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Should I Refinance My Home: Things to Consider


The decision to refinance your mortgage is not one that should be taken lightly, but depending on your circumstances, the refinancing process can be a powerful option at your disposal to meet your personal and financial goals.


To put it simply, refinancing is a means to obtain a new mortgage loan that replaces your existing one. From there it can be more complex, as there are a number of ways you can customize the details of this new loan to suit your specific needs, include the mortgage rate, loan length, and amount borrowed.


There are three types of refinance mortgages, Rate and Term Refinancing, Cash-Out, and Cash-In. Your individual circumstances will determine which refinancing type you should choose.


In rate and term refinances, the mortgage rate and loan term are the only components of the new loan that differ from the original one. Cash-out refinances operate much like rate and term refinances, but feature an increase in the amount borrowed — translating to cash back at closing. Cash-in refinances work as a counter to cash-out. With a cash-in refinance, the homeowner uses cash to pay down the loan balance at closing.


What Should I Consider Before Refinancing?

Refinancing your home takes a lot of work, and truth be told, it’s not for everyone. There are a number of things to consider before starting the refinancing process.


Refinancing Costs

Regardless of your reason for refinancing, you’ll need to calculate the costs and potential savings before making a decision to move forward. Every refinance has fees associated with it, even those labeled “no-cost”.


A home refinance usually costs between three and five percent of the loan amount. You need to determine how you’ll be paying these fees, and whether or not the potential savings make up for the money you put forward.


Some lenders offer "no-cost" refinances, but in reality the costs show up later as higher interest rates or fees added onto the loan balance. You’ll save far more money over the long-term by paying the fees out-of-pocket and avoiding “no-cost” mortgages.


Another thing to consider is the prepayment penalty on your current mortgage. Not all loans come with one, but if yours did, and you want to refinance before the prepayment penalty expires, you’ll have to fork over some serious dough. This might ultimately make refinancing more expensive than it’s worth.


Length of Time You Plan to Stay in the Home

The longer you plan to stay in your home, the more worthwhile it will be to cut your monthly payment. However, if you plan to move any time soon, you’ll want to recoup the expense of closing costs before you do.


If you plan to add a prepayment penalty to your new loan in order to get a lower rate, you should aim to stay in your home through the prepayment penalty period — which could be five years or more. If you aren’t planning to remain in your home for at least two years, it’s unlikely that refinancing will be of any benefit.


Your Credit Score

Currently, more mortgage loans are being approved than during any period this decade. This is due, in part, to lenders loosening their credit score requirements. Minimum FICO scores for home loans as of July of 2016 are:

  • Fannie Mae and Freddie Mac: 620

  • Federal Housing Administration (FHA): 500

  • Veteran’s Administration (VA): None

  • USDA Rural Housing: None

Mortgage lenders may approve loans for borrowers with lower scores, but interest rates or fees will be higher. However, even if you have perfect credit, you may not qualify for a loan if your debt to income ratio is above 43%.


The Amount of Equity in Your Home

The more equity you have in your home, the easier (and cheaper) it will be to refinance. For conventional loans, a minimum of 20% is needed. If you have less than 20% equity, you are still eligible for a refinance, but will most likely end up with higher rates and an additional monthly payment in the form of mortgage insurance.


What Are the Risks?

As with any loan, there are risks associated with refinancing your mortgage. It’s important to judge  these risks and weigh them against the potential benefits before moving forward in the refinancing process.


Lost Equity

Equity is measured by subtracting the amount you owe on your mortgage from the market value of your home. If you get a conventional rate and term refinance and pay the fees out of pocket, your equity will remain the same. However, if you roll your closing costs into the loan or participate in a cash-out refinance, the level of equity in your home will decrease as a result of the transaction. This can be a serious disadvantage if you plan to sell your home within a few years, as you won’t have enough time to rebuild your equity.


Low-Ball Appraisal

Home appraisals are often a necessity when refinancing in order to estimate your property’s worth. An appraiser uses recent comparable sales in the local area to assess your home’s value.


If you receive a low-ball appraisal, not only can it destroy your chances of acquiring a new mortgage and better terms, you may also end up paying the appraisal fee, which is often $300-400.


After considering all aspects of a home mortgage refinance — even the ones that are a bit intimidating — we can move forward to the advantageous side of refinancing.



http://themortgagereports.com/18621/mortgage-credit-score-minimum-gina-pogol
http://www.fhahandbook.com/debt-ratios.php


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