How to Refinance a Mortgage: Home Mortgage Refinance Options
There's not just one reason to refinance, and if you've got the idea on your mind, there are many different types of refinance options for your mortgage loan.
While all types of refinances have the same basic idea behind them -- a new mortgage that offers you some kind of benefits over staying with your current mortgage -- your different refinance options can influence how you refi.
Prior to engaging in a home refinance you should be clear about your financial goals, for example:
- Would you like a lower rate?
- Would you like to trade your adjustable rate for a fixed?
- Do you need to tap into your equity?
- Do you plan on purchasing a property in cash but would like most of the cash back?
- Does your business partner want to sell his/her half of the property?
To better understand let’s take a look at what each type of refinance has to offer your mortgage loan:
How to Refinance for Rate and Term
A rate and term refinance allows you to lower your rate and/or change your loan program (e.g., 5 year ARM to a 30 year fixed).
If you would like to take advantage of lower rates and a different loan program this type of refinance is a good option.
How to Refinance Using Your Equity: Cash-Out Refi or HELOC
When you need to access your equity it’s important to explore your options before incurring the cost of a cash-out refinance or taking a variable rate for a large loan.
Home Equity Line of Credit (HELOC) or Home Equity Loan (HE Loan)
The amount of cash you need will determine whether or not a second lien, HELOC or cash-out refinance is best for your financial needs. A general rule of thumb is if you need more than $50,000 then you may want to consider a cash-out refinance.
What Does a Cash-Out Refinance Accomplish?
This type of refinance allows you to take advantage of current market rates and keep one mortgage loan. Just know, in order to take advantage of the best rates you will not want to exceed a 60 percent loan-to-value (i.e., what your home is worth versus what you owe) and have at least a 740 credit score.
If you need the cash and the rate is not your main concern lenders will allow you to take up to 85 percent of your equity. Be mindful of your credit score as a score below 700 may result in cost-prohibitive rates. Additionally, you will be subject to mortgage insurance for a loan-to-value over 80 percent.
How to Refinance for a Special Purpose
Are You Paying Cash to Purchase Your Home?
If you are paying cash for a home but need the cash back right away there is a solution, a cash-out refinance. While your loan will be underwritten as a cash-out refinance (i.e., cash-out restrictions will apply) you will be offered rate and term refinance rates.
The benefit of paying cash for your home eliminates the stress of meeting the contract deadlines as well as the process of obtaining financing for your purchase.
What If I Want to Buy My Business Partner's 50% Ownership?
If you would like to use the equity in the property to buy out your partner the lender will require continuity of obligation. This means you and your partner must have jointly owned the property for at least 12 months as a primary residence.
If you have recently been legally awarded property as a result of:
- Recent Inheritance
- Divorce
- Separation
- Dissolution of Domestic Partnership
The 12-month ownership requirement will typically be waived.
Having a clear understanding of your financial goals will help when deciding what type of refinance or second loan you need. Always discuss all of your refinance options with your mortgage professional.
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