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Refinance

Establishing a new loan in place of your current mortgage at a more favorable rate is called Refinancing. This loan replaces your current mortgage, and is secured on the same property. You can use this loan to pay the current mortgage and any remaining money can be used for things like home improvement, credit card balances, etc.

Why should you Refinance?

You want to save more monthly

• If you can get a more favorable interest rate, you can save on monthly payments

You want to pay down your mortgage more quickly

• If you reduce the term of the loan, you shorten the length of your mortgage. You may pay more per month, but you will save on interest and be free of debt sooner.

You need extra cash to pay off other debts

• With equity in your home, you can refinance to borrow more than the current amount remaining on the loan and pay off that balance. Then, with the extra money, you can pay off debts with high interest such as credit cards or installment loans. This type of refinance may even be tax deductable under certain conditions.

To consolidate two loans into one

• If, due to high appreciation, there is enough equity, you can combine two mortgage payments into one and possibly pay less than you would on the refinanced loan than the combined payments on the first and second mortgage.

You want to switch from an Adjustable Rate Mortgage (ARM) to a Fixed Rate Mortgage (FRM)

• With the FRM you will know your monthly payments will be, as they will not change. With an ARM, your rate can be raised up to a certain amount (a cap generally, set at 2%) per period. ARMs usually have lower initial interest rates that fluctuate as time goes on. Refinancing from an ARM to a FRM to lock in a more favorable rate can be a good call.

When people are looking to reduce their mortgage payments, they are often unsure when the best time to refinance and take advantage of lower rates is or how to prepare.

Equity

• Most mortgages require at least 10% equity built up. It is possible to refinance with less than 10% or even 5% (as required by Fannie Mae) but you may have to pay to make up the equity.

Check to see if mortgage rates are low

• The 2% rule: If the rate you’re seeing is at least 2% lower than your current rate, the savings will help you pay off the costs of the new loan, assuming you aren’t planning to move in the near future.

Make sure you have no outstanding payments

• Lenders prefer that you have no late payments 12 months prior to getting a refinance.

Take steps to improve your credit score

• Pay off as much debt as you can and look for any inaccurate items on your account, then make sure to dispute them and have them removed.

• Term/Rate Reduction

  There are several reasons for a refinance. One of these reasons is to reduce the term of your mortgage, or take advantage of a more favorable interest rate. By reducing the term of your mortgage, say from 30 to 15 or 10 years, you can reduce the amount of interest you pay by a very significant amount.

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• Cash Out

  You can extract equity from your home by doing a Cash Out Refinance. A Cash Out Refinance is when the refinanced mortgage amount exceeds the existing mortgage amount. The excess can be used to pay off debt or make additional purchases.

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• Converting Rates

  Refinancing to a FRM from an ARM can lock you in on a lower rate and save you money.

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• Combining Mortgages

  If your loans carry higher than necessary interest rates, it may be a good idea to do a mortgage refinance and simplify your financial life with a single, low-interest rate mortgage.

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