How might changes in interest rates impact your choice to refinance? Of course, it is based on the mortgage interest rate you are now paying.
An older mortgage may nevertheless have a higher interest rate than those now being provided, even during periods of increasing rates. Additionally, if you anticipate a significant increase in rates, it can be advantageous to lock in the existing rate.
There are advantages and disadvantages to refinancing a mortgage in an environment with relatively low interest rates. For instance, your better credit score or a choice to shorten your mortgage term may result in refinancing conditions that end up saving you money over time. You may not be here for the long term, however. For individuals who qualify, several unique refinancing options might be quite helpful. Here’s a step-by-step guide to making decisions.
- Refinancing your mortgage should be based on your specific circumstances, not just on whether interest rates are increasing or lowering.
- Getting a lower interest rate, growing your net value, and improving your short-term cash flow are all benefits of refinancing.
- The drawbacks include overspending on closing fees, being stuck with a higher interest rate as a result of refusing to pay them, losing equity on a cash-out refinancing, and a decline in your net worth.
- Certain homeowners may be able to get more cheap mortgages with the aid of special programs from Fannie Mae, Freddie Mac, the FHA, and the VA.
Should You Consider Refinancing Your Mortgage?
In the past, low-interest rates have created a refinancing frenzy in the marketplace. But in any economy, the only way to know if a refinance makes sense for you is toconsider the details of your unique situation.
How Much Lower Are Rates Than the One You Currently Have?
How much should interest rates drop to refinance? That’s not the right question. Instead of listening to “rules” about how much of a percentage change in interest rates you should look for before you refinance, look at how much money you’ll stand to save. A 1% rate reduction is a lot more meaningful if you have a $500,000 mortgage than if you have one that’s $100,000.
How Long Do You Plan to Keep the Mortgage?
As when you purchased your home, you will have to pay closing costs on your refinance. If you’re planning on selling your house in a few years, you may barely break even (or actually come out behind) by refinancing. How come?
Ifthe monthly savings for the remainder of your mortgage are not greater than the closing costs associated with the refinancing, you’ll lose out. If you roll the closing costs into your mortgage instead of paying them up front, you’re paying interest on them, so you’ll need to factor this expense into your break-even calculation.
Can You Refinance Into a Shorter Term?
If you refinance into a new 30-year mortgage with 20 years remaining on your current loan, you may not end up saving money in the long term (even with a lower rate).
The total amount of interest you’ll pay until you buy the property free and clear will be significantly reduced if you can afford to refinance that 20-year mortgage into a 15-year mortgage, however. This is because of the lower interest rate and shorter duration.
Overpaying on closing costs
Overpaying on interest because you want no closing costs
Negatively impacting your long-term net worth
What You Stand to Gain
Refinancing successfully may result in both short-term and long-term advantages. What follows may be possible for you to accomplish.
Get a Better Loan
Perhaps your financial situation has improved since you obtained your current mortgage. Refinancing might provide you the chance to acquire a higher interest rate or improve an excellent mortgage. In any case, you’ll boost your chances of long- and short-term financial stability and avoiding the possibility of losing your house in the event of poor circumstances.
Increase Your Long-Term Net Worth
You’ll pay less interest thanks to the money you’ll save when you refinance your mortgage. You may use that money to save for retirement or for another long-term financial objective.
Increase Short-Term Cash Flow
You’ll have more money available each month if your refinancing reduces your monthly payment. This may ease your household’s ongoing financial strain and provide up options for investment elsewhere.
Dangers of Refinancing
Your financial condition changes when you refinance a mortgage. Your original mortgage’s risks are still there, and a few new ones arise as well.
Overpaying on Closing Costs
Unreliable or unscrupulous lenders may add a number of inflated and/or needless fees to the price of your mortgage. Additionally, some of these charges could not be disclosed up front in an effort to make you feel too committed to the transaction for you to walk out.
Overpaying on Interest Because You Want No Closing Costs
Cash may not be needed to close on a refinancing. Lenders may charge you a higher interest rate as a means of offsetting this cost. A $200,000 mortgage with no closing costs and a 5% fixed interest rate for 30 years is one choice; a $200,000 refinance with $6,000 in closing expenses and a 4.75% fixed interest rate for 30 years is the other.
In scenario A, you’ll pay a total of $386,511 if you retain the loan for its full period. You’ll pay $381,586 in case B. Over the course of the loan, “no closing expenses” wind up costing you $4,925.
The only part of the house that is really yours is the portion of the mortgage you have paid off, or your equity in the property. With each monthly mortgage payment, this sum gradually increases until you eventually own the whole property and are entitled to every cent of the sale price.
A cash-out refinancing, on the other hand, reduces the amount of your house that you really own by adding closing fees to the new loan or extending the loan’s duration. If you make bad refinancing selections, you can have to pay your mortgage for 50 years even if you live in the same house for the rest of your life. This may lead to significant financial waste and prevent you from ever having full ownership of your house.
Negatively Impacting Your Long-Term Net Worth
Although refinancing might decrease your monthly payment, if you extend the term of your loan, it will often cost more in the long run. Paying extra up front can be worthwhile if you need to refinance to keep your home. However, if your main objective is to save money, you should be aware that a lower monthly payment doesn’t always equate to long-term savings.
For qualifying borrowers, there are a few unique refinancing schemes that might be very helpful.
High LTV Refinance Option (Fannie Mae) and Freddie Mac Enhanced Relief Refinance (FMERR)
Mortgage loans with a high loan-to-value (LTV) ratio are ones in which the balance due on the loan is close to or more than the home’s assessed market value. Since a borrower failure or nonpayment might result in the lender losing money if the bank forecloses and sells the house for less than the loan amount issued to the borrower, these high LTV loans are seen as high risk by lenders.
Regrettably, the high loan-to-value (LTV) programs for home loan refinancing have been temporarily discontinued by Fannie Mae and Freddie Mac. All applications for high LTV refinances must be dated on or before June 30, 2021, and they must be bought or securitized on or before August 31, 2021. Historically, the Home Affordable Refinance Program (HARP), which ended on December 31, 2018, was intended to be replaced by these Fannie Mae and Freddie Mac initiatives.
HARP was created to assist homeowners who were unable to employ alternative refinancing options because their properties had lost value. Its objective was to increase a loan’s long-term affordability so as to lessen the likelihood that borrowers would experience house foreclosure. Only mortgages owned by Freddie Mac (FMERR) or Fannie Mae (High LTV Refinance Option) qualified. However, they also needed to have a loan origination date of October 1, 2017, or later, and the borrowers needed to be current with their payments.
RefiNow (Fannie Mae) and Refi Possible (Freddie Mac)
In order to lower their monthly payments and interest rates, Fannie Mae will start offering low-income mortgage holders a new refinancing option on June 5, 2021 via a program named “RefiNow.” Freddie Mac will be supplying the exact same scheme, known as “Refi Possible,” starting in late August 2021. Homeowners must make at least 100% of the local median income to be eligible (AMI).
The RefiNow program from Fannie Mae provides homeowners with a number of advantages. First, the homeowner’s interest rate must be lowered by a minimum of 50 basis points, and the homeowner’s monthly mortgage payment must be reduced by at least $50. Second, if an appraisal was produced for the transaction, Fannie Mae will provide a $500 credit to the lender at the time the loan is acquired. The lender is then required to pass this credit on to the homeowner.
Homeowners who want to participate in Fannie Mae’s RefiNow program must fulfill the following requirements:
- hold a mortgage that is guaranteed by Fannie Mae and is secured by a single-family home.
- current income that is equal to or less than 100% of the AMI (not the income as of origination of the original loan.)
- Never missed a mortgage payment in the previous six months and never missed more than one in the previous twelve months.
- hold a mortgage with a loan-to-value ratio of up to 97% and a debt-to-income ratio of 65% or less.
The Freddie Mac Refi Possible program enables qualified borrowers with Freddie Mac-owned single-family mortgages to take advantage of a lower interest rate and monthly payment, which may result in savings of between $100 and $250 per month.
Qualifications for Refi Possible
A homeowner must fulfill the requirements listed below in order to be eligible for Freddie Mac’s Refi Possible program:
- hold a mortgage held by Freddie Mac that is secured by their principal house, a 1-unit single-family home.
- have an income that is equal to or less than the area’s median.
- Never missed payments in the past six months, and not more than one missed payment in the past 12 months.
- A loan-to-value ratio at or below 97% and a debt payment-to-income ratio below 65%.
Federal Housing Administration (FHA) Streamline
For homeowners who currently hold an FHA mortgage, a Streamline refinancing is offered by the Federal Housing Administration (FHA). Its objective is to provide the borrower a new FHA mortgage with improved conditions, lowering their monthly payment. The procedure is meant to be fast and simple, needing no new proof of your financial condition or additional income requirements.
A house appraisal, termite inspection, or credit report are not necessary for this kind of refinancing. The fact that cash out is not permitted with an FHA streamline refinancing may be a disadvantage for certain homeowners.
U.S. Department of Veterans Affairs (VA) Streamline
Similar to an FHA streamline refinancing, this scheme is also known as an interest rate reduction refinance loan (IRRRL). You must already have a Veterans Administration (VA) loan, and unless you are switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, the refinance must result in a reduced interest rate. The VA does not demand an appraisal or credit report, but the lender could.
Notably, a warning order was issued by the VA and the Consumer Financial Protection Bureau in November 2017 informing service members and veterans that they had been receiving many unsolicited offers with false information concerning these loans. Before acting on any offer of a VA IRRRL, check with the VA.
It is feasible to pay little or no closing costs up front using the VA streamline and the FHA streamline (USDA rural home loans also provide a streamline). However, in return for avoiding having to pay closing fees, you will either pay a higher interest rate or these expenses will be incorporated into the mortgage. Therefore, even though you won’t pay anything up front, the refinancing will cost you money in the long run.
The Bottom Line
Borrowers should gain from a proper refinancing by having their monthly housing payments reduced or having their mortgage term shortened. Unfortunately, these intricacies might mislead the unsuspecting buyer and lead to a baddeal, just as with any significant financial transaction. Finding a lender and a refinancing program that provide the greatest value for your circumstance can be made easier for you if you are aware of the procedure.
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