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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.
My parents are in the process of refinancing and they alreadyto have lower monthly pmts. However, their tax adviser is suggesting that if they dont report more income they can fail to prove that they can manage to make their monthly payments.

But isn't one of the reasons to be able to have lower monthly payment being that they can't afford to make their current monthly payment?

What is the advantage to report more income when trying to lower their current monthly payments?
Posted on: 31st Jan, 2011 01:38 pm
I'm pretty confused about your post. You mentioned that your parents are already "approved" - why the quotation marks? Was the approval done by a chimp or a real human being? Did they approve themselves? Approval ought never to be contained in quotation marks - it either is, or isn't.

Why would their tax advisor get into the mix? Of course, they might have asked for that advice...I understand that's possible. But if they've spoken to a lender and received favorable responses, then what the advisor has to say might not be at all relevant to the transaction they're undertaking.

The advantage of reporting more income is that one is more certain to be approved when income is higher. But if they are already "approved" then all they need to do is remove those quotes and close the new loan.
Posted on: 01st Feb, 2011 08:20 am
Can I refinance with a mortgage company that surrendered their loan license in 2009?
Posted on: 04th Feb, 2011 10:18 am
Our current balance owed on our mortgage is $23,000. Is it possible to refinance our current home and take cash out to buy another home for cash? Our plan would be to rent our current home to our son and family.
Posted on: 05th Feb, 2011 09:47 am
TM, if that broker that surrendered the lending license two years ago is still trying to do business, then you'll apparently be able to use him/her; but of course, that would make the transaction illegal, as one must be licensed in order to do a mortgage. Why in the world would you want to try to go back to someone who's not even licensed to do the mortgage? That would also mean the broker is not cognizant of recent regulatory and secondary market changes.
Posted on: 08th Feb, 2011 11:19 am
Tommi, there'd be no reason why you couldn't apply for a cash out loan that would allow you to purchase a new property. What you need to keep in mind, however, is that lenders will want to be certain that the property you're refinancing is intended for your primary residence and will remain that way.

Can you say you're purchasing a second home? Yes, you can.
Can you say that when you're not actually purchasing a second home, but a new primary? Yes, you still can, but it won't be proper; and if you get found out, you'll be penalized.
Posted on: 08th Feb, 2011 11:22 am
i bought a condo almost 2 years ago for 94000 at 5.5% rate. fha loan. is it worth refinancing for a 4.5% rate? im new at this stuff.. just kinda went for it. im not worried about making my payments... but just wondering if its worth doing so in the long run.
Posted on: 09th Feb, 2011 10:36 pm
if property value goes down will that affect my mortgage payment. Should it go down to
Posted on: 10th Feb, 2011 04:14 am
I have 4 years left on my conventional mortgage. i also have a home equity line of credit. i want to convert the home equity to a 15 year fixed and keep
paying the conventional loan. am i able to do this
Posted on: 10th Feb, 2011 07:58 pm
Hi!

Welcome to forums!

To jake,

If you're planning to stay in the property for a long period of time, then you can refinance the mortgage loan. Staying for a long period of time will help you in offsetting the closing costs resulting from the mortgage refinance.

To Guest,

Your mortgage payments won't go down if your property value goes down. You will have to pay off the mortgage payments as per the agreed payment plan.

To Pattycakes,

If you have equity in your property, then you can contact the local lenders and apply for a 15 years fixed rate mortgage. If you meet the required criteria by the lender, you'll be able to get a loan.

Feel free to ask if you've further queries.

Sussane
Posted on: 10th Feb, 2011 10:53 pm
in response to jake and big cat and pattycakes:


jake - you'll want to calculate how long it will take you to compensate yourself for the closing costs associated with a refinance, based on your savings in the payment itself. for example, if you pay $3000 in closing costs and your payment is reduced by $100 per month, then you'll compensate yourself for those costs over the course of 30 months. that's not such a great deal - unless you plan to be in the home for a very long time. you generally want to be able to recoup the costs within a 2-year time period at worst.

big cat - i agree with sussane...your mortgage payment is based on what you borrowed, not the value of your home.

pattycakes - since you already have a conventional first mortgage, you'll not be able to duplicate that with a new 15-year loan. any new loan would still be a second mortgage, and rates will typically be a bit higher on those than with a first mortgage loan. shop around, by all means, but don't be surprised if you don't have as much success as you'd like to have.
Posted on: 11th Feb, 2011 11:01 am
02/11/2011-Chicago, Illinois

:?: Hello Jessica,

re:Refinance Mortgage

I Have:
*House Mortgage loan (Yr-2027) > $21,000 / $621/mo / R: 6.60%. Also,
**Line of Credit Home Equity Loan (Yr-2012> $32,000 / $160/mo R: 6.00%
I Pay a total of $300/Mo. Toward this loan ** L.O.C.H.E.L. Add this to the above amount of $621/Mo---> Tot. Monthly for * & ** Equal $921.

I need to do Refinance for * & ** total of $53,000/ 25 yr/ fixed rate / with $500-$525 / Monthly Payment.
I need to know the lowest I -Rate I can get, so I can save cash to pay other bills. I have a very good credit rating; prompt loan payment history (no late payment fees ever since 1993). Good assets and liquid assets are there, tax returns are available. Financial statement is available "upon request".
PS. ASAP
Regards,

Nick :?: :lol:
Posted on: 11th Feb, 2011 01:17 pm
Hi NED,

The rate of interest that you'll get will depend upon the market situation. If you have good credit scores and income, then you'll be able to qualify for lower rates and better terms and conditions. However, in order to get a refinance, you should have at least 20% equity in your property.

Thanks
Posted on: 11th Feb, 2011 10:49 pm
Nick, your "good credit" is going to have to be north of 740 in order for you to obtain the best rate these days. Even then, you'll pay a premium for cash-out, which you're doing because you have the home equity loan. Rates have gone up in the very recent past, so shopping today will be different than it was a week ago, and tomorrow may bring something altogether different as well.

You seem to be a good borrower, but having good credit isn't the same as great credit, though I'd have to consider that your good record since 1993 will contribute to an above-700 score. As long as your financials are in order (income), you ought to do well.
Posted on: 14th Feb, 2011 09:42 am
My 73 year-old aunt was approached by her bank with offer to refinance her home in Arizona and is asking be for advice. I'm suspicious because she is "upside down", owing more with home equity and first mortgage than the home is worth. She had refinanced to 6.75% six years ago and the bank is offering 5.75% for 30 years. Does the home equity loan become due in-full on refinance? What is the bank's angle? The officer says "She qualifies for a HARP refinance which is part of a government program that enables the bank to refinance our customers that do not have the standard 20% equity typically required. We would subordinate her current home equity line of credit behind the new first mortgage." Appreciate any help you can provide.
Posted on: 15th Feb, 2011 07:20 pm
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