Mortgage Refinancing Explained

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Mortgage Refinancing: FHA, VA, Conventional, And More, With Cash-Out Options

mortgage refinancingFor most borrowers, there are almost as many mortgage refinance options out there as there are mortgages.

Mortgage interest rates are still sitting at an exceptionally low level, so if you're considering refinancing your home, there's no time like the present.

The place to start your refinancing journey is by speaking to a lender or two. If better interest rates are available to you, it's time to consider your different refinance loan options.

All you need to do is pick out the refinancing option that best suits your needs -- which is easier said than done! We've taken a close look at three common refinancing options to help you see their benefits and limitations.

When it's time to refinance your mortgage, picking the best program depends on a lot of different factors. These are top-priority items influencing your decision: What type of mortgage you currently have, how much equity you have in your home, and your financial goals.

Most borrowers' needs are best served by one of these refinancing options:

* Conventional Refinance: This allows you to cancel your mortgage insurance, take cash out, get a lower interest rate, or a shorter loan term.

* FHA Streamline Refinance: This is a good way to refinance an FHA loan quickly.

* VA Streamline Refinance: This is a good way to refinance a VA loan, reducing your interest rate or mortgage term.

Refinancing wisely has a lot of different benefits to offer. You might reduce your monthly payments and your overall interest rate, but you could also cancel your mortgage insurance, avoid closing costs, or take cash out at closing.

Conventional Refinance

* Best Suited To: Borrowers with strong credit who are seeking a lower interest rate.

Fannie Mae and Freddie Mac, the government agencies responsible for stabilizing the US housing market, stand behind conventional refinance loans. Refinancers are responsible for meeting the agencies' guidelines. Conventional refinancing is ideal for borrowers with good credit and significant equity built up in their homes. When you opt for a conventional refinancing loan and you have more than 20 percent equity, you can cancel your mortgage insurance.

A conventional loan is always an option for refinancing, no matter what sort of mortgage you start with.

The ability to cancel your mortgage insurance makes a conventional loan particularly attractive if you currently have an FHA mortgage with mortgage insurance premium (MIP). Current FHA rules do not give you any way to avoid MIP if you refinance with an FHA loan. If you qualify for a conventional loan (and you've built up at least 20 percent equity in your home), though, you can say goodbye to your insurance payments.

Conventional loans offer additional flexibility when it comes to mortgage insurance requirements. Lenders are obliged to drop private mortgage insurance (PMI) once your loan-to-value ratio reaches 78 percent.

Conventional refinances can be split into two broad categories: The rate-and-term refinance and the cash-out refinance. If you opt for a rate-and-term refinance, your loan balance typically remains close to what it was in your previous loan. Your new one allows you to change the interest rate or term of the loan. Starting, for instance, from a 30-year fixed-rate mortgage at 4.875 percent, you might elect to drop the interest rate down to 4.0 percent. Alternately, if you're interested in paying off the loan faster, you could change the term from 30 to 15 years.

In a cash-out refinance, you exchange your existing mortgage for one with a higher balance. The difference between the old balance and the new one comes to you as cash. Note that you do have to pay closing costs out of the money you receive.

A cash-out refinance typically obliges you to pay a higher interest rate. Your lender will also limit the total amount available to you based on how much equity you've built up in your home.

See below for further details on cash-out refinancing.

FHA Refinance

* Best Suited To: Borrowers with an FHA home loan who are currently holding less than 20 percent of their homes' equity.

Any mortgage backed by the Federal Housing Administration (typically referred to as an FHA loan) can be refinanced into a new FHA loan. The primary advantage of refinancing this way is that you get access to the FHA streamline refinance program. In the streamline program, many of the documentation requirements normally imposed on refinancing are waived.

Some of the key requirements that are removed in the FHA streamline program include the need to verify your income, check your credit score, or appraise your home.

The big caveat with FHA refinancing is that you cannot escape from mortgage insurance. If you want to reduce or eliminate your MIP, you should consider refinancing out of your FHA loan into a conventional loan. If you've accumulated enough equity, you may not have to pay any mortgage insurance at all on your new loan.

Refinancing through the FHA streamline program is an effective option if you're looking for an easy, no-hassle way to bring down the interest rate on your existing FHA loan

VA Refinance

* Best Suited To: Active-duty military personnel or qualified veterans who already have a VA mortgage.

If you are serving in the military or have in the past, one of your most attractive refinancing options is a Department of Veteran's Affairs VA home loan. A VA mortgage refinance allows you to lower your interest rate or arrange to receive cash at closing.

VA loans offer truly impressive benefits to qualifying borrowers. Qualification guidelines are extremely generous and interest rates are low. VA-backed loans do not require mortgage insurance, and you don't have to meet a minimum credit score.

Further benefits include the ability to add your mortgage's closing costs into your principal balance. Documentation requirements are minimal; the VA doesn't require home appraisals, for example. And the funding fee for a VA loan is only 0.50 percent of the total loan.

As noted above, you can arrange a cash-out refinance through the VA. You are allowed to borrow up to 100 percent of the value of your home in this manner. VA loans are unique in this respect; no other mortgage allows you to take the full value of your home in cash-out.

Be aware that funding fees are higher on a cash-out VA refinance. The fee is set at 2.3 percent for your first cash-out refinance, rising to 3.6 percent if you repeat the process.

Fannie Mae High-LTV Loans

* Best Suited To: Borrowers whose current mortgage has a high interest rate and a loan-to-value ratio of at least 97 percent.

If you haven't yet built up enough equity to qualify for standard refinancing options, you may still be able to get a lower interest rate thanks to Fannie Mae's high-LTV loans.

While nationwide trends in home values are on the rise, this increase is unevenly distributed. In many areas, home values are stagnant or even falling. Some homeowners are stranded with a mortgage that exceeds the current value of their home, invalidating them for most refinancing options. This is the problem Fannie Mae's high-LTV program is designed to solve.

With a high-LTV loan, you can refinance your mortgage to bring your interest rate and/or your monthly payments down.

As long as your existing mortgage is on a fixed rate, you can take a high-LTV loan no matter how high your LTV ratio is. If your current mortgage is adjustable rate, though, your LTV cannot be more than 105 percent.

Whether your mortgage is fixed-rate or adjustable-rate, your LTV must be at least 97.1 percent to qualify for the Fannie Mae program. If your LTV is below that threshold, seek out private lenders offering their own high-LTV programs with competitive rates.

Cash-Out Refinancing

* Best Suited To: Homeowners with high equity levels and strong credit who are looking for a low-interest loan.

cash-out refinancingEquity is an easy-to-understand concept. It's the difference between your outstanding mortgage debt and the value of your home. Equity can be converted into cash by refinancing into a mortgage with a higher balance. You do this by moving to a loan that is worth more than your home, with the difference coming to you as a cash loan pegged to the same interest rate as your new mortgage.

A range of different organizations, including Fannie Mae, Freddie Mac, the VA, USDA, and FHA, all offer cash-out refinance options. By choosing the right options, you can refinance and come away with enough cash to make major home improvements, make long or short-term investments, or put a down payment on another piece of property.

A cash-out refinance cannot restrict your use of the money you receive in any way; you can do whatever you want with it. As a tradeoff, though, you have to go through a complete loan application process. Streamline programs are not compatible with cash-out refinancing.

In a cash-out refinance, the total amount of money available to you is typically dictated by your LTV. A given program might restrict your LTV to 85 percent, for instance. If you are at 75 percent LTV under your current mortgage, you can extract the 10 percent difference in your refinance. The remaining equity (15 percent in this case) is called an "equity cushion." Contemporary low interest rates make it not just possible but likely to reduce your interest rate and also come away from the closing table with cash if you opt for a cash-out refinance.

If you purchased your home or refinanced your mortgage within the last six months, you are most likely ineligible for another refinance.

Refinancing Without An Appraisal

We've already discussed some programs that allow you to refinance your mortgage without submitting to a new appraisal. The FHA and VA streamline programs both offer this. Fannie Mae and Freddie Mac are taking cues from those other government bodies and loosening up their appraisal requirements.

An increasing number of lenders will simply estimate your home's current value using automated valuation. This is faster and cheaper than appraising your home.

You may also get an appraisal waiver from Fannie Mae or Freddie Mac when you refinance. There is no hard and fast way to ensure you get a waiver, but as a general rule of thumb, waivers are more likely when you are merely lowering your interest rate and not trying to take cash out.

Refinancing Without Closing Costs

Many lenders are trying to entice borrowers into refinancing by eliminating closing costs. With traditional mortgages and refinances, the borrower is expected to pay for expenses like credit reports, title insurance, application fees, and more. Closing costs typically end up being two to five percent of your loan principal, depending on the details of your situation. That can be a significant amount of money to save if your lender offers to pay for closing costs!

Lenders generally expect to bump your interest rate up slightly in exchange for fully or partially paying your closing costs. Many lenders split the difference -- and keep your rate lower -- by waiving their own fees but leaving you responsible for third-party fees like title insurance.

A no closing cost mortgage is worth investigating if you are short of ready funds but still want to refinance to gain a lower interest rate.we-buy-houses

Picking The Best Refinance Option

The most effective refinance loan for you will ultimately depend on your general financial goals and what you're hoping to accomplish with your mortgage. If your mortgage is already government-backed and you simply want to reduce your interest rate, the streamline options are likely to be the most attractive to you.

If the idea of getting some cash along with an interest rate reduction appeals to you, start by checking how much equity you currently have. With your equity figure in hand, you'll be positioned to find lenders that offer the rates and LTVs you're looking for.

For more detailed information and help please visit who will be pleased to help and discuss your needs.



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