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Refinance a mortgage at the right time and for right reasons

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 05th Jun, 2005 10:46pm
Are you stuck with increasing monthly payments and looking for favorable rates and terms on your loan? Or, do you want to consolidate your debts and pay them off faster? All these and more can be done by refinancing your mortgage. If you want to know what refinancing is all about, check out the following topics:
Do it yourself!

What is refinancing?

Refinancing replaces your current mortgage with a new loan that has a more favorable interest rate and terms that you can afford to manage. The new loan is secured on the same property as your current loan. The new loan funds are used to pay down the current mortgage while any remaining money can be used to your best advantage.
Example: Mr. X and Mr. Y both took out a mortgage loan worth $400,000. After 4 years, both of them paid off $200,000. Mr. X then took out another home loan worth $200,000 in order to repay the existing loan balance.
On the other hand, Mr. Y took out another mortgage worth $300,000 in order to repay the unpaid loan balance which is $200,000. Mr. Y could use the remaining balance in order to fulfill other financial obligations.
The first scenario is a simple refinance while the second is that of a "cash-out refinance".

5 Reasons why you should finance

If you're thinking of refinancing your house, check out these 6 reasons why a mortgage refinance might be right for you.
  • You want to save more:
    Your monthly payments will be reduced if you get a lower interest rate or when the term of the loan s extended. However, with an extended term, you will be paying more in interest during the life of the loan.
  • You want to pay down your mortgage quickly:
    You can shorten the length of your mortgage by reducing the term of the loan. Your Monthly payments will go up, but you will be able to save more in interest payments. Moreover, you'll be debt free sooner.
  • You need extra cash to pay off credit cards:
    If you have enough equity in your home, you can refinance and borrow more than the current loan balance. With the extra money, you can pay off high interest debts such as credit card balances or installment loans. This refinance loan may be tax deductible under certain conditions.
  • You wish to consolidate 2 loans into one:
    If there's enough equity (due to high appreciation), you can consolidate a 1st and 2nd mortgage into a single mortgage. The monthly payment on the new loan might be lower than the combined payments on the first loan and the second mortgage.
  • You want to convert an Adjustable Rate Mortgage (ARM) into a Fixed Rate Mortgage (FRM):
    A FRM prevents the lender from ncreasing your monthly interest payments over the life of the loan, unlike with an ARM. This means your monthly payments will remain the same.
  • You want to keep your name in home during divorce:
    In case of divorce, you may want to keep home and at the same time and want your ex-spouse to be clear from mortgage payments. For that you should refinance the loan into a new one in your name only.

When to refinance a mortgage

"Should I refinance my house now?" This is what most people ask when they're looking to reduce their mortgage payments by taking advantage of low rates. To find the answer, check out the mortgage refinance tips below:
  • Build up equity:
    You can refinance when you have built up at least 10% equity in your home (Fannie Mae owned mortgages, require 5% equity). It is possible for you to refinance if you have less than 5% equity, but you may have to pay a certain amount of money in order to make up the difference in equity.
  • Check if mortgage refinance interest rates are low:
    It's better to follow the 2% Rule. The 2% Rule allows you to enjoy the benefits of home refinance if the refinance interest rate is 2% lower than your current loan's interest rate. The savings in interest will help you recoup the costs of the new loan, provided you aren't planning to move soon (the break-even period). However, there are no-cost as well as low-cost refinance loans where the costs of getting the loan are included. However, these loans have comparatively higher rates than loans that do not include the refinance costs and your options are limited when the credit market is experiencing a slump. Learn more about the when to refinance rule of thumb. As always, compare mortgage refinance interest rates offered by different lenders in order to get the best interest rate. This will help you save more over the life of the loan.
  • Pay off any late payments:
    There is no such limit on the number of times you can go for home refinance loans. Most lenders prefer that you have no late payments in the last 12 months before you refinance.
  • Remove negatives and improve your credit score:
    Get your credit report from the bureaus and review it for any negative items (late payments, collections, etc) and inaccurate items. Dispute any inaccurate items and remove them from the report. Pay off as much of your debt as you can. Otherwise, you won't get a low interest rate and may not even qualify for a refinance loan. Of course, there are lenders in the subprime lending market who may offer you a mortgage refinance loan, but it's better to avoid them as they'll charge higher interest rates and fees and could be fraudulent.

When not to refinance

Refinancing is not a good idea if:
  • Your property value has gone down:
    If your property value goes down and you refinance up to 80% of the appraised value, your original mortgage amount may be higher than the amount you borrow. Therefore, the new loan will not be enough to pay down the existing one.
  • You have been paying off the first loan for a long time:
    If you are almost finished paying off a 30 year fixed mortgage, then refinancing is not a good idea. You will lose equity in proportion to the amount you borrow over and above the remaining loan amount.
  • You have used up enough equity:
    Refinancing is not a good idea if you have already reduced the amount of your equity by taking out a 2nd mortgage or a home equity loan. Refinance loans for 100% of the loan are rare, and with the mortgage market currently in a crisis, are hard to find.
  • You have a few years left on the current loan:
    If there are only a few years left on your current loan, then refinancing is not a good idea. Taking out a new loan will only put you deeper into debt just when you were about to become debt free.
Refinancing makes sense for the right reasons and at the right time. You need to decide whether to opt for a simple interest rate adjustment refinance or a refinance that will provide you with extra money. If you'd like to check out what mortgage refinance rates and terms are currently available, request a no-obligation free mortgage refinance quotes from our community lenders and brokers.
Related Readings
Related Forum Discussions

Posted on: 05th Jun, 2005 10:46 pm
Are you burdened with rising monthly payments and seeking better terms and conditions on your mortgage? Or, are you looking to consolidate your unpaid debts and get rid of them faster? All these mortgage scenarios and many more can be accomplished by mortgage refinancing. To get the basic idea on refinancing, go through these topics:
Do it yourself!

What is mortgage refinance?

With mortgage refinancing, you can replace your original mortgage with a new one with better terms and conditions but the new mortgage should be within your affordable limit. The same property that you used as collateral to secure the original mortgage is used to secure the new loan also. The new loan proceeds are utilized to pay off the existing mortgage. In case there is any remaining money after paying down the original mortgage, that amount can be used to meet other financial obligations.

Example: Suppose each of the two borrowers A and B took out mortgage loan worth of $500,000. Again, say after 5 years, both A and B paid down $250,000. So, for both these borrowers, remaining unpaid mortgage amount is $250,000.

Borrower A then took out another loan worth of $250,000, so as to repay the remaining balance on the existing mortgage. This depicts a case of simple refinance.

Borrower B then took out another loan worth of $350,000. Out of this new loan amount, B used $250,000 to pay down the original mortgage. B could use the remaining $100,000 to meet other financial obligations. This describes a case of cash out refinance.

The first scenario is a simple refinance while the second is that of a "cash-out refinance".

5 Reasons that make refinancing sensible

There are some strong reasons which make mortgage refinance a very sensible move. Here we delve upon 5 of those -
  • To reduce monthly payment:
    If the mortgage rate is lowered or if the mortgage term is extended, your monthly payment amount gets reduced. With reduced monthly payment, you can pay off your mortgage with more ease. In case the term of the loan is extended, you have to however pay more in interest during the whole life of the loan.

  • To switch from ARM to FRM:
    Fixed rate mortgage (FRM) offers you the certainty of making fixed payment over the term of the loan. Whereas, in case of adjustable rate mortgage (ARM), the monthly payment amount may rise or fall, depending upon the prevailing mortgage rate. So, in case of ARM, the monthly payment amount is not fixed; rather it is uncertain. If you are looking for certainty in payments, then you can convert your existing ARM to an FRM through mortgage refinance.

  • To repay mortgage faster:
    If you want to pay down the mortgage early, then you can shorten the term of the loan. However, here your monthly payment amount increases. Here, over the term of the loan, you save more in interest payments. You also attain property ownership early.

  • To combine two loans into one:
    If you have adequate equity in your property, you can then consolidate your first mortgage and the second mortgage into a single mortgage. The main advantage of this type of consolidation is that the monthly payment on the single loan is less than the combined payments on the 1st mortgage and the 2nd mortgage.

  • To pay off high interest debts:
    If you have sufficient equity in your home, you can opt for a cash out refinance. You can use the remaining money to pay high interest debts such as credit card bills, car loans, installment loans etc.

What is the best time to refinance?

You may not always be eligible for refinancing or the situation may not always be conducive for refinancing. You have to time your move correctly so as to reap its benefits. You need to check out these crucial things carefully before applying for mortgage refinancing -

  • If you have built up equity:
    You may be eligible for refinancing when you have built up equity of at least 10% in your home. However, for mortgages owned by Fannie Mae, the equity requirement is 5%. It is possible to get the refinance approval even with less than 5% equity, but in that case you may have to pay a certain sum of money to compensate for the deficiency in equity.

  • If the refinance rate is sufficiently low:
    If the current mortgage rate is sufficiently lower than the rate on the original mortgage, then it may be wise to opt for refinancing. Here, you need to follow the 2% Rule. As per the 2% Rule, refinancing is beneficial for you in case the refinance rate is 2% lower than the rate on the original loan. Here, the savings accrued from low rate outweigh the costs of the new loan after a certain period of time, which is called the break-even period. To get benefits of refinance, you have to stay in the house at least till the break-even period.

  • If you have removed negative items and paid off debts:
    Before plunging into refinancing, obtain your credit report from the credit bureaus and review it carefully. If you find some negative items such as collections or late payments, dispute those items immediately and get those items removed from your report. Prior to refinancing, pay down as much debts as possible. All these will work in your favor in getting the refinance approval.

  • If you have no late payments in past 1 year:
    If you have history of late payments in the past 1 year, then your refinance appeal may be rejected. So, before refinancing, make sure you don't have any late payments in the past 1 year.

When refinancing is not a good idea?

Despite the fact that refinance has several benefits, it is not always a good idea to go for mortgage refinancing. There are some cases when your refinance appeal is rejected by the lender or it may not fetch the desired returns. Here are some cases when refinancing is not a good idea at all-

  • If the property value has declined sharply:
    If the value of your property has declined appreciably, the remaining balance on your original loan may be higher than the refinance loan amount. In other words, with the new loan proceeds, you won't be able to pay down the original mortgage loan.

  • If you have already used up your equity:
    Your equity is the key to get approved for refinancing. If you have already used up your equity by taking out a home equity loan (HEL) or a home equity line of credit (HELOC), then going for refinancing would not be a good idea.

  • If you have only a few years left on the existing loan:
    It does not make good sense to go for refinancing if you have only a few years left on your existing loan. It is not rational to refinance the loan which you have almost paid off. If you have almost paid down a 30-year fixed rate mortgage, then it is unwise to opt for refinancing. After all, refinancing is just like taking out a new loan and all the costs associated with taking out a fresh loan are applicable here too.
If you have the right reasons and if the time is right, then you can surely seek for mortgage refinance. However, before making the final decision, do the necessary research, take quotes from different lenders, make a comparative analysis and choose your lender.

Related Readings
Related Forum Discussions

meta title: 
Refinance a mortgage at the right time and for right reasons.
Hi Jonny,

I have said that if she have enough money to pay off the mortgage and complete the repair works of the house, then it is better to do it. Why should she go for the refinance? Only if she can't do it then she can choose the refinance option with the lower rate.

I hope you have understood now :)

Posted on: 27th Oct, 2007 02:04 am
Are there any options besides foreclosure for people who have an ARM that is about to adjust to payments that they can't afford to make and the value of the house has dropped about $30,000 from what they owe on it?
Posted on: 27th Oct, 2007 09:13 am
Hi Guest,

Welcome to our community forums.

You can go for the FHA Secure loan program which has been recently introduced by the FHA in order to help delinquent borrowers avoid foreclosures on their properties. But the loan amount cannot be higher than the value of the home.

Moreover, cash-out refinance isn't allowed as a part of the FHA Secure program. However, the FHA would include property taxes and insurance payments into the loan amount. But in order to avail this program, you need to be delinquent on the loan at least once.

If you can prove that you couldn't afford to make the payments due to the adjusting rate on the mortgage, then there are chances that you'll be able to qualify for the loan.


Posted on: 29th Oct, 2007 06:02 am
I need to do a refinance so that I can pay down my credit card debt. I have qualified for refinancing with low interest rate, that is available for disabled persons but until and unless the co-owner signs the note, the bank will not allow me to refinance. I don't want to do a divorce but I can't sell the house or refinance. Is there any option?
Posted on: 01st Nov, 2007 10:22 pm
oh, i forgot to add in..the cosinger is my spouse..he was supposed to sign but he is unreachable for a long time
Posted on: 01st Nov, 2007 10:24 pm
Hi Tsania,

If you are the co-owner of the property you cannot refinance it without the consent of your spouse. Only if he transfer the property through a quitclaim deed or allow you by signing the documents, you can get it. Otherwise it is very difficult for you. It will be better if you talk to an attorney on this regard.

Posted on: 02nd Nov, 2007 02:50 am
Hello Tsania,

It is not possible to sell or refinance without the consent of the co-owner.

Your husband has to transfer his share of property to you and only then you will be able to refinance it.
Posted on: 02nd Nov, 2007 03:17 am
I am into a refinancing deal with a California mortgage company, secured funding corporation. The closing papers have been given to me but I am not yet getting the funds. It's been 2 weeks now. The company says they're reviewing the appraisal for the refinance loan. What do I do? Do I have any legal rights here? Is this company doing scam?
Posted on: 27th Nov, 2007 04:47 am
Hello Garry,

Was the appraisal done before the refinance? I think you should contact the company talk to them clearly. It may not be a scam but you should keep the contact with them.
Posted on: 28th Nov, 2007 05:10 am
Hi Garry,

Welcome to this forum.

The company may not be a scam. But I agree with Jenkin that you should keep contact with the company and wait for some time; see what they do. If they are reviewing the appraisal for the refinance loan, then ask them when will you get the money? You can always take legal actions if you find the company is doing some kind of scam.

Posted on: 28th Nov, 2007 09:11 pm
4 months ago I bought a home and have now started renovating the property. A part of the renovation costs include cash obtained from the personal line of credit and my credit cards. But as soon as I started withdrawing my credit card money, my score dropped from 750 to 600. I didn't understand what's going on. I had initially thought of refinance and then I would have consolidated all the loans after I had done with construction. But now that my credit score is down, I'm afraid I won't be able to get the best rate. how do I get out of this whole mess?
Posted on: 11th Dec, 2007 12:26 am
Hello Susan,

If your credit score has dropped down to 600 then there are every possibilities that you won't be able to get the best rate.

As your credit score is based on the information available in your credit report, it is lowered due to the increase of unsecured debts like cash obtained from credit cards. So, a lower credit score due to these debts will increase the risk to the lender.

It would have been better if you had taken out a construction loan for this purpose.

You should try to bring down the credit card balances in order to increase your score. You may try for a home equity line of credit or a loan from your 401K account and pay off the credit card debt.
Posted on: 11th Dec, 2007 03:45 am
Hi Garry,

Are you sure those were closing papers? Paperwork will be sent to you after you apply for the mortgage and then when everything is signed off on, then they draw the final paperwork and you will usually sign those papers with a title company that will handle the dispursement. Most every lender will review your income. credit and appraisal before drawing final paperwork so that's why I ask.

If you did sign final paperwork then the lender still has the right to not fund the loan if there is something they don't like but this is rare since they usually review everthing before drawing the final docs. Contact the title company that handled the closing and ask them if the lender has funded the loan. If they have, then you need to demand those funds from the title company immediately.

If you did not sign the final paperwork yet, then you are still waiting for final approval to be able to do so.
Posted on: 13th Jan, 2008 09:45 pm
Hi Susan,

Credit reporting agencies really hit your score for utilizing credit cards. They look at how much available credit you have and how much you owe. The more you owe in relation to your limits is what will bring down the score. So first off, try and pay down one credit card at a time to below 50% of the credit limit. Start with the credit card with the lowest balance and pay it down to this level, then move to the next one. After paying down even just a couple, your score should improve. Do not close credit lines since this will reduce the credit limits and therefore making it appear that you are more maxed out.

To get approved for the best rates out there, you do not need to have a perfect credit score if you have plenty of equity, and other assets to offset the lower credit score. However I would suggest paying down on a couple of credit cards first to help secure the best financing possible.
Posted on: 13th Jan, 2008 09:53 pm
my home was appraised at $328,000. mtg balance $143,770. I'm looking to borrow about $115,000. I refinanced in 06/03 with an interest rate of 5.825 fixed for 30 years. I plan on selling in about 5 - 6 years. My credit score is only about 600 (I think - could be slightly higher) What are my options?
Posted on: 24th Jan, 2008 04:40 am
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