There are a lot of difference reasons you may want to explore your home loan refinancing options:
- Lower interest rates (the primary reason, as I’m writing this in early 2014!)
- Change in number of years you plan to own your home
- Divorce – one of the two partners needs to be off the mortgage
- Need to take equity out of your home in cash
A lot of people are talking about refinancing, and it’s worth taking a look to see if it’s right for you. Because right now may or may not be the right time for you to refinance, but there are a number of factors to include in your decision.
Let’s start with a definition. What exactly is refinancing? Your new mortgage is a refinance if at least one of the original property owners remains on the deed. There are two kinds of refinancing:
- Rate/term refinancing pays off your existing mortgage loan and in addition rolls in closing costs.
- Cash out refinancing pays off your existing mortgage loan plus closing costs—and, in addition, will take cash out of the equity you already built up that you can then use at your discretion.
Most lenders will not charge a higher rate for a refinance than for a first purchase, so if your lender is doing so, check with your mortgage loan professional for other options.
If you’re considering the lowest refinancing rate , then you’ve already been through the mortgage process once, and you’re probably thinking that you don’t need any help the second time around. Wrong. There are some definite differences between first and second mortgages, and only your mortgage professional can help you find the one that’s right for you.
Let’s look at a few of those differences …
First of all, the LTV (loan-to-value) amount is different. Remember that the standard loan to value amount is the result of the loan amount divided by the price being asked for the property. There’s no sales price in a refinance (you’re not actually selling the house to yourself!), so the number that replaces the sales price is the appraised value. What typically happens is that an appraiser looks at three comparable properties in your area that have sold recently and uses those numbers to determine the sale value of your home at that point in time. This can either benefit you or work to your disadvantage, depending on how housing values are holding up. Rate/term refinancing allows a 95 percent loan-to-value ratio, while cash-out refinancing allows a 90 percent loan-to-value ratio.
If you’re refinancing your home (as opposed to your summer cottage or the place you rent out), the feds give you a three-day “right of rescission,” which means that you can cancel the transaction any time in the three days immediately after signing.
There are also a couple of tricky caveats. If your home was listed for sale within the past year, you will not be able to the best mortgage refinance deals using Fannie Mae or Freddie Mac; so no “instant” refinancing for a better rate there.
And then there are your personal considerations. If you’re going for a lower interest rate, then be sure that you compare the difference in payments (don’t include taxes and insurance, which will stay the same). The principal amount will be lower if you’ve had your home for a long time; it will be higher if you’re opting for cash-out refinancing.
Most homeowners look solely at the interest rates when considering refinancing. Don’t make that mistake! Closing costs can be significant and may change your mind about that attractive interest rate. If you ask for a good-faith estimate (GFE) of closing costs, you can have some idea of the numbers you’re working with. If you think your payment will go down due to lower interest rates, take your GFE and divide it by the payment difference between your current mortgage loan and your prospective mortgage loan. What number are you left with? That’s the number of months it will take you to recoup your closing costs. It may not deter you, but it’s important to know what it is.
Refinancing can make a lot of sense for a lot of homeowners. To see if it makes sense for you, consult your mortgage professional, who can always get you up-to-date and complete information.
