Should I refinance my home loan? That is a question many homeowners ask. And it’s a question that is especially relevant when news headlines at CNN Money and elsewhere reflect a trend toward lower mortgage loan interest rates. When rates go down, the ability to refinance into a lower mortgage interest rate is very attractive, but who should consider making the jump?
The United States Federal Reserve Board weighs in on this question on its’ official site. It says, “…before deciding, you need to understand all that refinancing involves.
Your home may be your most valuable financial asset, so you want to be careful when choosing a lender or broker and specific mortgage terms. It’s crucial to use a mortgage calculator, try it out here, to work out exactly how much you’re entitled to, so you aren’t accepting the wrong agreement for you. Remember that, along with the potential benefits to refinancing, there are also costs.”
Refi Loan Advice From the United States Federal Reserve Board
The Federal Reserve official site lists three scenarios to consider if you are trying to decide whether to refinance. If any of these apply to you, a refinance loan may not be a good idea:
- You have paid on your mortgage for a long time;
- Your purchase agreement includes a penalty for early payoff (not applicable to FHA and VA mortgages which forbid such clauses);
- You do not plan to remain in the home much longer.
Exceptions To These Refinance Rules
Naturally, the three scenarios listed above have exceptions. One such exception? When a borrower wants to rehab or remodel a home and decides to apply for a refinance mortgage such as an FHA 203(k) Rehabilitation Refinance Loan to do it. Such loans provide funds to refinance the home and to apply toward approved projects (the lender will have a list of such projects).
No cash is permitted back to the borrower. The Exceptions? Refunds and “draws” to pay for the renovations. Such loans may require direct payment to contractors rather than a payment to the borrower.
Cash-Out Refinance Loans
Another exception is when a borrower wants to pull equity from their home in cash using a cash-out refinance loan. This is also true of a home equity conversion loan, etc. But it’s important to do the math on such transactions. You need to know whether the closing costs, plus interest payments and other expenses, outweigh the financial benefit of the refinance loans.
Refinance Loan Costs to Consider
All home loans, including refinance loans, have closing costs to pay. You may be required to pay an appraisal fee (which can run between $300 and $500 depending on the housing market), lender’s fees, and other expenses. Some refinance loans are offered as “no-cost” refi transactions. That generally means the expenses you would normally pay as cash to close are rolled into the loan instead.
That also means potentially higher monthly mortgage payments, so ask your loan officer to break down the costs required, and how much your loan will require you to pay over the full term of the loan with those expenses rolled into the loan amount as opposed to paying upfront.
Refinance Loans and Lower Interest Rates
There are two types of home loans you should consider refinancing. This is especially true if your financial goals and needs require you to pay less per month. Some prioritize saving money over the lifetime of the mortgage, some prioritize having more cash left over at the end of the month. For those who need the cash and have existing FHA or VA mortgages, Streamline Refinancing is an option to consider.
A VA or FHA Streamline Refinance loan features no government-required appraisal or credit check. (The lender may require one or both depending on circumstances, but the basic rules of the VA and FHA programs do not include a mandatory appraisal or credit check.)
A Tangible Benefit Is Required
These refinance loans are generally required to provide a “net tangible benefit” to the borrower in the form of any of the following:
- A lower interest rate
- A lower monthly payment
- A shorter loan term
- Getting out of an adjustable-rate mortgage and into a fixed-rate loan.
Borrowers who plan to stay in the home for a long time, need a lower payment, and have an existing FHA or VA mortgage should consider applying for a Streamline Refinance from a participating lender. These Streamline loans cannot be used to refinance non-FHA or non-VA mortgages.
Should You Refinance?
Refinancing your home loan is an important decision. You can use the following list to help you decide whether to explore your refinance loan options:
- Refinancing is a good way to get out of an adjustable-rate mortgage and into a fixed-rate loan;
- Cash-out refinancing is an option generally for those who have 20 percent equity in the home or better. The longer you have paid on your mortgage the more cashback on the transaction you may be eligible for once the original mortgage is paid off;
- You have the ability to refinance into a fixed-rate or adjustable-rate mortgage. An adjustable-rate loan is good for those who know they won’t stay in the home long-term, a fixed-rate mortgage is an advantage if you do not plan to sell and want to stay in the home long-term;
- Adjustable-rate mortgages (new purchase or refinance) should not be considered without a strategy to deal with the end of your low introductory rate period and the first few interest rate adjustments;
- A rehab loan or rehab refinance loan can help you make important improvements to your house. But consider the size of the project and do the math. How much will you spend using a personal loan compared to a refinance loan? The answers may convince you to refinance if the numbers make sense for your financial needs and goals.
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Joe Wallace specializes in personal finance, military affairs, and consumer protection topics. Since 1995, his work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and collects unusual vinyl records, which gives him an excuse to write the vinyl blog Turntabling.net.
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