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Because the financial situation of each homeowner is unique, it is best to disclose as much information to the lender as possible in order to make sure that they can make an accurate assessment and offer the best refinancing options and interest rates available.
If a homeowner has consistently made their mortgage payments without delinquency, and has 20% or more equity in their home, they may be eligible to refinance and eliminate private mortgage insurance for good.
Cash out refinancing options allow a homeowner to use the equity in their home in order to secure a loan amount greater than the principal remaining in their mortgage, and keep the difference. Cash out refinancing is a way for homeowners to put money in their pocket to pay for expenses, consolidate debt or pay off high-interest credit cards and is considered one of the major benefits of mortgage refinancing.
Because the property is considered collateral for a mortgage, an appraisal is nearly always necessary. Property appraisal is one of the common costs of mortgage refinancing.
Mortgage refinancing is a daunting task that tends to be time consuming for any homeowner, especially for a first time homeowner and those with complicated financial backgrounds. The assistance of a professional mortgage consultant can eliminate the shroud of uncertainty and stress surrounding mortgage refinancing.
Whether a homeowner is, paying for more than one mortgage, looking to change to a lower adjustable or fixed interest rate, has the need to get access to extra cash from the equity, wanting to get rid of their private mortgage insurance (PMI), or just looking to lower the overall monthly payments, mortgage refinancing is an option that has many potential benefits for a large spectrum of homeowners.
It is important for a homeowner to consider and review all the factors related to their financial situation before deciding if refinancing their loan is the right option. Homeowners considering the option to refinance their mortgage should ask themselves the following:
- Are the current interest rates lower?
- Are the monthly payments too high?
- Is cash needed for large expenses?
Answering, “Yes,” to any of these is a strong indication that refinancing is the right option.
As long as the value of the home is greater than the remaining balance of the previous mortgage, it is likely that a homeowner will qualify for a mortgage refinance.
Although it seems like a slightly lower rate will not lower monthly payments by much, even a rate decreased of a few tenths of a point could translate to significant savings over the long-term. A homeowner is able to get the most savings from a refinance for a slightly lower rate if they plan on staying in their current home for several years.
As opposed to a home purchase, mortgage refinancing does not carry an obligation to close at a specific date. Therefore, the borrower could essentially delay closing in order to hold out for lower interest rates. Determining an answer to this question depends on the forecast for interest rates and whether or not the homeowner would be discouraged from proceeding with the refinance if the rates declined. Some lenders apply a fee for delaying closing and “floating” the interest rate.
The basic difference between an ARM and fixed-rate mortgage is security: With an ARM loan, the interest rate could rise dramatically over time. The rate increase will result in an inflated mortgage payment. Refinancing from an ARM loan to a fixed-rate loan will increase monthly payments when compared to the introductory payments of an ARM loan; the interest on a fixed-rate mortgage loan remains constant, so there is absolutely no risk of an inflated mortgage payment for the life of the loan.
After bankruptcy, the borrower should wait for a period of time, typically between 2 and 4 years depending on the type of filing. While still in bankrupt, the borrower will need the approval of the bankruptcy court, then they must disclose their bankruptcy information to the lender.
Lenders require proof of income, this usually consists of a current pay stub and or a W-2 for the past couple of years of employment, along with any documents related to additional income, including investments. Depending on the current employment situation of the homeowner, there may be other forms that are required by the lender before they will process the loan refinance. There are limited documentation mortgages available, but these types of loan often carry a higher interest rate than a loan that requires extensive documentation.
Private mortgage insurance (PMI) is often required by lenders for loans secured with less than a 20% down payment by the borrower.
Seasoning is when the lender requires the borrower to make payments on an existing mortgage for a period of time (typically 12 months), before refinancing.
A prepayment penalty is a condition of some mortgages in which the lender is allowed to charge a fee (consisted of additional interest) if the borrower repays a mortgage before the mortgage term is finished. Mortgages with a prepayment penalty typically carry a lower interest rate or discounted closing costs.
Non-conforming or jumbo loans are mortgages that are above the national loan limit which is set and defined by the government. Currently, jumbo loans range from $417,000 to $729,750 (or 125% of a metropolitan area or region’s median home price as defined by the Department of Housing and Urban Development). Conforming loans are mortgages below this amount. For more information about jumbo loans, please visit the HUD website at http://www.hud.gov/.
The actual cost of refinancing will vary. However, an application fee, property appraisal, and mortgage prepayment penalty are some of the possible costs that will more than likely be associated with refinance.
APR, or annual percentage rate, is a calculation of the annual cost of the mortgage above the principal. APR is meant to give a more accurate depiction of the mortgage cost by considering closing costs, fees, and the interest rate over the life of the loan.
A no or low cost refinance is when the lender agrees to pay for all or a portion of the non-recurring closing cost that are related to the mortgage refinance in exchange for a slightly increased interest rate, sometimes as low as a quarter of a percent. This is different from a zero point mortgage, in which a borrower has decided not to pay points to buy their interest rate down but remains responsible for the closing costs. There are very few loans that actually have no closing costs.
Typically, when a homeowner chooses to do a cash-out refinance loan they will receive the same interest rate as if they did a non-cash out refinance. However, some lenders charge a slightly higher fee for a cash-out loan.
Homeowners are considering the option of mortgage refinancing to switch from a risky ARM to a more secure fixed-rate interest loan. Especially if interest rates are on the rise and inflated monthly payments are in their financial forecast, refinancing an ARM should be considered a few months before the loan adjusts.
Both are viable options. However, depending on the financial situation of the homeowner, the closing cost of a reverse mortgage is typically much higher than the cost of a mortgage refinance and is something to consider when reviewing either of these two options.