Mortgage Refinancing Information
There are many reasons to consider refinancing your mortgage. When interest rates are low, the cost of borrowed money is less, giving the homeowner options to explore. He can choose to refinance to decrease payment, term, take money out to consolidate debts or to remodel the home. Consider what type of loan you are currently in, and what your goals are in a refinance, then investigate.
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Mortgage Refinancing to Decrease Payments
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If you are considering refinancing your mortgage to decrease payments (or stablize payments if you are in an adjustable rate mortgage). If you have a nongovernment (conventional) loan you will need equity in your home to refinance in the best way. Keeping the new balance under 80 percent of the property value, you can avoid paying PMI (private mortgage insurance). If you recently bought the home, you need a 12-month payment history to use your appraised value. If you have been in the home less than 12 months, the lender will work from your sale price.
If you are refinancing and presently have an FHA loan, you might be able to do a "Streamline Refinance," which may not require an appraisal or a credit report. You need a good payment history, but you can not increase the loan amount any higher than the original loan amount to add closing costs or MIP (FHA's mortgage insurance). You may have some rebate on the MIP if you haven't owned your home very long. Ask a lender to discuss this option with you.
Find Out If You Have Equity to Refinance
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Call your present lender for a correct loan balance, then ask a realtor in your area to do a "sold search" on their Multi List System (MLS) computer service. This will give you data on all the sold properties in your neighborhood, complete with selling prices. Assess the ones that are most like yours (same number of bedrooms, baths, square footage, etc.) since these will be the measuring sticks an appraiser will use in an appraisal. Your value should fall somewhere in the middle of these sale prices. Calculate 80 percent of the appraised value and check to see if your balance is well under that amount. You will have new closing costs to add to that balance, so call a lender and have her give you a total of costs involved in closing, total up your balance and costs and see if you are under 80 percent of the estimated value. Get your lender to quote a new payment, and subtract this payment from your present payment and look at the monthly savings. Divide the new closing costs by the monthly savings, and that will tell you how many months it will take you to break even.
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Refinance to Decrease Term
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Refinancing to decrease your term is a smart investment in your future. Going from a 30- to a 15-year mortgage will drastically cut the cost of paying off the home. Call your lender and ask them to run your balance on a 15-year loan with current rates and adding back closing costs. Take your current payment and multiply by 360 payments (a 30-year loan). This tells you what you will pay over all scheduled payments for 30 years. Multiply that payment by 180 payments. This represents the total you will pay over a 15-year term.
Refinance to Consolidate Debts
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Refinancing to consolidate debts at low mortgage interest rates can reduce your total of payments down to a figure that better fits within your budget. Under conventional guidelines, you can pull cash out up to 80 percent of your appraised value. Pull out all of the statements of debts that you want to wipe out, and list the balances on paper with current payment beside each. Obtain your mortgage balance, and add it to all of the debts. Call your favorite lender or broker to get a quote of rate and closing costs for a refinance. Follow instructions above for "Find out if you have equity to refinance," to find out an estimate of the appraised value of your home. Calculate 80 percent of your estimated home value then subtract mortgage balance, closing costs and balances from other debts to see if you are able to fit in all of the debts. (A full appraisal will be ordered during the loan process). If you find you are not able to fit in all the debts, choose the ones with the highest interest rates to pay off.
Refinance Your Mortgage to Remodel Your Home
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If you have a lot of equity, you might consider a refinance to pull out the cash to remodel your home. Under conventional guidelines, limit the loan to 80 percent of present appraised value (avoiding PMI), minus closing costs, and see how much cash you might be able to access. You need bids from contractors to see what costs are involved in completing whatever repairs or remodel you choose to do. When you close your loan, the funds are all disbursed directly to your account.
You have the option of doing a refinance under a lender's construction perm program. This requires that you have all bids in place, and the appraisal that is ordered is based on "future value." This means that if you are adding heated square footage to the home, the new appraisal will be based on the added square footage. When you close the loan, the construction money is drawn on in stages of completed construction, then it modifies into a predetermined interest rate and term that you decide on.You can use an FHA 203k program to refinance and rehabilitate your home. This loan is more restrictive in some ways as compared to the conventional construction-perm program, but more lenient in others. Manufactured homes can be remodeled with this program. Talk with a lender who is seasoned in FHA 203k loans to get all of the details needed to make your decision.
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