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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 Lizziebc,

Welcome to the forums.

The Heloc should be considered to be in the first position unless you subordinate it with respect to the replacement loan.

take care
Posted on: 22nd Aug, 2008 04:09 am
5 years ago, I bought some houses and condos, as I was working for a US company.
Since 3 years I have no US job, working in Europe and need to refinance my existing houses.
Bank knows that I gain enough money but need to see my US tax returns.
In USA I am writing tax returns only for the rental income what I have in USA and it is not great
Bank do not approve my refinancing (50% value of my primary house).
What can I do ?

thanks
Posted on: 14th Sep, 2008 07:49 am
I think you sell off the houses if you're not able to manage the loans or refinance them. An experienced realtor will be able to help you in this regard.
Posted on: 15th Sep, 2008 11:10 am
My wife and I are in an extremely bad financial situation. We are a month behind on our mortgage, along with a few other bills we filed chapter 7 last year in october. We fell behind in june and havent been able to catch up. We make enough money monthly to pay all of our bills on time if we stick to a budget. the problem is we cant stay on the budget when we are trying to catch up. I was wondering if you know how possible it would be for us to refinance and get cash back. the value of our home is definatly worth more than whats left on the mortgage
Posted on: 15th Sep, 2008 06:53 pm
It doesn't seem realistic to go for a refinance since most lenders require at least 2 years out of bankruptcy. Your best solution is to contact your current lender and ask for a loan modification or payment plan. Most lenders are bending over backwards to work something out with you since they don't want to have to take the house back. I'm sure they will come back with something that will work for you to get back on track.
Posted on: 17th Sep, 2008 12:01 am
My wife and I bought our house back in 2005 and in 2007, I lost my job and couldn't land one. We couldn't afford the payment any longer. The value of the house dropped almost 50%. Is there anyway way to lower our mtg payment? We very much love to keep the house as we have invested so much in it. If we refinance it under the current value, what will happen to the difference of the original loan?

Thanks,
Roland
p.s. I wish I had a piece of that bailout money.
Posted on: 11th Oct, 2008 01:15 pm
Hi Roland!

It is the discretion of the lender whether he will lower the mortgage payments or not. As you do not wish to sell the property, you can easily go for a loan modification offered by the lender. You can speak to your lender regarding that.

Thanks,

Jerry
Posted on: 13th Oct, 2008 04:24 am
Thanks for the info, Jerry.

We are not behind in our mtg payment as of now but it won't be long before it happens. It's just my wife working. Do you think the lender will entertain our plea for loan mod? We really value our creditworthyness and trying to avoid late payments before working on any options.

Thanks again for any help.
Roland
Posted on: 13th Oct, 2008 03:09 pm
Hi Roland!

If you have genuine reasons then the lender will definitely agree to go for a loan modification with you. You can speak to the lender about the options he can offer you.

Thanks.
Posted on: 15th Oct, 2008 03:55 am
What is QROPS ? I want to know more about it's benefits and whole process of a personal pension scheme. Please help me.

Thanks
Posted on: 31st Oct, 2008 02:58 am
Hi QROPS,

QROPS stands for Qualifying Recognized Overseas Pensions Scheme. It is a specific pension which is available to expatriates and anyone contemplating living or retiring abroad. If you are a US citizen or a US resident, then the QROPS benefit will be mostly unavailable to you, but citizens of other nations can apply.

For British applicants, it is a scheme set up outside the UK but is regulated in the country in which it is established. This must also be recognized for tax purposes in the country in which it is established. Once the pension plan has been transferred into QROPS and you are a non-resident for at least 5 years, then your QROPS provider has no obligation to report any action to the UK tax authorities. If the QROPS provider is situated in a country where payments in such schemes are paid tax free – then you can enjoy the pension related income without the deduction of tax.

Thanks.
Posted on: 05th Nov, 2008 02:00 am
in order to take advantage of my husband's 100% veteran disability property tax break, i.e., we do not have to pay property tax since he is at 100% permanent and total however his name must be on the deed/title. i purchased my house 17 years ago, we only married 7 years ago. 2 yrs ago we did a srr and he signed papers with the mortgage company, however i was told a quit claim deed would be sufficient to add him so we can file for the property tax break. does anyone know if this is the case. i would think so, but just want to make sure.
Posted on: 17th Nov, 2008 12:33 pm
In order to take advantage of my husband's 100% Veteran Disability property tax break, i.e., we do not have to pay property tax since he is at 100% permanent and total however his name must be on the deed/title. I purchased my house 17 years ago, we only married 7 years ago. 2 yrs ago we did a SRR and he signed papers with the mortgage company, however I was told a Quit Claim Deed would be sufficient to add him so we can file for the property tax break. Does anyone know if this is the case. I would think so, but just want to make sure.
Posted on: 17th Nov, 2008 12:33 pm
Hi smcgovern!

I think your lender is correct in saying that you should use a quitclaim deed to add your husband to the property. You can get quitclaim deed forms online but you can also take the help of an attorney to draft one. To know more about quitclaim deed, check out the link:
http://www.mortgagefit.com/quitclaim-deed.html

Thanks
Posted on: 18th Nov, 2008 02:36 am
I am 52 and know that I will never pay off a 30 yr loan and do not have the optimism to think that I will live past 70. Anyway, I need about $30,000.00 cash out to pay off high interest debt. This inturn will not give me 20% equity anymore. I need debt consolidation; FHA Refinance? I will put a lot of money out(closing, FHA premiums, etc.) but will save money over the next 10 or 15 years. However, I will be paying a higher monthly house note for 30 years. I will be more open toward the rest of my 50's and early 60's BUT will continue this higher note unitl my death. I am worried that my wife will not be able to pay this house note if I die. I do not or Cannot get enough insurance to cover the monthly mortage?? Do I refiance at the same rate(I have 6.00% now) and cash out the money and pay all of the closing fees and 1 point to the lender(permanant mortage insurance also) I will be saving about 600.00 per month initially BUT will pay this higher house note(by refinancing at 6.00%) for the rest of my life. You must know that I do not feel as if I am going to live to 82 NOR do I care. My retirement from the government in a year or two will be about $5,000.00 a month clear and my house note will be about $1500.oo per month with everything included in it.???????

oi
Posted on: 24th Nov, 2008 09:13 am
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