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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.
Can I refinance my VA loan and have it changed to an FHA loan?
Posted on: 23rd May, 2011 02:55 am
Hi gregory,

You can refinance your VA loan and change it to a FHA loan. In order to do so, you should have equity in your property. Apart from that, you should have a good credit score and income as well.

Posted on: 23rd May, 2011 10:42 pm
Getting a refinance can be an exciting time, especially if you meet the requirements. However, not everyone will qualify for a refinance for many reasons. I mortgage loan modification can work out to be just as good or better than a refinance. Remember, there are not fees for a government mortgage loan modification. I blog about it a great deal at: mortgage crisis tips dot com . Do you think a you would do better with a modification or a refinance
Posted on: 16th Jun, 2011 05:42 pm
Posted on: 18th Jun, 2011 01:46 pm
Posted on: 19th Jun, 2011 10:27 pm
I have 2 years left on my mortgage @ 4.62% and a balance of $27K and an interest only equity loan of $75K. Does it make sense for me to refinance to combine the two and get down to one payment?
Posted on: 22nd Jun, 2011 03:51 pm
Welcome b.omalley,

As you've just 2 years left in order to pay off the mortgage in full, it won't be a good option to refinance the mortgage now. While you refinance, you will be liable for paying the closing costs which you won't be able to offset within 2 years. Moreover, your loan term will also get increased.
Posted on: 22nd Jun, 2011 11:19 pm
Is it better to make extra payments on my 4.75% loan or refinance at 4%? we are 3 years into a 20 year mortgage and owe 239,000 and were thinking of refinancing a 15 year mortgage instead, but can we accomplish the same thing by making extra payments on our current loan?
Posted on: 23rd Jun, 2011 04:05 am
Hi ama,

You should refinance the mortgage only if you're planning to stay in the property for a longer period of time. Also, it will be a good option to refinance if you're getting an interest rate which is lower by 2% from your existing rate.

Posted on: 27th Jun, 2011 11:31 pm
I have a lien on my home from a previous home equity loan from over 9 years ago. I filed bankruptcy in 2003 and I thought that this was part of my payment agreement. I never heard from this finance company again. Now that it has been discharged 2 years, I decided to refinance because I am at a 10.75% interest rate. A prominent loan company approved me at a 4.50% FHA, I did $6000.00 worth of repair to the home to pass the appraisal. It was a refinance and consolidation with some cash out to help me cover the cost of the repairs. All set and signed, the underwriter found a lien against my property from this old finance company that I thought I had paid off through my bankruptcy. They told me to call them and check that sometimes they just don't remove them. I had in the meantime checked my bankruptcy paperwork and indeed I had made payments to them, but just what was in arrears. I did owe this money. I called the finance company back and got a 50% settlement amount and my new loan officer said they could finance it and pay it off with the new loan. The cash out would be less but I would be saving in the interest rate. Still all good until a few days later when he called me to tell me they would now not do the loan, the underwriter considered the lien delinquent. Keep in mind my loan officer had originally told me that my credit was good enough and that this debt was marked closed and paid on my report. Is there any way to have this refinance done with this lien factored in. I spent 6grand on repairs, If I had known that the lien existed I would have paid it off first, now I'm stuck.
Posted on: 29th Jun, 2011 03:43 pm
Hi jwarner,

I can understand how difficult things have been for you. I will suggest you to contact other lenders and check out if they can refinance the mortgage for you. This community, too, has a large number of lenders. You can seek a no obligation free mortgage quote from them and check out whether or not you can qualify for a loan.


Posted on: 30th Jun, 2011 02:07 am
we've just modified our first mortgage. ocwen, which owns our second mortgage says we can't modify the second mortgage. do we have any options? thanks.
Posted on: 26th Jul, 2011 03:12 pm
Welcome aem,

There is no reason why the second mortgage lender cannot modify your loan. Nevertheless, as you're facing financial hardship in paying off the loan. I will suggest you to contact the lender and request them to give you an affordable repayment plan to pay off the loan.
Posted on: 26th Jul, 2011 11:04 pm
First mortgage: 97000.w/ 27yrs left on a 30 year 5.25 rate.
Home equity loan: 36000. w/7yrs left on a 10yr 4.5 rate.
Credit card debt: 25000. w/no end in sight.
Should I combine all into a 20yr 4.0 rate fixed loan w/ 2100. closing cost. We don't plan on moving in the next 5-7yrs. Please advice.
Posted on: 16th Aug, 2011 01:41 pm
Welcome Freddy,

You can refinance both the loans into one so that you will be liable for paying off only one monthly payment toward the mortgage. As far as the credit card debt is concerned, you will have to pay it separately as you cannot merge an unsecured debt with a secured one. Also, you should check out what type of closing cost you're being charged.
Posted on: 16th Aug, 2011 09:16 pm
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