Refinancing consists of applying for a second loan with the purpose of paying off another loan that is secured against the same property. In the case that this original loan has an interest rate that is fixed but has declined significantly, then you want to be availed of the new loan at a much better interest rate. The traditional rule of thumb is that the interest rate that you acquire for your new mortgage should be at least two percentage points below your current mortgage. With the advent of no-cost refinancing and other low-cost programs it is a good idea to look into whether refinancing is an option for you.
Many homeowners have found that refinancing is a good way to catch up on the equity of the home for renovations or for cashflow purposes. Americans have traditionally gotten refinancing prior to putting their house for sale on the market. However, a trend that is gaining traction is the hiring of home stagers who can increase the resale value of the sale home. Stagers often suggest tricks and tips on making your house look as good as possible so that it sells at or above a price that reflects its true value. Simply allowing homebuyers to imagine themselves in the home performing certain functions is a great way to get the best value for your home.
The Option of Refinancing
Home refinancing is typically performed when you apply for a second loan to pay off the home mortgage on the first loan. It is very important to make sure that you know the amount saved in terms of interest balances throughout the refinancing period. There are many benefits to refinancing your home including access to increased cashflow, and a smaller monthly mortgage payment. For most people, owning a house is one of the biggest assets that you will be involved with. Likewise, mortgage payments are usually the largest part of the monthly budget and a reduction in this payment can lead to significant extra amounts of cash in your pocket. When you have refinanced your mortgage successfully you can take advantage of equity in your residence by using it to finance an investment property or simply to have more cashflow stability.
Lower Rates Leads to Lower Payments
Chances are that the financial market environment dictated the interest rates that you received when you purchased your first home. Certain factors such as your credit rating and down payment influenced this loan rate but the single most important variable was the rates in the industry. Interest rates continue to increase and decrease in cycles that are related to the global economy. The Federal Reserve is involved in the printing of money and the cutting of interest rates as determined by market stability and the value of global commodities such as oil and wheat. In any case, there are many factors which are out of your control when it comes to refinancing your home. That being said, it is important to take advantage of periods in the cycle that are advantageous to refinancing. By refinancing when mortgage rates are universally lower you can change out higher interest rates for lower ones which will lower monthly mortgage payments.
Length of Refinancing
It is best to use short mortgage loans when refinancing. Another one of the benefits that comes along with refinancing your mortgage loan is that it is possible to shorten the terms of your mortgage. For example, if you began with a 30 year fixed mortgage and have been earning equity on it for 10 years, you could now switch to a short-term that can save you thousands of dollars simply because of interest. If the rate at which you refinance is also lower than your previous loan, you can keep the same monthly payments while building up equity quicker because your money will be going towards the principal.
Fixed Rates Are Best
In the event that interest rates are lower than normal, adjustable-rate mortgages used to be great for everybody. Unfortunately, when the housing market crashed in 2007/2008, adjustable rate mortgages quickly lost their popularity and many homeowners vowed never to use them again. Going forward that seems to be good logic because the financial future looks less secure and if that is the case then fixed refinance rates are your best option. There will however always exist the possibility of adjustable rate mortgages being more beneficial than fixed ones, but the peace of mind that you can receive from a fixed rate may be worth more at the end of the day. Fixed rates means that there is security in knowing what your monthly payments will be month after month, regardless of the state of the economy.
Cash-out refinancing refers to the method involved in using built up equity as usable, liquid cashflow. In this way it is possible to refinance for more than the principal balance left on your mortgage loan for the purposes of receiving extra cash. This money can be used for any purpose including remodeling, paying off other debt, or financing higher education.
The Private Mortgage Insurance Option
Private mortgage insurance comes into play in the event that less than desirable down payments were made during the purchase of your home. Basically what is involved with these insurances is the possibility that your house has appreciated to an amount greater than the original down payment. If this is true and you have steadily payed your mortgage down, you may no longer need to have PMI if you refinance. This is another one of the many ways that refinancing can be used to put cash in your pocket because of the hard work that you already put into your house over the years. Use the internet to find the best refinancing plans for you in the state that you live in.
Having the best credit score you can have is obviously important when it comes to getting the best interest rates on every finance. A score in the 700s is ideal while scores between 650 and the low 700s will allow you to get above-average interest rates in most cases. Your options dwindle considerably if your scores are below 650. The minimum credit score is 620 for an FHA loan. Each situation is evaluated upon an individual basis but these are general guidelines that you can follow to get an idea of where you stand in terms of qualifying for a low-interest refinance.
It is always good to have some equity built up as a hedge against home values which may decline. Usually lenders like to give refinance loans to individuals who would be asking for less than 80% of the current market value of the home to be refinanced. This will give you a 20% cushion that should be covered by equity debt. If that is the case then a refinance is definitely a viable option for you. In the case that you do not have 20% of home equity built up, you they want to consult a mortgage broker to help guide you through your available options.
Income and Expenses
The formula that vendors use to determine your income and expenses can easily be simulated on your own to see how much you can afford with the new loan payment. All you have to do is tabulate your monthly debt payments, take the potential mortgage payment plus any taxes and insurance, and add your housing expenses to your monthly debt total. Then simply divide your gross monthly income by this number and the result will be your debt-to-income ratio or DTI. Lenders usually like to see a debt-to-income ratio that is below 36% with even lower percentages being better.The relationship of employment to mortgage refinancing is a strong one. Employment history can be easily linked to income potential and this plays a large role in a refinance application that looks strong. Industries that fluctuate in cycles such as construction tend to make lenders more hesitant about allowing refinancing. Of course all these concerns can be voiced with your area broker to determine thresholds, ranges and requirements.
While a lender on a second mortgage can actually block the refinance of the first mortgage, it is possible to circumvent this by paying both mortgages off with the proceeds from the refinance process. If this is not possible you can always contact the second loan lender for additional options or even see if they will offer to do the refinance for you. Surely it is advantageous to only refinance if you can truly afford it so that both you and the lender will be protected. This is why timing is so critical when you are planning your refinance. It is not always the ideal time to restructure your loan payments but the other side of that equation means that when it is the right time that you should act before the window of opportunity closes again.
Saving With a Refinance
The savings that come from timely refinances do not necessarily come directly from getting the best rate. The biggest savings come from making a good decision about the refinancing because of careful analysis of solid options that protect you against the ups and downs of interest rates. You will want to have a good idea about where your money typically comes from and how your expenses vary from month to month in order to have a smooth transition to a healthy refinance. Your family life may be more stressful during certain months so a refinance during that time period would not be the ideal situation. Due diligence cannot be overstated when it comes to making quality decisions. Seek the advice of a real estate professional before you delve heavily into evaluating refinancing possibilities.
Cashflow is the most understated part of refinancing, yet having the available cash in your pocket each month may be the single most important factor and benefit of a successful refinancing effort. Sometimes your cash on hand is well above average and other times unforeseen emergencies or property taxes take big chunks out of the available monthly family cashflow. Upfront, refinancing will cost you on average about 2-4%. However, over time this will be compensated by your lower monthly payments. That should be something you take into consideration.
Support From Equity
The current value of your home can make a difference because of the amount of cash that can be made available to you. If you are considering a cash-out refinance, the current value of your home should be at or around 20% more than your desired loan amount. This means that if you want to refinance your mortgage with a home that is currently $300,000 and your lender asks for a 20% cushion of equity, your home should ideally be worth $375,000. In the event that your property is anywhere close to this threshold value you should go ahead and refinance as soon as you can because interest rates and housing values can be unpredictable. There are a number of factors that could change the current situation quickly such as new houses going up for sale on your block that could adversely affect you.
Mortgage Rate Adjustments
Upcoming rate adjustments following adjustable rate mortgages has also been driving many homeowners to refinance. Before you go shopping around for refinancing options, it is good practice to calculate the total impact that the adjustment will have on your finances. As soon as you come across information that you are not comfortable with or that you do not fully understand, ask for the assistance of a lender in your metro area who is familiar with current the changes and nuances particular to refinancing rates and payments. While it is possible to predict rate increases and decreases with relative confidence, the simple fact that rates are high or low should not be the sole determining factor in any potential refinance.