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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 del,

Welcome to the forum.

The very first that you should do is to get your credit report from one of the bureaus or check for it online at . I am saying because you are not fully aware of your score value.

If you are thinking of a refinance, I don't see any problems in it because you have last refinanced in 2006 march and 1 year is alerady over. Most lenders require a seasoning or loan payment of 12 months for anyone to refinance again. Since you alerady fulfil this criteria, therefore you can start off talking to lenders about their offers.

Hope this helps...

God bless you.

Posted on: 25th Jan, 2008 02:36 am
Hi Del,

The more you borrow against the home, the higher the rate will be. If you need to borrow the full amount to pay off your ex according to the divorce decree than that's what you will have to do.

I can tell you that the rate will most likely be a little higher than what you are paying right now. With a score of 600 it is hard to say if you will be in the mid 6's which is possible or higher. The reason is that several other factors will be taken into consideration to determine the best rate available for you such as: Assets that include checking/savings, stocks, 401K, along with your actual credit history (ie: late payments, prior bankruptcy, etc). I would work with a good mortgage broker that has access to many lenders and has the expertise to get you the best mortgage terms.
Posted on: 26th Jan, 2008 11:06 pm
I have tons of cc debts and 3 mortgages on my home. Two of them are at 10% and 7.45% . My credit is worse as I have had missed payments default debts and judgments as well. my job is a good one and I'm lucky that it is. I have somehow avoided garnishments by arranging for payment plans. But what are my chance of a refinance as it's getting tougher going with 3 mortgages? Or should I file bankruptcy?
Posted on: 09th Feb, 2008 05:04 am
hi dominique,

welcome to the forum.

how long have you taken those mortgages? if these are more than 12 months, you can refinance. the rates are low now. so you can consider it.

regarding filing bankruptcy, you will have to qualify for it and it will have a huge negative effect on your credit. so i think bk should be your last option to choose.

best of luck,
Posted on: 09th Feb, 2008 02:39 pm
i have a first and second mortgage, 50 days late on first loan and 110 days late on the second. i am trying to refinance now. i am right now on a forbearance agreement with the first lender but i cannot afford the payments. it is twice my actually payment and hurting me a lot. what should i do? refinance both or any credit is the worse
Posted on: 19th Feb, 2008 04:29 am
Hi Lori,

How much do you owe on the first and second mortgage? Also, what is your home worth? These two factors will help me narrow down your options.
Posted on: 20th Feb, 2008 09:09 pm
Hi Lori,

Welcome to the forum.

You need to answer first the questions posted be Lisa so that we can give you an answer.

As you are already "on a forbearance agreement with the first lender ' and you have said "my credit is the worse" so do you really want to refinance the mortgage or can you really afford the house any longer? Think about that. As your credit is not the bests, you will not be approved for the bests of rates and terms.

Best of luck,
Posted on: 21st Feb, 2008 12:59 pm
I am refinancing my mortgage so that I can renovate my home. But I don't have enough equity to cash out as much as is needed for the repairs. So I was just thinking of taking out a loan from 401k. should I refinance after taking out 401k loan or simultaneously? I have good income and understand that there are risks associated with borrowing from 401k. I would borrow maximum $25000. pls advise
Posted on: 02nd Apr, 2008 11:16 pm
Hi Jess,

Welcome to the forum.

If you can take out a loan of 401k, then it is all right. In that case you need not to refinance. You can refinance if you have just take the loan within 2 to 4 years and also you are getting a better rates and terms.

So how long have you taken the loan? How much equity do you have?

Best of luck,
Posted on: 03rd Apr, 2008 01:45 am
jess, the biggest risk you run in borrowing from a 401(K) is that doing so is a little too easy for some. in other words, once you've borrowed, you might be tempted to go back to the well again.

as long as you repay that loan in short order, your risk will be negated. i think your plan makes sense, frankly.
Posted on: 16th Apr, 2008 07:56 am
My wife and I will be signing on the divorce papers. We don't have children but there's a house we own together and I have agreed to let her keep it.she has been staying there ever since we separated in sept 2006. the divorce papers state she should be able to refinance by the end of august, that too in her name only. But she is unable to refinance due to bad credit. if she is not able to do so, what will happen to me? Say if the house goes into foreclosure, will it be reported by the CRA for 7 years or will the court automatically free me from the responsibility of paying off the loan in case she doesn't get a loan? I'm getting mixed views from my lawyer and the mortgage company? So any help will be highly appreciated.
Posted on: 08th May, 2008 04:43 am
welcome dave.

if your wife cannot refinance on her name and defaults then it may also affects your credit. why doesn't your wife request the lender for navation? if you, your wife and the lender agree then the mortgage can be transferred to your wife's name through novation.

let me know if you have any further questions.
Posted on: 08th May, 2008 05:38 am
Is there a place in Texas that would help me refi my loan so that I wont go into foreclosure or start being late with the payments? I am not late at all but the payments are high because I got the house from an investor and I am at 10.5% and my credit is in the 570's. This is my first home and I dont want to lose it. Help me help myself. Thanks
Posted on: 03rd Jul, 2008 01:15 pm
Hi rjones.

Welcome to the forum.

The interest rate is really very high but you credit score is not too good. And you have also made late payments recently. So you will not qualify for FHA loans. And because of the credit crunch the lending criteria got tightened.

But anyhow you should shop for the lenders to see where you can get approved for mortgage or not. You can even go for No-obligation free consultation with the community professionals to know whether you can refinance the mortgage or not.

Hope this helps. Feel free to ask if you have further questions.

Best of luck,
Posted on: 04th Jul, 2008 04:50 am
We had a first and currently have a HELOC. We had our family trust payoff our first mortgage then right after we had the trust take out a mortgage on our property to cover the payoff. Does that now mean the HELOC moves into first postion and the replacement mortgage is now in 2nd position?
Posted on: 20th Aug, 2008 09:53 pm
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