Considering a Mortgage Refinance
A Mortgage Refinance in today’s world may be a viable option. Perhaps shedding some light on the subject can provide enough information for someone to make a confident and informed decision. Please don’t take my word, check many resources. There are many lenders and mortgage brokers so ask questions. With interest rates continuing to remain at all time lows it makes good sense to consider a mortgage refinance. In the 1980’s interest rates peaked at 16.63% APR, according to Freddie Mac. Average rates gradually fell to 9.25% in 1991. Currently rates depending on product, term, location, credit scores are mid 3’s. When you compare 1991 to the present that percentage difference is equivalent of a car payment or even an additional room and square footage for the money.
Mortgage Refinance Goals
A Mortgage Refinance can lower your monthly mortgage payment or accomplish a shorter loan term or even provide needed cash back. Determining your need and what goals you would like to accomplish helps define what type of loan product best suits you and if you can qualify. With a lower interest rate, over time all alternatives save you money but if you are doing a refinance only to lower the monthly payment with no cash out for any purpose the interest saved and monthly payment need to overcome the costs of a new loan. Every new mortgage loan and every Mortgage Refinance incur closing costs so a borrower needs to determine the savings and the length of time it will take to pay for the costs of a new loan. A standard rule of thumb is a savings of 1 point, but that is as stated general. When a borrower applies and begins the mortgage application process, the law requires disclosures and loan estimate. This estimate will provide a good idea of closing costs and from this you can determine how long your savings will pay for the costs of the new loan. Closing costs can be from 2% to 5 % of the loan amount.
Benefits of Refinancing
In contrast with those sky-high rates in 1981 and 1991, home mortgage rates have remained low since 2010 below 5% APR. Anyone who holds a mortgage taken out prior to 2010 might want to consider a mortgage refinance. Some of the potential benefits of a Mortgage Refinance may be:
- Lower interest rate. – Lower interest rate will lower your payment
- May shorten the loan term, for example from a 30-year fixed rate loan to a 15-year, fixed rate loan. This will save money on the total interest payments.
- A borrower may be holding an adjustable rate mortgage or variable rate mortgage, switching to a fixed rate can not only save you money but create more certainty for future budget planning.
- A mortgage refinance can allow you to use equity in your home for another purpose or remodeling renovation.
Benefits of a Mortgage Refinance
Deciding to refinance a mortgage offers several potential benefits:
- You can lower the interest rate. Doing so should reduce your monthly payment amount.
- You can shorten the loan term. For example, you can switch from a 30-year, fixed-rate loan to a 15-year, fixed-rate loan to save money on total interest payments.
- You can create more certainty. If you currently have an ARM or a mortgage with a variable interest rate, you can switch to the certainty of a fixed interest rate.
- You can take out a loan. If you have equity in your home, you might refinance the mortgage and take out some of the equity to use for home remodeling or other purposes.
Where to do a Mortgage Refinance
Many banks can do mortgage loans and there are literally thousands of mortgage brokers that can assist finding the best loan product for your needs. Mortgage brokers will often have a broader choice of loan products. First as a borrower determining if Conventional loans or Non-Conventional loans, sometimes this is quickly determined with answers to these two questions.
- How does your credit profile look ? What is your FICO Credit Score and pay history
- What is the equity in your home?
I use these two check questions for simplicity, of course there is more to it but when you visit a lender or broker you can delve into details. Your credit profile is evidenced immediately by your FICO Credit Score, from 300-800, the higher the number the better for the borrower indicating less risk for the lender. Conventional loan products will usually require a minimum 640 FICO score, sometimes down to 620 but the lower the FICO score the higher the interest rate and the more equity the lender will want in the home. Most Conventional loan refinance will require Loan to Value (LTV) of 80% for a cashout mortgage refinance. If you fall in this credit range and have limited equity position then a FHA loan may be a better fit for the simple reason of qualifying for a loan. For a FHA Mortgage Refinance cashout FHA will want a LTV of 85%. According to 2016 FHA Guidelines the minimum FICO Score can be 58o. FHA also offers a FHA has a Streamline Refinance that does not consider credit FICO score but the borrower must be current on their current FHA mortgage with no late payments for at least 12 months and be employed. There are a few curves when considering the right mortgage refinance but it really isn’t that complicated, a mortgage broker can very helpful maneuvering through the twists and turns. One other disclaimer is although FHA will allow a FICO of 580 most banks have overlays. Overlays are additional restrictions above the minimum guideline and is perfectly legal. However, the Larry Stepp Team do not have any overlays and can get you qualified with no overlays.
Reasons why a Mortgage Refinance is denied
Lenders might deny your mortgage refinancing application for many reasons, including the following:
- Current Mortgage is underwater, meaning the amount owed is more than the house is worth. After the mortgage meltdown in 2008 many mortgage holders were left with mortgage debt greater than the value of their homes.
- Income is too low or unstable. This is especially true with Conventional Loan qualifying. FHA guidelines are not nearly as stringent. The Larry Stepp Team at Gustan Cho Associates can offer information and guide you towards your goal, often we can do the mortgage when others cannot, primarily because we have no overlays.
- Credit Score or Credit history are weak. Lenders may turn you away or require charge offs or collections to be paid.
- DTI does not meet the lender’s criteria. Find a broker or lender that does not have any overlays
- Home appraisal is too low, however if you are doing a renovation, There is also the FHA 203k that will encompass the refinance and include the costs of a remodel or renovation into one loan.
I am available 7 days a week, holidays and weekends.
Larry Stepp 407-922-4755 LarryS.Homesnetwork@gmail.com