REFINANCE » Refinance Your Mortgage

If you’re a homeowner then you are probably aware that you can use your home as collateral to get additional loans. Many homeowners take out home equity loans or home equity lines of credit in order to get more cash. Senior citizens can also use the so-called reverse mortgages. Another option is cash out refinancing.

Cash out refinancing allows a home owner to tap into the equity that they have built up in their home. With cash out refinancing, you can basically add on to your mortgage loan. It differs from a home equity loan in that it is not, like a home equity loan, a second or separate mortgage. Cash out refinancing means you take your existing mortgage loan and replace it with a larger mortgage loan. If the market conditions are right, refinancing may also improve your interest rate.

If your financial situation changes and you need to get some mortgage payment relief, or if market interest rates fall, you may find benefit in refinancing your mortgage loan. The good news is that you have multiple mortgage refinance loan options available to you.

The first choice is whether to go with a fixed-rate loan or an adjustable rate mortgage (ARM), and for what duration. A fixed-rate loan is very safe, since you know exactly how much you’ll be paying for the life of the mortgage (well, you might end up paying less if you are lucky; since when rates go down, nobody can stop you from refinancing again at better rates!). With ARM, the future is less predictable. Typically, ARM loans have a few years of a fixed rate, and then they revert to a variable rate. The variable rate will change with the market conditions. In the worst case, you may end up paying very high interest rates (for example, if serious inflation hits several years down the road).

With Interest Rates Falling, Should you Stay in an Adjustable Rate Mortgage or Refinance?

Once you’ve gone through the hassles and complications of buying a home you probably want to be done with everything as soon as possible. However, the details of home ownership aren’t set in stone – for example, you may have just finished signing all the paperwork for your mortgage loan, but that doesn’t mean you can’t refinance in order to take advantage of even better rates. A refinance can often save you a few thousand dollars a year! If you’re in an ARM (Adjustable Rate Mortgage) then you may want to think about refinancing, seeing as interest rates are falling.

Adjustable rate mortgages are probably the most common mortgage sold today. One reason they’re so popular is because you (the borrower) can refinance an ARM mortgage whenever you want. (Bear in mind that some states will only allow you to refinance your mortgage one time per year, so make sure you’re aware of the mortgage refinancing laws specific to your state). Now could be the right time to refinance, because interest rates are falling, and you could find yourself with a better mortgage deal.

If refinancing your home is high on your list of priorities because you’re in danger of foreclosure due to an underwater mortgage, you’re not alone. However, there may be some ways to avoid losing your property. So let’s look at what it really means to be “underwater” and what options you may have for keep your home.

Do I Really Have an Underwater Mortgage?

The U.S. Department of Treasury  announced the Making Home Affordable Plan,  as part of President Barack Obama’s continuing endeavor to resurrect the U.S. economy. Companies are also helping to restructure mortgages to aid the faltering housing market and in reaction to growing unemployment. The  plan is designed to aide 7-9 million homeowners in keeping their homes, and to stop the destructive tide of foreclosures. There are two separate programs, The Home Affordable Refinance and The Home Affordable Modification – both have been created to help different groups of homeowners.

The Home Affordable Refinance (expires June of 2010) helps:

Owning a home is a wonderful thing. It gives you a safe, comfortable shelter from the world outside and all its elements. It affords you and your family a place in which to thrive and to pursue different dreams. Home ownership is also a complicated and expensive affair, and in many ways, is constantly challenging you, the homeowner. No one can afford to rest on their laurels, least of all a homeowner. That’s because even though you may be settled into your home and job and the routine of family life, you still need to be on the lookout for opportunities that can really make a big impact in owning a home. One of these opportunities lies in finding or hearing about a home mortgage refinancing rate that could save you money. What’s more, you can refinance more than once. 

Refinancing Your Mortgage

If you are a veteran who qualified for a VA home loan when you first purchased your house, you may be able to get special rates and terms that are not available to civilians when you want to refinance your home. Special programs, such as the Interest Rate Reduction Loan (IRRL), or VA Streamline Refinance, allow eligible veterans to obtain the lowest fixed interest rates available, with little or no cost out of pocket.

This program for American veterans is considered one of the most attractive loan programs available for refinancing, for several reasons.

With an interest-only mortgage, you have a fixed period of time in which you have the option of paying just the interest on the loan every month. Or, you can pay the interest plus as much principal as you would like above the minimum payment. If you decide to make the interest-only payments, your monthly payment will be lower than it would otherwise be with a payment that included interest and principal. For this reason, interest-only loans may be an attractive option when you are looking to refinance your home.

However, it is important to keep in mind that eventually, your principal will become due and the loan payments will increase. Once your interest-only period ends, your monthly payments will reset to a more standard payment that includes interest and principal. The period of time a loan is interest-only varies, but some available terms are 3, 5, 7 or 10 years. The loan itself can be either a fixed rate or adjustable rate mortgage with a term of 30 years. Interest-only is an option on a loan that affects a certain period of repayment obligations. It does not affect the interest rate, or whether that rate is adjustable or fixed.

One way a homeowner can access the equity in their home is by taking out a cash-out refinance loan against the property. In this type of loan, the homeowner takes out a new mortgage against their house, replacing the old mortgage, for an amount greater than the amount they currently owe on the house. The homeowner can finance up to the amount of equity they have in their home, and take the difference in liquid value, i.e., cash.

For example, let’s say you want to consolidate $25,000 in credit card debt, and install wood floors in your home, at a cost of $5000. If you owe $100,000 on your mortgage and your house has recently appraised at $200,000, you could refinance your mortgage for $130,000 at a lower interest rate, take the difference in cash, pay off those credit cards, and get your floors done. You now have a mortgage of $130,000, but your interest rate on that mortgage is probably lower than the interest rate was on your credit card debt. Plus, you have lowered your interest rate on the mortgage, and remodeled your home!

While mortgage interest rates have lowered significantly in the past few months, homeowners are cautioned toward refinancing without careful consideration. According to a recent survey conducted by Freddie Mac, rates on the 30-year loan fell to 4.96% in mid January – the lowest rate on record. So why should homeowners proceed with caution? Here are a few reasons:

• The conforming loan limit has dropped. Since last year, the conforming loan limit has declined to $625,000 from $729,750 in high-cost markets, which means those looking for loans above this limit will fall into the Jumbo loan category, even if their original financing was categorized as a conforming loan.
• Jumbo (non-conforming) mortgage rates aren’t lowering. Homeowners with jumbo mortgages are still seeing rates around 7% for 30-year fixed mortgages, so refinancing for them is not as appealing.
• No closing cost loans are higher. While mortgage rates are significantly lower than last year, interest rates for the no closing cost loan have gone up almost a point, which means if it is included in your mortgage, you won’t be saving as much as you’d hoped.
• Not everyone will qualify. Because defaults on subprime loans caused massive debt in the market, lending standards are now much stricter. As a result, about two-thirds of the population will not qualify for refinancing with lower interest rates. So if you have bad credit or an underwater mortgage, brace yourself for a declined application.