When you decide to refinance, you might be surprised that there are many types of refinances from which to choose.
Your refinance depends on factors such as
Following is a brief synopsis of each loan type and for whom each type is best.
A conventional loan is good for those who have decent credit and equity in their homes. Conventional financing does not require mortgage insurance with 20% equity. You can refinance into a conventional loan no matter what kind of loan you have currently. Learn more>>
Current FHA loan holders might consider an FHA streamline refinance. Going from FHA to FHA requires much less paperwork: no appraisal or income documentation is required. Learn more>>
These are high-LTV loans backed by Fannie Mae and Freddie Mac, and offered by local lenders. If your loan was opened prior to June 2009 and you have little or no equity, the HARP loan might be right for you. Learn more>>
A VA streamline refinance replaces an existing VA loan with another VA loan with a lower rate. It's called a "streamline" loan because it requires no appraisal, and no verification of employment, income, or assets to qualify. Learn more>>
Current USDA mortgage holders can refinance with no appraisal. This program was recently rolled out in all 50 states. Learn more>>
You take equity out of your home in the form of cash by opening a larger loan than what you currently owe. The difference is forwarded to you at closing.
Conventional cash-out: Use conventional lending to tap into your home's equity. Learn more>>
Cash out a rental property: Grow your real estate portfolio using equity from your existing investment property. Learn more>>
Home equity line of credit: Should you get a cash-out loan or a home equity line of credit? It depends on whether you want to leave your first mortgage intact. Learn more>>
FHA cash-out: No matter which kind of loan you have currently, you are eligible to use an FHA cash-out mortgage up to 85% of your home's current value. Learn more>>
VA cash-out: Eligible military veterans can take a new loan up to 100% of their home's value. Proceeds can be taken as cash or to pay off debt. You can also refinance out of any loan using a VA cash-out loan. Learn more>>
By increasing your home equity, you create a lowerÂ loan-to-value ratioÂ (LTV). This is the amount that youâ€™re borrowing as a percentage of your homeâ€™s value. LTV is key to getting approved for a refinance -- and getting a lower interest rate -- because lenders consider loans with low LTVs less risky.
There are three ways to increase your LTV.
According to Fannie Mae, cuttingÂ your mortgage from 71 percent LTV to 70 percent could dropÂ your rate byÂ 125 basis points (0.125%). That's a savings of $8,000 over the life of a $300,000 loan. If your LTV is just aboveÂ of any five-percentage-point tier, consider paying down the loan just enough to get to the tier below.
You can also make small improvements to increase your value, thereby lowering your LTV. Focus on bathrooms and the kitchen. These upgrades come with the most bang for the buck.
Lastly, stroll your neighborhood and look for homes that are on the market. A high-priced sale near you can increase your homeâ€™s value; appraisers base your home's value on sales of similar homes in the area.
In general, borrowers with credit scores of 740 or higher will get the best interest rates from lenders. With a score less than 620, it can be difficult to get a lower rate or even qualify for a refinance.
Whatâ€™s the best way to improve your credit score? Pay your bills on time, pay down credit card balances, delay major new purchases, and avoid applying for more credit. All these things can negatively affect your credit rating.
Itâ€™s also wise to order copies of your credit report from the big three credit reporting agencies â€“ Experian, Equifax, and Transunion -- to make sure they contain no mistakes.
You are entitled to one free credit report per year, per bureau.
Closing costs can be substantial, often two percent of the loan amount or more.
Most applicants roll these costs into the new loan. WhileÂ zero-closing-cost mortgagesÂ save out-of-pocket expense, they can come with higher interest rates.
To keep rates to a minimum, pay the closing costs in cash if you can. This will also lower your monthly payments.
Points are fees you pay the lender at closing in exchange for a lower interest rate. Just make sure that â€śdiscount points,â€ť as they are known, come with a solid return on investment.
A point equals one percent of the mortgage amount â€“ e.g., one point would equal $1,000 on a $100,000 mortgage loan.
The more points you pay upfront, the lower your interest rate, and the lower your monthly mortgage payment. Whether or not it makes sense to pay points depends on your current finances and the term of the loan.
Paying points at closing is best for long-term loans such as 30-year mortgages. Youâ€™ll benefit from those lower interest rates for a long time. But remember: that only applies if youÂ keepÂ the loan and home as long as it takes to recoup the cost.
As with any purchase, refinance consumers should comparison shop for the best deal.
This applies even if you have a personal relationship with a local banker or loan officer.
A mortgage is primarily a business transaction. It shouldn't be personal. A friend or relative who â€śdoes loansâ€ť should understand that.
Even if your contact suggests he or she can give you a lower rate, it canâ€™t hurt to see what other lenders offer.
Lenders compete for your business by sweetening their deals with lower rates and fees, plus better terms.
And, donâ€™t pre-judge a company just because itâ€™s aÂ banker or broker. If a bank isnâ€™t presenting tempting offers, consider a mortgage broker, or vice versa. Brokers may obtain a wholesale interest rate for you, which can be cheaper than the rates offered by banks. On the other hand, many banks offer ultra-low rates in an effort to undercut brokers.
You can benefit when lenders fight for your business.
Two mortgages with the same APR are often unequal.
For example, some mortgage rates are lower only because they include points youâ€™ll have to pay upfront. Others may have an attractive Annual Percentage Rate (APR), but cost more overall because of various lender fees and policies.
Itâ€™s possible for two mortgages to have the same APR but carry different interest rates.
Shopping by APRÂ can be confusing, so itâ€™s best to focus on the total cost of the loan, especially the interest rate and fees.
Itâ€™s also important to check out competing loans on the same day because rates change daily.
Once youâ€™ve found a new mortgage that meets your needs, consult with your lender to pick the best date toÂ lock in low rates.
Loan processing times vary from 30 days to more than 90 days, but many lenders will lock in the rates for just 30 to 45 days.
Avoid expensive lock extensions. An extension is needed when you donâ€™t close the loan on time.
Ask your lender to determine theÂ best day to lock the loanÂ based on a conservative loan processing time frame. Otherwise, you may end up spending more money than you originally planned.
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.
Barry L. Systems Analyst
The Mortgage Reports is an excellent resource. I depend on the Mortgage Reports for the most up-to-date information regarding shifts in government policy and mortgage rate information in general.
Ron Z. Real Estate Agent
I am a full-time Realtor and I look forward to daily updates from The Mortgage Reports. The advice is useful and the insight is important. Thank you!
The Mortgage Reports is doing the BEST mortgage reporting of anyone out there!
2017 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)