In the world of mortgages, to "finance" means to borrow money from a bank to partially, or completely, pay the cost of the property.
To partially borrow money is to make a downpayment for "your" part of the purchase, with the rest financed by the bank. To completely borrow money is to take a loan for 100% of the purchase price.
In exchange for borrowing money from the bank, the bank gets an ownership stake in the home until said loan is paid-in-full.
The process of borrowing money from a bank in exchange for an interest in real property is called "giving a mortgage". Colloquially, this loan has come to be known as a mortgage.
Each mortgage is unique. It has its own interest rate, its own loan size, and its own terms of repayment.
In time, though, as a homeowner, you may find that your mortgage is no longer "good". Maybe you want to pay a lower interest rate; or, shorten the loan's length in years; or, maybe you want to access some of the equity your home has built since your purchase.
In order to change your mortgage, you can do what's called a "refinance". To refinance is to obtain a new mortgage loan which pays off and replaces on old one.
Refinance activity is usually high when mortgage rates are low.
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 some cash, but not more than $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.
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.
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.
The FHA Streamline Refinance is available to homeowners with an existing FHA mortgage. The FHA Streamline Refinance program waives all verifications and refinance mortgage rates are as low as with a standard-verification FHA-backed loan.
The 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 the FHA Streamline Refinance.
Cash-out refinance mortgages are not allowed via the FHA Streamline Refinance program.
The VA Streamline Refinance is available to homeowners with an existing VA-backed mortgage.
Officially known as the VA Interest Rate Reduction Refinancing Loan (IRRRL), the 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 a 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 the FHA Streamline Refinance or 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.
Compare today's refinance mortgage rates now. Rates are available online at no cost, with no social security number required to get started, and with no obligation to proceed whatsoever.
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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2015 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.