Refinancing
Rate/Term Refinance
Refinancing –
There are a few different types of refinances that I’ll cover in this article. They are useful in many different ways, so we need to find which program is best for your situation.
Interest Rate and Term Refinance -
With this option the main goal is to lower your payment and to better off your family’s financial situation. It’s a useful program if mortgage interest rates are significantly lower than what you were locked into when you bought the home. It can also be used to get out of mortgage insurance if you think you have 20% equity in the home and are still paying PMI.
Along with negotiating a new interest rate you will also have the option to choose a new term on your mortgage, whether that is a 30, 25, 20, 15, or a 10 year term. It’s typical that the shorter term options yield lower interest rates, but the monthly payment will be higher since you have less time to pay off the principle balance of the home. Overall, you will save a significant amount of money due to the amortization of the lower interest rate though.
There are benefits of taking a longer loan term as well. Although you’ll have to pay more interest over the term it is difficult for some families to have the cash flow for the higher payments. With a longer term it allows for flexibility with lower mortgage payments if times get tough. With a shorter term the payment is fixed and you can’t go back to lower mortgage payments.
Doing a refinance is not free! We still have to pay a title company, an appraiser, and an underwriter to complete your loan. On a typical basis you should expect around $4,000 in fees in order to complete the transaction. Depending on your situation these costs can be rolled into the loan so that you don’t have to pay money upfront, but the more you roll into the loan the higher the payment will be and the more money you’ll pay in interest over the term.
If you are about to save $100/month by lowering your interest rate, dropping mortgage insurance, or both it will take 40 months for that $100 to break even with the $4,000 in costs. This means if you plan on living in the home for longer than 3 ½ years it would be a good investment to do the refinance.
If you’re about to save $200/month through a refinance the breakeven point is 20 months or just under 2 years.
If you plan on selling or moving before these timelines it would not make financial sense to do a refinance and pay for the costs.
We can also look into a No Cost Refinance – by taking an above-average interest rate your lender will be able to apply lender credits to help pay for these costs.
Streamline Refinancing –
If you used Government Financing (VA, or FHA) when you initial bought the home you are eligible to do a streamline. Streamlines are very similar to a rate/term refinance, but they come with even lower interest rates!
A down side of doing a FHA Streamline is mortgage insurance. With an FHA Mortgage the mortgage insurance premium will not stop once you have 20% equity in the home unlike a Conventional loan. See my Mortgage Insurance Blog post for more details. Although you may get a lower interest rate with a streamline your overall payment and your future payments will be higher due the FHA Mortgage Insurance. A Conventional loan is ultimately the better long term loan program.
A Cash out Refinance –
With this program we’re able to pull out money from the homes equity and return it to you in cash! You may be thinking, why would I ever want to do that, wouldn’t that increase my loan and overall increase my monthly payment? The answer is yes it will, but there are a few great benefits for using your homes equity.
Instead of using a private loan where you are going to be paying a much higher interest rate you can use the equity in the home to finance it. The interest on private loans are also not tax deductible, where mortgage interest is. This will save you money come tax season as well!
Looking to remodel the kitchen or do another big remodel to your home? You can use a cash out refinance to fund the project!
Do you already have multiple high interest credit cards or private loans? You can use a cash out refinance to consolidate debt.
With a cash out refinance on a primary residence we can only take out up to 80% of your home’s value. If you’re looking to do a cash out refinance on an investment home we can only take out up to 75% of your home value.
For Example –
Let’s say your neighbor who has an exact replica of your home just moved and sold his home for $300,000. This means your home should be worth around $300,000. We will do an appraisal on the home to verify during the process.
You owe $100,000 left on your mortgage and are wanting to consolidate your high credit card balances.
We can increase your loan to 80% of the value ($300,000) or $240,000.
Once we pay the $4,000 in closing costs and your current $100,000 mortgage balance off this leaves you with $136,000 that we can get you back in cash!
Home Equity Line of Credit or Second Loans
Since I am a solely a mortgage lender I am unable to complete these transactions. The Government restricted HELOC’s and Seconds to the banks of the world, so you will want to talk to your bank lender to get the actual Specifics.
On top of the Cash-Out Refinance up to 80% of the home equity you can look into doing a HELOC or a Second mortgage to get more money if needed. Typically banks will go up to 90% of the home’s value, but the money you take from a bank will be held at a much higher interest rate than a First Mortgage Cash Out refinance.
If you’re needing more money you’ll want to do a first mortgage up to 80% equity and a 10% HELOC or second to get to the full 90% loan to value.
Have Questions?
Read our other blog posts or reach out to us directly.
Benson Ringle
Loan Officer NMLS #1516626
GA Lic. # 1516626
(218) 507-0429
Benson.Ringle@supremelending.com
