Homeowners Can Refinance their Mortgage for several reasons:
To take advantage of lower interest rates and lower your monthly payment.
If interest rates have gone down since you got your original mortgage, you could save money over the life of your loan, while reducing your monthly mortgage payment.
To switch mortgage types.
You may want to switch from a variable to a fixed interest rate, or vice versa. If you have a balloon/reset mortgage, you must either pay the mortgage in full at the end of the 5- or 7- year term, contact your Service Provider (the organization to which you send your monthly mortgage payments) to start procedures to reset your mortgage to a fixed-rate of interest, or refinance with a new mortgage.
To shorten mortgage terms.
You may want to refinance to shorten the term of your loan. This would allow you to pay less interest over the life of the loan because the money is borrowed for a shorter period of time, and more quickly builds up equity in your home.
To get "cash out."
Some lenders will let you borrow more money than the balance of your original mortgage, based on the equity you have in your home. A portion of the money left after the original mortgage is paid off goes to you to use for things like paying for a child's education or home remodeling. However, remember that you'll have a new mortgage, at a higher amount, that will eventually need to be paid off.
Home Refinance Programs:
Fixed Rate Loans - Both interest rate and payment remain the same over the term of the loan. Loans can be amortized over the following terms: 10, 15, 20, 25, 30, and 40 years. The advantage of a fixed rate program is that it allows you to get a fixed rate, over a specified period, without being concerned about market fluctuations. This type of financing is recommended for borrowers who intend to stay in their house for a long period of time.
Adjustable Rate Mortgage (ARM) - Both interest rate and payment remain the same for a fixed time period, usually 1, 3, 5, 7, or 10 years. At the end of that period the rate can rise at fixed intervals. The amount the rate can rise, or margin, is predetermined (normally 1/2% to 2% per rise). The intervals are normally 1, 3, 6, or 12 months. Typically there is a cap on the margin, which determines the highest the rate could ever go. The advantage of an ARM is that it allows you to get a lower rate, for a known period of time, while you watch the market to see if and when fixed rates get better. Some feel that although they may have gotten a better rate with a balloon, an ARM will adjust at the end of the "fixed period", whereas a "Balloon" has to be refinanced or paid in full. ARMs are recommended for those borrowers who intend to stay in their house for a fixed period and have taken the time to factor in the margin, to determine that they would not be better off with a Fixed Balloon or even a Fixed Rate.
Buydown - Both rate and payment remain the same for a fixed period, at the end of which, the rate and payment increase. The rate and payment may increase once, twice, or even three times, depending on whether the Buydown is a 1/1, 2/1, or 3/1. The percentage of increase, as well as number of increases is predetermined. Once all of the increases have occurred the new rate and payment remain fixed for the term of the loan. Also, lenders will typically charge a fee to "buy the rate down" for the first 1, 2, or 3 years of the loan. The advantage to a Buydown is that it offers a lower rate and payment during the first few years of the loan. Buydowns are recommended for those borrowers who are having trouble qualifying for a Fixed Rate Loan or those who need a more affordable payment at present.
Home Refinance Loan Types:
Conforming - Conforming loans refer to loan amounts that conform to government service standards as determined by Fannie Mae & Freddie Mac (the original government agencies, set up to established help people finance new homes). Conforming loansamounts range form state to state.
Jumbo (Non-Conforming) - Jumbo loans refer to those loan amounts outside of the "conforming" range or, above conforming loans. (different from state to state.)
Government Loans - Government loans refer to those loans that are guaranteed by one of two federal agencies. The two types of government loans are: Federal Housing Administration (FHA) loans, and Veterans Administration (VA) loans. The advantage of financing using FHA loans are that they are easier to qualify for and allow a borrower to finance more of the loan amount than non-government loans. Whereas with a Conforming loan a borrower may only be able to finance 80% of the loan amount, a FHA loan allows a borrower to finance 97% of the loan amount. FHA loans are recommended for those borrowers who are first-time buyers, have little money to put down, have a short credit history, or are having trouble qualifying for a Conforming loan. The two main advantages of financing using VA loans are that the VA allows borrowers to finance 100% of the loan amount, and that, the VA only requires proof of veteran status to qualify for the loan. The only drawback to government loans is that mortgage insurance is required at all loan to values (LTV), unlike Conventional and Jumbo loans where payment of mortgage insurance is determined by the amount of equity a borrower has in his home.
Investment Properties (Non-Owner Occupied) - These types of homes are normally acquired specifically for investment purposes or are owned as a result of moving to a new house without selling or being able to sell the old house. Financing for investment properties can be achieved using any of the above described programs. Typically, the rates for financing on investment properties are higher than owner occupied homes and the LTV's allowed are lower, due to the fact that default rates tend to be higher on these types of loans.
Cash-Out Refinances - Occasionally, when refinancing a first trust, a borrower wants to "cash out" some of the equity that has been built into the loan. Under specific conditions, established by the lender, a borrower can actually receive a check for an amount of money that meets those conditions. Cashing-Out is not normally limited to any type of loan program, it can be done with most of the described programs.
Top 4 Reasons People Make Mistakes When Refinancing Their Home
1. Choosing a home loan lender for the wrong reason
People choose home loan lenders for all the wrong reasons. Getting a low rate is important, but it's not the only consideration. Lenders may offer the lowest rate but charge extra fees (loan fees, origination fees, copy fees) so that in the end you'll pay more for the refinanced home loan even though your rate may be lower. The only way to protect yourself is to wait for the Good-Faith Estimate (GFE) which should list all the closing costs. Compare the GFE's from a number of home loan lenders.
But comparing GFE's is not the only story when you want to refinance your home. If time is important, you want to choose a mortgage company that is capable of acting quickly. Ask each company to give you their average closing time for loans similar to yours.
2. Not getting everything in writing about refinancing your home loan.
Get everything in writing. No matter what the Loan Officer tells you, ask him to confirm it in writing. Don't believe someone when they tell you that your refinance rate is guaranteed. Get it in writing.
3. Not knowing the appraised value of your home.
Many people go ahead and try to refinance their home without knowing the true value. There are many places you can get an estimate of the true value of your home for purposes of refinancing. Many realtor sites have home value estimators on their site. For the price of listening to a mortgage company try to sell you a mortgage, you can get an approximate value for your home.
Check the recent sales in your neighborhood and try to find a comparable house in a comparable location. Or you can ask the appraiser to do a drive by and give you a verbal estimate of the value of your home. If it's in the right ballpark, you can order a thorough appraisal. Know the value of your home before you seek to refinance your home loan.
4. Not doing the math when refinancing your home loan.
Do the math. Refinancing your home has a cost. You need to see what the cost is, and then determine how long you are going to stay in your home. For example, if you are going to stay in your home for 5 more years, and the cost of refinancing your home is $5000, you need to save at least $1000 a year in order for the deal to make sense. If you only save $50 a month as a result of refinancing (that's $600 a year), you'll be loosing money.
Dreading@skylinefinancialcorp.com
Direct: (805) 794-4374
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