Home Loan Refinancing 101

Refinancing your home is a negotiable transaction similar to the process of your initial home purchase. If market rates have dropped since you took out your initial mortgage it might be time to consider the options available and determine if refinancing is right for you. Mortgage rates have a tendency to be lower than other types of debt, and can be repaid over a longer period of time.

So how much is it going to cost? This depends largely on the type of refinancing, and the interest rate of the loan. Financial milestones can be overwhelming without clear and concise information to guide you; refinancing your home shouldn't be one of them.

Programs Available:

• Cash-Out Refinance - This program allows you to borrow money, and depending on the market, reduce your mortgage rate at the same time. To qualify you will need to have a certain amount of home equity to borrow against. So let’s look at these factors a little closer:
  -If you owe $150,000 on a home currently worth $250,000, that gives you $100,000 (40% of the home’s value) in equity. Lenders will generally want you to retain at least 20% of that equity after refinancing. In order to borrow against the available equity, you would take out a new mortgage for $200,000 comprised of the amount already owed ($150,000) plus the amount to be cashed out ($50,000), and you would receive a $50,000 check at closing. These figures do not take into account your closing costs (3-6% of loan) which are often rolled into the mortgage. Pros & Cons

• Home Equity Loan - A home equity loan is a completely separate loan, and is often referred to as a second mortgage. This loan is similar to a cash-out refinance because the collateral is your available home equity. Most lenders will allow a homeowner to borrow up to 80% of the LTV ratio with a home equity loan. Loan-to-value ratio (LTV) is used by financial institutions to assess the risk of lending. The LTV ratio is determined by dividing the total mortgage loan amount by the total purchase price of the home. Pros & Cons

• Rate & Term Refinance - This is the typical mortgage refinance which allows you to take advantage of the low-interest rates and negotiate a new loan term. Rate & Term will lower your mortgage rate and your monthly mortgage payment. To determine if a Rate & Term Refinance is a good choice for your situation, consider how much longer you plan to own the property you’re considering refinancing and the “break-even” point of the refinance once you factor in closing costs such as appraisals - required by the lender to determine the current value of your home - and closing costs.

• Streamline Refinance - As the name suggests this process requires little paperwork, and is available for home loans that are backed by the government, such as Fannie Mae and Freddie Mac-backed mortgage loans. This program cannot be used by borrowers to raise ready cash, and exists with the sole purpose of reducing the burden of an outstanding mortgage. The lender bases this type of refinancing agreement on the information submitted with the original mortgage application. A streamline refinance has minimal credit requirements, limited asset and income verification, and in many cases, does not require a new appraisal.

Refinancing has been on the rise, so a potential waiting period due to the high volume of requests is very common. If you plan to stay in your home for a few years, take the time to crunch the numbers, and connect with a trusted professional. If your current home does not fulfill your living expectations for the next few years, perhaps the equity you’ve already built can be used for a down payment with a lower interest rate on a new home. Working with a real estate advisor can help you safely navigate the housing market without bringing your plans to a standstill while prioritizing your momentum.