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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 Joseph LaNasa!

As you are planning for a cash out refinance, I don't think there is any need to go for a debt consolidation separately. A cash out refinance will help you to solve the issues that you may be facing. You can definitely get FHA refinance provided you meet the terms and conditions of the getting an FHA refinance loan.

To get a FHA cash out refinance loan:
  • You should not be delinquent under the terms and conditions of their current mortgage.

  • The property should be owned by you as your primary residence.

  • The loan amounts cannot exceed the maximum loan limits for the area.

  • The lender will check your credit and your credit should match the requirements of the lender.
You can try for refinancing at the same rate but as you are looking for a cash out refinance, there are chances that the interest rate and the payments may increase and it can be a bit higher than the usual refinance rates.

This community also has a number of lenders who can help you as well. You can seek a no-obligation free mortgage quote from them. This will help you to know about the rates that you may get. Thus, you will be able to compare the rates and choose the one which you can afford.

Thanks,

Jerry
Posted on: 25th Nov, 2008 02:06 am
I have tried to refinance but I am self employed. This makes it very difficult. There seem to be different rules. I have not missed a payment but live on the edge of possible miss. Who takes on these types of loans and could I get a good rate? My rate is now 6.75.
Posted on: 04th Dec, 2008 04:31 am
Hi aloneymous

As far as I know, it is not impossible to get refinancing but it is difficult to get. More documentation is required if you are self employed and seeking refinance. You can consult other lenders as well and check what they are saying. It is not mandatory to refinance the mortgage with the same lender.

This community also has a number of lenders. You can speak to them and seek a no-obligation free mortgage consultation from them. This will help you in comparing the market rates and you can select the one you can afford.

Thanks
Posted on: 05th Dec, 2008 01:58 am
I wish to refinance from a variable rate to a fixed rate. I also wish to shorten the term of the loan. I've been in my home with excellent credit for 16 years and often have doubled my payments to whittle down the principle. Unfortunately, the balance of my current loan is "too low" to refinance. Most companies will not even consider a refinance with me unless I borrow more. Why do I have to be further in debt to qualify for a refinance?
Posted on: 20th Dec, 2008 07:38 am
Hi Jane,

Lenders generally don't prefer to offer refinance for a loan which has too low balance. They generally prefer refinancing when the loan balance is higher. They do this because of their benefit. It is not that you have to further in debt in order to qualify for a refinance, but the lenders feel it is very time consuming for them to approve the loan and go through the closing for a very small amount of loan.

Thanks,

Jerry
Posted on: 22nd Dec, 2008 12:25 am
my home is paid for. . I'm paying a car note ,but i need funds to renovate my home,can i refinance car note and get extra moneys,I need about 10,000 dollars :cry:
Posted on: 26th Dec, 2008 03:27 pm
Hi Pauletten!

You have mentioned that you need funds to renovate your home. In that case, you can take a home improvement loan. As far as car note is concerned, you will be able to refinance it. But you will have to inform the lender that you will use the money for home improvements.

Thanks.
Posted on: 29th Dec, 2008 01:29 am
I'm a first time home owner. I've been in my house for a little over 3 months. My interest rate now is 6.75%. I've recentyl seen where rates are somewhere around 5.3-5.5. I have perfect credit with little to no other debt. Can someone give me a few options on refinancing? Am I able to now? My mortgage company has not returned any messages.. frankly, they have not been a bit of help since they got my money!! I feel lost and alone. Thank you for any help.
Posted on: 03rd Jan, 2009 12:37 pm
You may have to wait another three months because most banks will not allow you to refinance for six months. In addition, if you have good credit and you got a rate of 6.75% three months ago from your current lender, then I would suggest that you try a few other lenders as well. That rate seems a bit high three months ago.

Eric
"http://www.dreamhomefinancing.com"

[Link deactivated as per forum rules. Thanks.]
Posted on: 04th Jan, 2009 04:51 pm
i have a first mortage loan and a fixed home equity loan. can i refinance just the home equity loan? the first mortage already has a good rate.
Posted on: 05th Jan, 2009 10:31 am
Am I imagining it or do some of the fees associated with refinancing seem like a borderline scam? It seems like the borrower should have more control of this. I.e., why couldn't we compare rates from the various providers to get the best value instead of having the banking "professionals" co-opt this and just bundle thenm together as-is?

Also I wonder, do the fees change at all based on how long it's been since the last time that a mortgage was financed?

Thanks (and sorry to seem so negative, but even to do a re-fi, it seems like I engage this huge juggernaut, when the Title search, etc was all done just last spring)
Posted on: 05th Jan, 2009 04:25 pm
Hi,

To Tom H,

As far as I know, yes, you will be able to refinance the home equity loan. You do not need to refinance the first mortgage.

To anonymous guy,

You definitely have the option of comparing the mortgage rates before refinancing the property. I don't think the fees are based on the fact as to how long it's been since the last time that a mortgage was financed.

Thanks
Posted on: 05th Jan, 2009 11:47 pm
I live in 92882 zip. I owe $105,000 on my property. It is now worth approx $300,000. My current rate is 6.5. I'm looking for the best rate with the a low cost to me. Thank you "memster2you2@aol.com"

[Link deactivated as per forum rules. Thanks.]
Posted on: 06th Jan, 2009 02:16 pm
Hi Theresa

You can check out the option of refinancing with your current lender as well as other lenders. This will help you in knowing the rates and terms available in the market. I would suggest you to do some mortgage shopping before finalizing the deal with a lender. You can also speak to the lenders of this community and seek a no obligation free mortgage consultation from them. They will tell you what type of rates and terms you might get.

Thanks.
Posted on: 07th Jan, 2009 12:52 am
Has anyone heard of any lenders that offer a "one-time privilege rate adjustment", without closing costs, when refinancing a home loan, when the homeowner has just owned the home for a few (three) months?
I am trying to refinance without paying any closing costs. Do ALL refis require closing costs? Thanks.
Posted on: 14th Jan, 2009 06:09 pm
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