Monthly Archives: November 2013

Home Refinancing Explained

To Refinance Your Home means getting a new mortgage and using some or all of the proceeds to pay off the old mortgage – good credit refinance, poor credit refinance or fair credit refinance.  Homeowners
may home refinance their mortgage for several reasons:

  1. To take advantage of lower interest rates and lower your monthly payment. If interest rates have gone down since you got your original mortgage, you could save money over the life of your loan,
    while reducing your monthly mortgage payment.
  2. To switch mortgage types. You may want to switch from a variable to a fixed interest rate, or vice versa. If you have a balloon/reset mortgage, you must either pay the mortgage in full at the
    end of the 5- or 7- year term, contact your Service Provider (the organization to which you send your monthly mortgage payments) to start procedures to reset your mortgage to a fixed-rate of interest,
    or refinance with a new mortgage.
  3. To shorten mortgage terms. You may want to refinance to shorten the term of your loan. This would allow you to pay less interest over the life of the loan because the money is borrowed for a shorter
    period of time, and more quickly builds up equity in your home.
  4. To get “cash out.” Some lenders will let you borrow more money than the balance of your original mortgage, based on the equity you have in your home. A portion of the money left after the original
    mortgage is paid off goes to you to use for things like paying for a child’s education or home remodeling.  However, remember that you’ll have a new mortgage, at a higher amount, that will eventually
    need to be paid off.

Home Refinance Programs:

  1. Fixed Rate Loans – Both interest rate and payment remain the same over the term of the loan. Loans can be amortized over the following terms: 10, 15, 20, 25, 30, and 40 years. The advantage of
    a fixed rate program is that it allows you to get a fixed rate, over a specified period, without being concerned about market fluctuations. This type of financing is recommended for borrowers who
    intend to stay in their house for a long period of time.
  2. Fixed Rate Balloons – Both interest rate and payment remain the same until the loan is due. Typically, the entire loan amount is due in either 3, 5, or 7 years. The advantage of balloon programs
    is that they tend to have the lowest rates, due to the fact that the entire balance must be paid off or refinanced at the end of the term. This type of financing is recommended for borrowers who know
    they will be leaving their current house in either 3, 5, or 7 years.
  3. Adjustable Rate Mortgage (ARM) – Both interest rate and payment remain the same for a fixed time period, usually 1, 3, 5, 7, or 10 years. At the end of that period the rate can rise at fixed intervals.
    The amount the rate can rise, or margin, is predetermined (normally 1/2% to 2% per rise). The intervals are normally 1, 3, 6, or 12 months. Typically there is a cap on the margin, which determines
    the highest the rate could ever go. The advantage of an ARM is that it allows you to get a lower rate, for a known period of time, while you watch the market to see if and when fixed rates get better.
    Some feel that although they may have gotten a better rate with a balloon, an ARM will adjust at the end of the “fixed period”, whereas a “Balloon” has to be refinanced or paid in full. Arm’s are
    recommended for those borrowers who intend to stay in their house for a fixed period and have taken the time to factor in the margin, to determine that they would not be better off with a Fixed Balloon
    or even a Fixed Rate.
  4. Buy down – Both rate and payment remain the same for a fixed period, at the end of which, the rate and payment increase. The rate and payment may increase once, twice, or even three times, depending
    on whether the Buy down is a 1/1, 2/1, or 3/1. The percentage of increase, as well as number of increases is predetermined. Once all of the increases have occurred the new rate and payment remain
    fixed for the term of the loan. Also, lenders will typically charge a fee to “buy the rate down” for the first 1, 2, or 3 years of the loan. The advantage to a Buy down is that it offers a lower rate
    and payment during the first few years of the loan. Buy downs are recommended for those borrowers who are having trouble qualifying for a Fixed Rate Loan or those who need a more affordable payment
    at present.

Home Refinance Loan Types:

  1. Conforming – Conforming loans refer to loan amounts that conform to government service standards as determined by Fannie Mae & Freddie Mac (the original government agencies, set up in the early
    1940’s, established to help people finance new homes). Conforming loans range in amount form $1 to $275,000. Although not all conforming loans are serviced by these government agencies, the mortgage
    industry has adopted the term to express loan amounts in this range.
  2. Jumbo (Non-Conforming) – Jumbo loans refer to those loan amounts outside of the “conforming” range or, above approximately $300,000 (different from state to state.)
  3. Government Loans – Government loans refer to those loans that are guaranteed by one of two federal agencies. The two types of government loans are: Federal Housing Administration (FHA) loans,
    and Veterans Administration (VA) loans. The advantage of financing using FHA loans are that they are easier to qualify for and allow a borrower to finance more of the loan amount than non-government
    loans. Whereas with a Conforming loan a borrower may only be able to finance 80% of the loan amount, a FHA loan allows a borrower to finance 97% of the loan amount. FHA loans are recommended for those
    borrowers who are first-time buyers, have little money to put down, have a short credit history, or are having trouble qualifying for a Conforming loan. The two main advantages of financing using
    VA loans are that the VA allows borrowers to finance 100% of the loan amount, and that, the VA only requires proof of veteran status to qualify for the loan. The only drawback to government loans
    is that mortgage insurance is required at all loan to values (LTV), unlike Conventional and Jumbo loans where payment of mortgage insurance is determined by the amount of equity a borrower has in
    his home.
  4. Investment Properties (Non-Owner Occupied) – These types of homes are normally acquired specifically for investment purposes or are owned as a result of moving to a new house without selling or
    being able to sell the old house. Financing for investment properties can be achieved using any of the above described programs. Typically, the rates for financing on investment properties are higher
    than owner occupied homes and the LTV’s allowed are lower, due to the fact that default rates tend to be higher on these types of loans.
  5. B, C, D Credit – Just because your credit isn’t perfect does not mean you can’t obtain financing. Most, if not all of the above described programs can be utilized even if a borrower does not have
    perfect credit. In these cases the rates will be higher and LTV’s allowed will be lower. Most lenders have special divisions specifically created for the marketing and sales of sub-prime products.
    Also, most lenders will offer special limited programs as incentives, when they recognize an area where there is a need.
  6. No Document or Low Document Loans – In certain situations it is either difficult or impossible for potential borrowers to show a lender their income on paper. In these instances any of the above
    described programs can be used, but under circumstances called NIV or No Income Verification. All of the other program parameters must be met, however, in the case of income, a borrower may only be
    required to show a operating license or business license and/or limited income information. With this type of financing, rates offered tend to be slightly higher. This type of financing is recommended
    for self-employed borrowers or borrowers who have difficulty showing their income on paper, for one reason or another.
  7. Cash-Out Refinances – Occasionally, when refinancing a first trust, a borrower wants to “cash out” some of the equity that has been built into the loan. Under specific conditions, established
    by the lender, a borrower can actually receive a check for an amount of money that meets those conditions. Cashing-Out is not normally limited to any Your Type Of Loan Desired program, it can be done
    with most of the described programs.