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WHAT IS A MORTGAGE REFINANCE?


As their names suggest, mortgage refinance options award borrowers the unique opportunity to adjust their previously agreed upon loan obligations. In other words, a proper refinance could give qualifying borrowers the chance to change their credit terms and conditions. In the event a borrower qualifies, today’s mortgage refinance options could easily represent an improvement over their previous terms, as refinancing typically offers a better alternative. The average refinance will revise the interest rate, payment schedule and terms of a previous credit agreement.

REASONS TO REFINANCE

There are several reasons homeowners, investors and any other borrowers may want to refinance their current loans. The following list represents the most common reasons a borrower may want to look for the best mortgage refinance options:

  • Interest Rates: The current interest rate environment is typically the greatest catalyst for someone wanting to refinance their existing loan terms. Provided today’s rates represent an improvement over the rates currently represented on the mortgage, borrowers may way to refinance to a lower rate than they are currently paying. As perhaps the most common reason for refinancing, most borrowers will do so to decrease the amount of interest they pay over the course of the loan.
  • Payments: Not unlike interest rates, many people will refinance to simply lower their monthly payments. While refinancing will ultimately resent the length of time they have to pay the money back, payments will be easier to manage on a monthly basis.
  • Change In Credit Profile: It is quite common for borrowers with better credit profiles to be given access to better terms, as they represent less of a risk to lenders. That said, borrowers may want to consider refinancing if their current credit profile is better off today than it was when they got the original loan. In the event a borrower’s credit profile has improved, a simple refinance could easily improve the loan terms.
  • Fixed And Adjustable Rates: Depending on the individual’s long-term goals and the current rate environment, it may be in their best interest to switch from a fixed-rate mortgage to an adjustable-rate mortgage, or vice versa. Adjustable-rate mortgages, for example, may be a great choice for borrowers who plan to move or pay off their loan sooner rather than later. Consequently, someone looking to stay in the home for a long period of time may like the idea of refinancing to a fixed-rate mortgage to lock in a good interest rate.
  • Tap Into Home Equity: Many borrowers will tap into their home’s equity by refinancing the loan. Doing so may be a great financial move under the right circumstances. For example, one could cash out some of their equity to buy an investment property–just be careful what you spend the money on, as the loan will use your home as collateral.

Countless lending institutions are more than willing to let qualified borrowers exercise their right to refinance. In fact, it’s quite common for lenders to actually compete over the privilege to refinance someone’s current loan; after all, they’ll make money on every dollar lent out. It is, therefore, in the best interest of homeowners and investors to compare the mortgage refinance options made available to them. There are countless lenders to choose from, and the only way to find a refinancing option that works for you is to shop around.

HOMEOWNER REFINANCING OPTIONS

Everyone with a mortgage could potentially benefit from refinancing in the right environment, and homeowners are no exception. Any homeowner looking to capitalize on today’s interest rates should take a look at all of the options made available to them. Below you’ll find some of the most popular homeowner refinancing options borrowers turn to in today’s market.

  • Fixed-Rate Mortgages
  • Adjustable-Rate Mortgages
  • Cash-Out Refinancing
  • The Home Affordable Refinance Program (HARP)
  • FHA Streamline
  • The VA Interest Rate Reduction Refinance Loan (IRRRL)

Fixed & Adjustable-Rate Mortgages

Fixed-rate mortgages and adjustable-rate mortgages are exactly what they sound like: mortgage options that either lock in interest rates or allow them to shift with the market. Aside from being two of the most popular choices, these options allot borrowers a certain degree of personalization. Fixed-rate mortgages, for example, lock in a specific interest rate at the time of signing. As such, fixed-rate mortgages are often recommended for homeowners that plan on spending a long time in the property. That way, they can protect themselves from a rising interest rate environment. Adjustable-rate mortgages, on the other hand, are better left for homeowners that plan to pay off their mortgage quickly.

Cash-Out Refinance

Many borrowers will look to a cash-out refinance option to tap into their home’s equity and use it as a source of funding. That said, a cash-out refinance follows the same procedure as a standard refinance, but with one simple caveat: a cash-out refinance will cover the existing debt, and then some. Cash-out refinances will always be bigger than the existing loan, as to enable the homeowner to replace the existing debt, and use the excess capital to tap into the equity their home has managed to build. In order to qualify for a cash-out refinance, homeowners typically need to have already built up equity, often times as much as 20 percent to qualify.

HARP

While constantly threatening to expire, the Home Affordable Refinance Program is a government mortgage refinance option that was extended through 2018. As a result, HARP will continue to be able to help homeowners with mortgages owned by Fannie Mae or Freddie Mac refinance. Perhaps even more importantly, HARP is specifically designed for those whose mortgages exceed normal lender loan-to-value guidelines. In other words, HARP will help many homeowners refinance, whereas traditional lenders ma have turned their back due to the risky nature of homes with poor loan-to-value ratios.

FHA Refinance

Those without conventional mortgages backed by Fannie Mae or Freddie Mac are award a refinancing option of their own: the FHA Streamline Refinance. This mortgage refinance option let’s the holders of FHA loans refinance, even if they haven’t managed to build up as much equity as a standard refinance typically requires. Of course, there are a few criteria that must be met; namely, the loan must be FHA insured and current. Additionally, the new refinanced loan must exhibit more favorable financial terms than the previous loan.

VA IRRRL

Not unlike the aforementioned FHA Streamline mortgage refinance option, the VA Interest Rate Reduction Refinance Loan grants approval to those that apply without a rigorous credit check or strict underwriting procedures. Instead, borrowers must currently have a VA loan, and either be able to lower their interest rate by refinancing or by switching from an adjustable to a fixed-rate mortgage. It is also important to note that anyone who qualifies for the VA IRRRL mortgage refinance option will not need private mortgage insurance (PMI).

THE DIFFERENCE BETWEEN INVESTOR REFINANCING OPTIONS

Today’s low interest rates have paved the way for many homeowners to refinance, not excluding investment property owners. It is worth noting, however, that refinancing an investment property is slightly different from standard mortgage refinance options. As such, it is important for investors to understand the differences.

In addition to the reasons for mortgage refinance I listed previously, investors should also consider the following benefits:

  • Lower mortgage payments
  • Maximize ROI (return on investment)
  • Increase cash flow
  • Cash-out refinance to fund additional investment properties
  • Cash-out refinance to fund home improvements

In order for investors to partake in these benefits, they should expect to pay higher interest rates on their refinanced investment properties than they would on a primary residence. If for nothing else, lenders consider secondary properties riskier, as borrowers are more likely to default to making payments on their primary residence instead of an investment property in the event of default. While rates will vary from lender to lender, it’s not uncommon to see investment properties being refinanced for an entire half of a percentage point higher than their traditional counterparts.

Investors should also expect to be confronted with stricter loan-to-value ratio requirements. According to Zillow, “The higher your LTV ratio, the more of a risk you seem to the lender (since you don’t have that much equity built up in your property) and thus the higher interest rate you can expect to pay. For investment properties, most lenders will only let borrowers who have a LTV of 75% or lower refinance.”

Summary

Mortgage refinance options are designed to help everyone from homeowners to investors. There are even a wide variety of products made available to those willing to shop around. That said, you’ll need to compare options before committing to one. Mind due diligence before choosing the best mortgage refinance option for your particular situation. Then, and only then, will you truly benefit from refinancing your own property.

By Than Merrill


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