-year fixed mortgage. A 15-year fixed mortgage payment is a lot higher than a 30-year since it is amortized over 15 years. However, if your salary or work pay has increased considerably since you bought the home, a 15-year mortgage may be more affordable than it was before. In addition, the interest paid over the life of a 15-year loan is much less than a 30-year fixed.
Who to use for my Refinance?
You may have heard about using Rocket Mortgage and similar online companies who tout their speed and rates. However, some homeowners prefer more human interaction and responses during the process.
When it comes to jumbo loans and million dollar plus mortgages, some people prefer more than just 2 clicks and automated email alerts. If you’re a person with questions, concerns about what if my credit is, what if my appraisal comes back low, etc. You may prefer talking to an actual person, like a loan officer. An experienced loan officer can give you guidance and strategies if “A”, “B” or “C” happens.
It doesn’t matter if you are geographically located 2-3 hours away. With just a few phone calls, texts, emails, and e-signed documents, all your questions can be answered efficiently and still close your refinance in less than 30 days.
Moving Forward With the Loan Process
Once you are committed to refinance your home loan and chose your mortgage company to work with, you’ll begin the loan process. You will need to fill out a loan application over the phone with the loan officer, by email, or online if available. Your credit will also be pulled to confirm your credit scores through the lender’s credit provider. You will have to give the lender a signed authorization (e-signed is acceptable).
After you pass this phase of pre-qualifying, you will be asked to provide income, employment and tax return records. Additional documentation required is your latest mortgage statement, homeowners insurance policy, and a recent HOA statement if applicable. If you are applying for a bank statement loan, you’ll to provide copies of 12 or 24 months of bank statements.
Mortgage rates have dropped so much in mid-2019 that millions of homeowners may possibly benefit by refinancing — even if they purchased a home only a year ago. The average borrower(s) who refinances might save over $200 a month. Those who know it’s a good time start right away.
Since 2018, the applications to refinance are almost two-times more than the year ago period, based on data from the Mortgage Bankers Association. However, some homeowners are so busy that they have paid little attention to the low mortgage rate environment and are missing out on account of not having the time to start the process.
Many potential borrowers may wait on refinancing and do it in the near future. The general guideline to check into refinancing is if you can reduce your interest rate by one-full percentage point to strongly consider starting the process. Sometimes even a .75% drop with minimal costs can be worth exploring.
Since January 2019, interest rates for mortgage loans have been declining. With the political atmosphere so important and the China trade talks, it won’t get the headlines it deserves. Recently, the 30-year fixed rate came down to its lowest levels dating back to September 2017.
To find out how much you could save:
• Calculate your potential savings using our refinance calculator.
If the new payment and rate looks appealing, you’ll want to determine your break-even period: this is known as the time required for the monthly savings to go above the loan fees.
For example, if you pay $7,500 in fees to save $250 a month, it will take 30 months to break even ($7,500 divided by $250 comes out to 30). If you believe you’ll stay in the house beyond the break-even period, it is worth refinancing your property.
Bonus Refinance Tip:Generally, you can refinance whenever you think it’s a good time. Although some lenders will require “seasoning” of six months to one year for the new appraisal value. For example, most lenders will not allow you to use a higher appraised value if you bought the home just four months earlier. There’s a few loan programs that will allow it but the rates are not slightly above the best refinance rates.So, it may be smart to wait out the required time.
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