Refinancing a Mortgage

Refinancing a Mortgage

Refinancing a mortgage includes paying off the existing mortgage and replacing it with a new loan. Sometimes, it is even possible to combine a first and second mortgage into a new loan. Many homeowners refinance to take advantage of market conditions or to change their loan type. Homeowner’s might refinance when interest rates are low and switch to a different type of mortgage, saving money and getting cash from equity in their home.

For homeowners who have great credit, refinancing can be a good way to transform an adjustable-rate mortgage into a fixed rate with better terms. On the downside, borrowers with bad credit and high debt may be risking too much by refinancing.

Refinancing a Mortgage

Reasons to Refinance a Mortgage

  • Change the Type of Mortgage. Another common reason homeowners refinance is to change from a fixed-rate mortgage to an adjustable-rate mortgage, and vice versa. This is usually done when the homeowner can no longer afford the mortgage. This includes getting out of an ARM, interest-only mortgage, or any other type of mortgage loan.
  • Lower Interest Rate. No matter how much equity there is in the home, one big advantage of refinancing is a lowered interest rate. This advantage is typically available for borrowers who have excellent credit scores and qualify for low rates. Getting a lower interest rate can drastically change the monthly mortgage payments, saving hundreds or even thousands of dollars.
  • Cash Out Refinance. Many homeowners choose to refinance by tapping into their home equity for a large purchase or to consolidate debt. Cash our refinancing programs usually come with slightly higher interest rates than regular financing due to the added risk taken by the lender. Not every homeowner will benefit from this type of refinance plan. Converting debt can give the borrower a lower interest rate, but they also run the risk of losing the home since it is collateral for the loan.
Reasons to Refinance a Mortgage

Prepayment Penalties and Closing Costs

Many mortgage agreements have a provision that allows the lender to charge the borrower if the existing mortgage is paid off with a home equity line of credit. It’s crucial to find out if such penalties exist to decide whether it will be worth it to refinance.

One of the biggest drawbacks when it comes to refinancing are prepayment penalties. The clause in the current mortgage stipulates that lenders can charge penalty fees if the mortgage is repaid before 2-5 years.

Refinancing is not without closing costs and refinancing a loan to a lower rate may not be the wisest decision after these costs are taken into account. Closing costs typically run around $4,000 for a $200,000 mortgage. Before refinancing, borrowers should know how many months it will take to recover all the closing costs.

Cash Our Refinance

Refinancing Options

If you owe more on your mortgage than what your home is worth, you will have very limited options for refinancing. Lenders usually ask that borrowers have 20% equity in their home to refinance. Despite this, there are other options available.

  • HAMP. This mortgage program is called the federal Home Affordable Modification Program (HAMP) which is for homeowners who have missed payments and are upside down on their home loans. HAMP does not refinance home loans, but instead changes the mortgage terms. Those who receive assistance from the HAMP program can have reduced mortgage payments for up to 60 months.
Problems With Refinancing Mortgage
  • HARP. If you are underwater on your mortgage and you qualify, you may be eligible to refinance your mortgage under the federal Home Affordable Refinance Program (HARP). Not all homeowners who are upside down on their mortgages qualify, as you cannot have any late payments on your credit history within 12 months of applying. Only mortgages owned by Fannie Mae or Freddie Mac qualify for the HARP program.
  • FHA Streamline Refinance. This option can be used by homeowners with existing FHA mortgages. FHA streamline refinance loans make it simple and fast for borrowers to refinance an FHA home loan since there is no appraisal required. There is also no need for the applicant to verify income, employment, or credit since it’s based on the homeowner’s existing mortgage.
FHA Streaming

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