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What Does It Mean to Refinance Your Home?

Lee Nelson
The Mortgage Reports contributor

Mortgage Refinance: You Have Questions

What does it mean to refinance your home? If you’ve never refinanced your home mortgage before, it might seem a little confusing or complicated.  To refinance your home means you replace the mortgage you have with a new one, with better terms.

Verify your new rate (Apr 26th, 2019)

The Refinance Decision

People refinance for many reasons. The decision to refinance or not depends on interest rates, closing costs, how many years you will remain in your house, and whether refinancing saves you enough money.

It may take months or years for the savings from refinancing to cover the costs of refinancing. You’ll want to see how long it takes to break even before you refinance.

“You need to look at the whole picture if you are refinancing your home,” says Greg Iverson, senior mortgage broker at F&B Financial Group in St. Louis.

“Don’t just ask about the interest rate. You need to pay attention to what it all translates to because you can always lower an interest rate by paying points and closing fees.”

Top Reasons For Refinancing

Refinancing a mortgage can solve many problems. Some include reducing your monthly housing cost, accelerating your mortgage payoff, providing cash for other needs, removing former partners from the property title, and dropping mortgage insurance.

Cashing Out Equity

In markets where homes have appreciated a lot, homeowners could refinance to take cash out for home improvements,” says Iverson.

Rather than move, borrowers get a cash-out refinance loan so they have extra money to update their homes or pay expected unexpected bills.

Drop Your Rate

One of the most popular reasons for refinancing is the opportunity to drop your interest rate. You may be able to do it by refinancing to a different loan, for example, a 3/1 ARM fixed for three years, or a 15-year product.

You may be able to reduce your rate if your credit scores have improved, if your property value has risen, or if the mortgage market is better than it was when you got your loan. If you did not shop carefully for your current loan, and paid too much, you may be able to fix that mistake by refinancing now.

Speed Up Repayment And Save

Some refinance their homes to get a shorter term for their mortgage. They may have been paying on a 30-year loan but want to get done quicker, and rates for shorter terms are significantly lower.

The most popular shorter term remains 15 years, Iverson says. But some even choose ten or 20 years, or sometimes a five- to seven-year adjustable rate mortgage (ARM).

“Sometimes, their income has increased, and they want to pay more per month to get done quicker paying off the house,” he adds.

Get A Fixed Loan

When interest rates are on the rise, homeowners with ARMs get nervous. If your interest rate can increase, and you plan to keep your home more than a couple of years, consider refinancing.

Exchanging your ARM for a fixed loan can provide peace of mind, if not a lower interest rate. Also worth considering are hybrid ARMs with rates fixed for three, five, seven or ten years.

Drop Mortgage Insurance

Mortgage insurance drops automatically once you pay down your loan to 78 percent of the purchase price. However, if your property appreciates in value, you can drop MI sooner by refinancing.

If you have a 30-year FHA home loan which closed in 2013 or later, you don’t get to drop mortgage insurance no matter what your loan-to-value (LTV) is. the only way to avoid that expensive coverage is to refinance.

Types of Refinance Mortgages

Conventional

In mortgage lending, “conventional” simply means, “not government-backed.” That’s it. Conventional loans can refer to any program that is not FHA, VA or USDA.

If you choose one of these and don’t have 20 percent down or equity in your house, you usually pay private mortgage insurance premiums.

Conventional loans are usually less costly than government loans if you have very good credit, are making a large down payment or don’t require mortgage insurance.

FHA

This government-insured loan offers several refinance options, including the streamline FHA refinance.

You can refinance from an FHA loan to a new FHA loan without getting an appraisal and without income verification or minimum credit scores. FHA also offers a cash-out refinance and a 203(k) remodeling loan.

VA

The VA also offers a streamline refinance called the Interest Rate Reduction Refinance Loan, or IRRRL. Like FHA’s version, lenders require no appraisal or income verification, and there is no minimum FICO score.

While you can only use a VA mortgage to purchase a primary residence, you can streamline refinance even if you converted the home to a vacation property or rental.

USDA

Low- to moderate-income homebuyers in USDA designated rural areas, which includes small towns and suburbs of big cities, are eligible.

The USDA program does not allow cash out, but there is a streamline option to refinance easily.

Conforming Home Loans

“Conforming” simply means a conventional loan that conforms to guidelines established by Fannie Mae and Freddie Mac. They buy mortgages that meet their guidelines and sell them to investors.

This makes their loans less risky for lenders, and often less expensive than other conventional programs.

Jumbo Loans

“Jumbo” mortgages are just loans too big to meet Fannie and Freddie guidelines. In most cases, that means loans larger than $484,350.

However, the conforming limit is higher in areas with expensive housing markets — up to $726,525 in the Lower 48, and even higher in Alaska, Hawaii, the US Virgin islands and Guam.

HARP

The Home Affordable Refinance Program (HARP) helps underwater homeowners with loans backed by Fannie Mae or Freddie Mac. (Being “underwater” means your mortgage balance is higher than your property value.)

If either of these entities back your mortgage, and your current loan balance is over 80 percent of your property value, you may be eligible for this form of streamline refinance.

Iverson believes most of the people who were paying on mortgages above six percent already refinanced in the past five years. But if your rate is over five percent, you should definitely consider a refinance.

What Are Today’s Mortgage Rates?

Current mortgage rates are low and may be good enough to make a refinance worth doing. However, interest rates, terms and fees vary widely between lenders. To get the best deal, compare several quotes and pick the best deal.

Verify your new rate (Apr 26th, 2019)