Mortgage Daily

Published On: December 23, 2022

Which refinancing loan is optimal for your circumstances?

When deciding to refinance, you may be surprised by the variety of refinance loan options available.

Your optimal refinancing strategy will rely on variables such as:

  • The sort of current debt you have
  • The ratio of your home’s worth to its loan balance
  • Whether or not you have mortgage insurance

With so many accessible refinance alternatives, you are certain to discover a new mortgage that meets your needs.

Loan Types for Refinancing

The minimum credit scores and maximum loan-to-value ratios for conventional refinancing schemes are listed below. Note that these restrictions only apply to refinancing a primary dwelling; the requirements for refinancing a second home or investment property are different.

A loan-to-value ratio (LTV) compares the loan amount to the value of the residence.

Conventional Refinancing

Conventional refinancing involves exchanging your current mortgage for a new conventional loan. Homeowners frequently choose this sort of mortgage refinancing because it enables them to access cheaper interest rates, shorten their loan terms, and achieve other financial goals, such as refinancing a second property.

Regardless of your mortgage, you can refinance into a conventional loan.

With 20% equity, conventional refinancing does not require mortgage insurance. It is a viable alternative for folks with strong credit and equity in their houses.

Rate and Term Refinance

Borrowers frequently utilize rate-and-term refinancing to modify their loan terms, mortgage interest rate, or both.

Rate-and-term refinancing enables homeowners to save money on their mortgages by reducing their monthly payments, paying less interest owing to lower interest rates, or shortening their loan durations.

Here are a few situations involving rate and term refinancing:

  • A 30-year fixed-rate mortgage is refinanced into a 15-year fixed-rate mortgage.
  • Refinancing a 5-percent 30-year fixed-rate mortgage into a 3-percent 30-year fixed-rate mortgage.
  • Refinancing a 5-percent 30-year fixed-rate mortgage into a 3-percent 15-year fixed-rate loan.

Rate-and-term refinancing is prevalent in a real estate market with declining interest rates.

Cash-out Refinancing

A cash-out refinance allows homeowners to access their home’s equity while refinancing their current mortgage.

Your new mortgage will be sufficient to pay off your existing mortgage. You will retain the remaining monies as a lump payment for various financial purposes.

Many borrowers utilize this income to pay for college, invest in real estate, or pay down credit card or student loan debt.

How a cash-out refinancing works is as follows:

  • Home value: $400,000
  • Existing mortgage debt: $200,000
  • New refinancing loan amount of $250,000
  • Cash received at closing: $50,000 (less closing costs)

Cash-out Refi Options

The majority of mortgage lenders provide three primary forms of cash-out refinancing loans.

  • With this cash–out refinance option for conventional loans, you can borrow up to 80% of your home’s worth. FHA loans typically need a minimum credit score of 620. 
  • FHA cash–out refinancing allows you to borrow up to 80% of the value of your property. You normally need a credit score of at least 600.
  • VA cash–out refinancing permits you to borrow up to the full value of your house. The minimum credit score necessary for this refinance option varies but is often lower than other lending options. Only veterans, Reserve and National Guard members, active–duty service members, and certain surviving spouses are eligible for VA loan programs.

Each loan program has unique regulations and criteria, so discuss your alternatives with your lender.

Consider a home equity line of credit (HELOC) or a home equity loan if you need clarification on whether a cash-out refinancing is the best option for your financial position.

Both refinancing options permit homeowners to borrow against the value of their house without replacing their existing mortgage.

Cash-in Refinance

The reverse of cash-out refinancing is cash-in refinancing. Refinancing allows homeowners to lower their loan by contributing a lump sum to their mortgage. Refinancing with cash-in might result in a reduced interest rate or a shorter loan term.

Lenders frequently group cash-in and rate-and-term refinancing together (so it may not be presented as a separate option). If you are interested in this form of refinancing, inquire with your loan officer about its cash-out regulations when you apply.

Numerous customers select a cash-in refinancing mortgage to obtain cheaper interest rates on a new home loan, which are often only offered to borrowers with lower loan-to-value ratios (LTV).

This refinance option also allows homeowners to eliminate mortgage insurance premium (MIP) payments. When the LTV of your existing mortgage loan falls below 80%, MIP payments are no longer necessary.

However, this MIP regulation does not apply to FHA loans, which demand MIP throughout the loan. To eliminate mortgage insurance, a homeowner might refinance out of an FHA loan and into a conventional loan.

FHA Streamline Refinance

Current holders of FHA loans may choose to explore an FHA Streamline Refinance. It functions similarly to other forms of refinancing loans. Borrowers replace their current mortgage with a new FHA loan.

Refinancing an existing FHA mortgage into a new FHA mortgage requires significantly less paperwork; neither an appraisal nor proof of income is necessary.

Additionally, homeowners who refinance within the first three years of their current mortgage may be eligible for a partial return of the upfront mortgage insurance payments (UFMIP) paid when the initial FHA loan was closed.

However, there are disadvantages to the FHA Streamline Refinance. You are not permitted to withdraw cash or reduce the duration of your loan, and closing fees cannot be added to the loan sum.

VA Streamline Refinance

A VA Streamline Refinance converts an existing VA loan into a new loan with a reduced interest rate.

This refinancing option is the VA Interest Rate Reduction Refinance Loan (IRRRL). However, it is frequently known as a “streamline” loan because it does not require an assessment and does not require proof of job, income, or assets.

Veterans, active-duty service members, Reservists, National Guard members, and certain surviving spouses are eligible for VA loan programs.

In addition, only existing VA home loans are eligible, and homeowners must also fulfill Department of Veterans Affairs underwriting standards.

Current guidelines include the following:

  • Current payment history with up to one 30-day late payment in the preceding 12 months.
  • Your new rate and monthly payment for the IRRRL must be less than the monthly payment on your old mortgage. When converting an adjustable-rate mortgage into a fixed-rate mortgage, this regulation does not apply.
  • No withdrawals permitted
  • Certify that you presently or have occupied the property. 
  • You must have utilized your VA loan eligibility on the property you wish to refinance. This might be referred to as a VA-to-VA refinancing.

USDA Streamline Refinancing

USDA mortgage loan holders are eligible for the USDA Streamline Refinance.

This refinance option involves fewer costs than regular underwriting, similar to other government-backed mortgage loans.

No appraisal is necessary for homeowners who do not get a subsidy. However, your mortgage lender will examine your credit score and confirm your income.

Current guidelines include the following:

  • You must fulfill the USDA credit score criteria
  • You can add the principle, interest, closing charges, escrow fees, and upfront guarantee fee to the sum of the new loan.
  • Your current USDA loan must be paid on time for 180 days
  • You must have held your existing mortgage for at least a year.
  • Your residence must serve as your principal abode.
  • Your income must fall under the USDA’s guidelines to qualify.

Seven Strategies to Improve Your Refinancing Rate

Increase the Equity in Your House

By raising home equity, the LTV is decreased. LTV is crucial for refinancing approval and obtaining a lower interest rate since mortgage lenders view loans with low LTVs as less risky.

There are three methods for increasing the loan-to-value ratio.

  • Reduce your mortgage
  • Make improvements
  • Wait until comparable properties in your neighborhood sell.

According to Fannie Mae, reducing your mortgage’s LTV from 71% to 70% might result in a 0.125% rate reduction. This is an $8,000 savings over the life of a $300,000 loan. If your LTV is barely below the five-percentage-point threshold, consider paying down the loan just enough to reach the below tier.

Remember that you may only know your home’s full market worth once you receive either a Desktop Underwriting valuation or a standard appraisal.

There is a high probability that your property is worth substantially more than when you purchased it since home prices are growing rapidly across the nation. Therefore, you may qualify for refinancing sooner than you believe. If you need clarification about your home’s current value, it’s a good idea to see a lender.

You may also boost your property’s worth with minor enhancements, decreasing your LTV. Concentrate on bathrooms and kitchens. These enhancements are the most cost-effective.

Finally, stroll your neighborhood and search for available properties. A high-priced sale near you can improve your property’s value; appraisers base your home’s value on sales of comparable properties in the neighborhood.

Enhance Your Credit Rating

Lenders often provide the lowest interest rates to applicants with credit scores of 740 or above. With a score below 620, it might be difficult to refinance or even qualify for a reduced interest rate.

What is the most effective technique to increase your credit score? Pay your bills on time, reduce your credit card balances, postpone big new expenditures, and avoid requesting further credit. All of these factors might harm your credit score.

In addition, you should request copies of your credit report from the three major credit reporting companies — Experian, Equifax, and Transunion — to ensure that they are accurate.

Every bureau, you are entitled to one free credit report per year.

Pay Closing Fees in Advance

Typically, closing expenses are at least 2% of the loan amount.

The majority of applicants include these charges in the new loan. While zero-closing-cost mortgages save you money on out-of-pocket costs, they may come with higher interest rates when your loan-to-value ratio increases.

Pay the closing fees in cash to reduce your interest rate. Additionally, this will reduce your monthly expenses.

Pay Points

Points are closing costs paid to the lender in return for a lower interest rate. Ensure that “discount points,” sometimes referred to, provide a satisfactory return on investment.

One point is equal to one percent of the mortgage amount; therefore, one point on a $100,000 mortgage loan would be $1,000.

The more points you pay in advance, your interest rate and monthly mortgage payment will be cheaper. Whether or not it makes financial sense to pay points depends on your present financial situation and loan length.

Long-term loans like 30-year mortgages benefit most from paying points at closing. You will enjoy these cheap interest rates for a very long time. However, remember that this only applies if you maintain the loan and house long enough to recuperate the cost.

If you appreciate the concept of discount points but need to bring substantial cash to closing, you may also roll the cost of points into the loan. This arrangement is advantageous for some homeowners since it results in much cheaper monthly payments.

Make Mortgage Lenders Compete

As with any other purchase, refinancing shoppers should search around for the best rate.

This is true even if you have personal contact with a banking or loan officer in your community.

A mortgage is predominantly a commercial transaction. It should not be intimate—a family or acquaintance who “deals loans” should comprehend this.

Even if your contact indicates they can provide you with a lower interest rate, comparing rates with other lenders doesn’t harm.

Lenders compete for your business by offering lower interest rates, cheaper fees, and improved conditions.

Also, do not assess a firm based on its banker or broker status. If a bank’s offerings are unattractive, try a mortgage broker or vice versa. Brokers can secure you a wholesale interest rate, which may be lower than the rates given by banks. In contrast, several banks provide extremely cheap interest rates to undercut brokers.

You can gain when lenders compete for your company.

Look Beyond APR

Typically, two mortgages with the same annual percentage rate (APR) are not equivalent.

For instance, certain mortgage rates are cheaper because you must pay points upfront. Others may have a more appealing APR but may be more expensive overall due to lender fees and rules.

It is conceivable for two mortgages to have identical APRs but distinct interest rates.

It might be complicated to shop by APR, so it’s preferable to concentrate on the whole cost of the loan, including the interest rate and principle.

It is also essential to compare competitive loans on the same day, as interest rates fluctuate regularly.

Know When to Lock in a Rate

Consult with your lender to determine the optimal date to lock in low rates once you’ve chosen a mortgage that matches your needs.

Loan processing durations range from fifteen to thirty days to more than ninety days. However, many lenders will only lock in rates for 30 to 45 days. Note that the rate-lock duration has little impact on the rate cost.

Avoid pricey lock extensions. When the loan is not closed on time, a postponement is necessary.

Ask your lender to decide, based on a conservative loan processing time frame, the optimal day to lock the loan. Otherwise, you may wind yourself paying more than you had anticipated.

The Current Best Refinancing Rates

Rates on all sorts of refinancing loans are low.

Obtain estimates from several lenders with no commitment to move further. Check out the current mortgage interest rates using the website provided below.

 

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