Million of homes are sold each year and the majority of them are not paid for in case
The typical U.S. home sells for more than $250,000 and that's a lot of cash to spend in one place, saying nothing for markets such as San Francisco where the median home sale price exceeds $800,000.
Buyers don't often have that kind of cash on-hand to make such a purchase; and, those that do have cashĀ often prefer toĀ keep their cash liquid.
This is where mortgages come in.
Rather than paying 100% cash for a home, buyers can bring someĀ cash to their closing andĀ borrow the rest from a lender.
In exchange for that loan from the bank, the homeowner gives a bank a claim against the property.
This process is known as "giving a mortgage" to the bank (even though it's often thought of as gettingĀ a mortgage).
This mortgageĀ remains in effect until the loan is paid-in-full and each given mortgage is unique. Each has its own interest rate, its own loan size, and its own terms of repayment.
In time, though, as a homeowner, you may want toĀ change the terms of your loan; you may find that your mortgage is no longer "good".
For example, if market interest rates drop, you may want to adjust your mortgage rate to something lower.
Or, you may want toĀ the number of years until your loan is paid off; or, maybe you want to withdraw some of the equity your home has amassed since your purchase.
When you want to change the terms of your mortgage, you can't just call the bank -- you do what's known as a "refinance".
To refinance means to replace your current mortgage loan with a new one. Refinances are common whether current mortgage rates are rising or falling; and you can get one fromĀ any bank you choose.
You're not limited to working with your current mortgage lender.Click to see today's rates (Feb 6th, 2016)
Refinance mortgages come in three varieties -- rate-and-term, cash-out, and cash-in. The refinance type that's best for you will depend on your individual circumstance.
Refinance rates vary between the three types.
In a rate-and-term refinance, the only terms of the new loan which differ from the original one are either the mortgage rate, the loan term, or both. Loan term is the length of the mortgage.
For example, in a rate-and-term refinance, a homeowner may refinance from a 30-year fixed rate mortgage into a 15-year fixed rate mortgage; or, may refinance from a 30-year fixed rate mortgage at 6 percent mortgage rate to a new, 30-year mortgage rate at 4 percent.
With a rate-and-term refinance, a refinancing homeowner may walk away from closing with someĀ cash, but not more thanĀ $2,000 in cash.
"No cash out" refinance mortgages also allow for closing costs and escrow reserves to be added to the loan balance.
In a cash-out refinance, the refinance mortgage may optionally feature a lower mortgage rate than the original home loan; or shorter loan term, such as moving from a 30-year mortgage to a 15-year mortgage.
The defining characteristic of a cash-out mortgage, though, is that the loan balance of the refinance mortgage is larger than the original mortgage by five percent or more.
Because the homeowners only owes the original amount to the bank, the "extra" amount is paid as cash at closing, or, in the case of a debt consolidation refinance, directed to creditors such as credit card companies and student loan administrators.
Cash-out mortgages can also be used to consolidate first and second mortgages when the second mortgage was not taken at the time of purchase.
Cash-out mortgages represent more risk to a bank than a rate-and-term refinance mortgage and, as such, carry more strict approval standards. For example, a cash-out refinance may be limited to a lower loan size as compared to a rate-and-term refinance; or, may require higher credit scores at the time of application.
Most mortgage lenders will limit the amount of "cash out" in a cash-out refinance mortgage to $250,000.
Cash-in refinance mortgages are the opposite of the cash-out refinance. With a cash-in refinance, a refinancing homeowner brings cash to closing in order to pay down the loan balance and the amount owed to the bank.
The cash-in mortgage refinance may result in a lower mortgage rate, a shorter loan term, or both.
There are several reasons why homeowners opt for cash-in refinance mortgages, but the most common reason is to get access to lower mortgage rates which may only available at lower loan-to-values, or to remove mortgage insurance premium (MIP) payments for loans which are currently over 80% LTV.
Refinance mortgage rates today may be lower for a mortgage at 75% loan-to-value, for example, than a mortgage at 80% loan-to-value. Also, conforming loans under 80% LTV pay no PMI.Click to see today's rates (Feb 6th, 2016)
Because a refinance mortgage amounts to establishing a brand-new loan with brand-new terms, refinance applicants are typically subject to the same approval process as with a purchase mortgage.
A refinance mortgage represents a brand-new debt to a lender, and must be underwritten accordingly.
As with a home purchase, there are three basic areas against which a refinance applicant is evaluated :
In addition, the home being refinanced is subject to a home appraisal in order to determine its current market value.
Documentation for a refinance mortgage is often less than for a comparable purchase mortgage loan. You will be asked to provide proof of income using W-2s and pay stubs; proof of assets via bank statements; and proof of citizenship or U.S. residency status.
Self-employed homeowners will be asked to submit two years of federal tax returns for review.
Refinance mortgages are often ready to "close" in 30 days or fewer.Click to see today's rates (Feb 6th, 2016)
Most refinance mortgages require verification of income, assets and credit. There are four specific refinance programs, however, for which verifications are bypassed in-full.
Collectively, these programs are called "streamline" refinances because their respective underwriting requirements are grossly simplified.
With a streamline refinance, mortgage lenders typically waive large parts of their "typical" refinance mortgage approval process. Often, home appraisals are waived, income verifications are waived, and credit scores verifications are waived.
Different lenders may deploy different overlays for each of the streamlined programs, but the programs can be summarized as follows.
TheĀ FHA Streamline RefinanceĀ is available to homeowners with an existing FHA mortgage. TheĀ FHA Streamline Refinance program waives all verifications and refinance mortgage rates are as low as with a standard-verification FHA-backed loan.
TheĀ FHA Streamline Refinance requires refinancing homeowners to save five percent or more on their mortgage payment; and to show a history of on-time payments to their lender.
Some refinancing households get access to reduced FHA mortgage insurance premiums (MIP) via theĀ FHA Streamline Refinance.
Cash-out refinance mortgages are not allowed via theĀ FHA Streamline Refinance program.
TheĀ VA Streamline Refinance is available to homeowners with an existing VA-backed mortgage.
Officially known as theĀ VA Interest Rate Reduction Refinancing Loan (IRRRL), theĀ VA Streamline Refinance also waives income, asset and credit score verifications.
Refinancing VA homeowners are required to demonstrate that the refinance mortgage will result in monthly payment saving, except for homeowners changing to a shorter loan term, such as from a 30-year mortgage to a 15-year mortgage; or from an ARM to a fixed-rate loan.
Homeowners may not receive cash-out as part of aĀ VA Streamline Refinance.
The HARP loan is a government-backed refinance program good through December 31, 2015. Its official name is the Home Affordable Refinance Program.
HARP is the Fannie Mae/Freddie Mac-equivalent of theĀ FHA Streamline Refinance orĀ VA Streamline Refinance. It's a streamline refinance for conventional home loans.
In order to qualify for a HARP loan, homeowners must a have a mortgage backed by Fannie Mae or Freddie Mac which predates June 2009; must show a 6-month history of on-time payments; and may not have already used the HARP loan to refinance.
HARP loans do not allow cash-out to the homeowners. Rate-and-term refinance mortgages only.
The USDA Streamline Refinance Program is available to homeowners with existing USDA home loans. USDA loans are loans for homeowners in rural or suburban areas which allow for up to 100% financing.
The USDA Streamline Refinance Program does not verify income, assets or credit; and, homeowners using the program to refinance are limited to 30-year fixed rate mortgages until mid-October 2015, when the program will expand to allow 15-year loans, too.
Cash-out refinance mortgages are not allowed via the USDA Streamline Refinance.
There are many ways to refinance a home and, with current refinance mortgage rates below historical norms, millions of U.S. homeowners have the opportunity to lower their mortgage rate, reduce their loan term, or both.
Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Click to see today's rates (Feb 6th, 2016)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2016 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)