One option to take to ease the burden of a mortgage is to refinance. It could potentially lower monthly payments or give you enough space to use the money for other things.
However, the issue is that many people have trouble deciding what kind of refinancing to take. There are many options available, and each has its pros and cons.
The best approach would be to understand each loan type they bring. Knowing its similarities and differences can help you decide on the best option for your mortgage.
Before choosing one, account for the loan requirements. That may open the doors for some while shut the doors for others.
Conventional Refinancing
In a conventional refinance, a new loan pays for the old one and replaces it. People usually choose this if the new loan offers better interest rates to get some liquidity back to finance another, like a second home.
Conventional loans are one of the most accessible because it’s available for all mortgages. It also doesn’t have strict requirements.
Anyone with a good credit score or equity in their homes can use this option.
However, a decent score is necessary to gain the benefits. People over a 620 credit score can benefit from using a conventional refinance.
People also call conventional refinancing rate-and-term, meaning a change in both.
Cash-out Refinance
In a cash-out refinance, the homeowner will take a second loan to pay for their original loan. The difference is that the second one is a much larger value because they want to have the excess as cash.
The lender pays them the difference, and they can then use the money to fund another project. It’s common to see this option for those who want to buy a second home or move to a new one.
The benefit of this is that you don’t get two loans. You only acquire a larger loan, and these deals have equal monthly payments.
The lender benefits from this as they get more money over the loan's term. There can be some differences with the agreement, but its purpose is gaining accessible cash.
Cash-in Refinance
A cash-in refinance offers better terms by accelerating payments through a new loan using home equity.
For example, if you bought a $200,000 home but have only paid 10% in the mortgage so far. Some lenders may not accept a new loan because you don’t have enough equity.
What you can do, is you can pay another $20,000 to cover and reach the minimum 20% equity. That way, you can get a new loan with a higher principal paid.
That new loan will have better interest rates and terms. You can go for this option to impact your monthly payments by adding money directly to the new loan.
No-Closing Cost Refinance
Closing costs are one of the biggest detriments to acquiring a new refinancing deal. Apart from paying the mortgage, you’ll have to pay extra fees for completing the loan early.
A no-closing refinance works similar to a rate-and-term, without paying the closing costs.
While there is no lump sum at the start, the costs roll over into the new loan. It means that you’ll have to pay that over time, and it will also gain interest.
This way, there’s less pressure on your finances right now, and the lender also has a way to get the money.
Aside from rolling the closing costs into the new loans, other lenders take advantage of the new terms. For example, they can charge you a higher interest rate to accept the refinance.
Streamline Refinancing
Federal-backed loans have the options to refinance through their programs. Conventional loans from private lenders do not offer these methods.
However, you must have a specific type of mortgage to apply. You can get them through the following mortgages:
- USDA
- VA
- FHA
It’s an option to choose to take advantage of a weakened real estate market.
For example, the price of your home has gone down because of the current conditions. You decide to take a new loan to lower the rate.
Like the VHA, there are no strict requirements with the VA and USDA streamline. They usually process right away, meaning you can take advantage of better terms faster.
FHA Streamline
FHA Streamline is available to those under a Federal Housing Authority mortgage. Like a conventional loan, you can replace the terms of the old one with something new.
What makes it different is that FHA loans often process much faster without the need for the paperwork of the traditional loan. The FHA already has records, so it’s an easy way to lighten the process.
Some also go for this option since the existing mortgage may be eligible for a partial refund. Once closed, the original FHA loan within its first three years, they refinance to gain the benefits.
The only issue with this is that you will not get extra cash. The loan’s payment term will also remain the same.
You’ll also have to consider paying the closing costs, which can be a significant percentage depending on the value of your home. Unlike other loans, you cannot roll the closing costs into the new one’s balance.
VA Streamline
Another name of the VA is the Interest Rate Reduction Refinance Loan (IRRRL). There is often a verification process to confirm the borrower’s risk and credibility for conventional loans.
The lender has to check income, employment, and other assets. The VA skips all that for those who are already under the program.
It’s a courtesy as only active servicemen and veterans are the only ones eligible to gain these types of benefits. It also extends to surviving spouses, reserve members, and those part of the National Guard.
However, with that convenience comes to some restrictions to gain it:
- Borrowers cannot cash-out loans.
- The previous loan must be VA eligible or applied through VA
- The borrower must have occupied the home or presently occupy it.
- They must accept a new rate that’s lower than the existing mortgage.
- Borrowers can only have one late payment within the past year.
USDA Streamline
Like the FHA or VA, the USDA Streamline is only applicable to loans under the same organization. One advantage of streamlining is there are fewer fees compared to standard underwriting.
There will be no assessment, but there will be verification. Here are some other requirements they’ve put in place:
- The home must be the borrower’s primary residence.
- The borrower must have held the mortgage for at least a year, and they’ve paid on time for the last six months.
- The USDA must verify if your credit score is acceptable.
- The borrower’s household must have adequate income to support the refinance
Another benefit of the USDA Streamline is the possibility of rolling other costs into the new loan balance. That means borrowers won’t have to worry about closing fees and other payments to get their new terms.
However, that may also mean higher interest in future payments as they add to the initial principal.
Reverse Mortgage
Those who’ve managed to gather significant equity in their home can approach lenders to get a reverse mortgage. These deals are often available to those of an older age.
In these agreements, the borrower gains money from the lender equivalent to the home’s value. They do not have to pay the loan for the remainder of its life.
Instead, the lender will acquire the home once the borrower passes away. They will then get the proceeds from the sale or have the next of kin pay the remaining balance.
There are no limits to using the money after getting it through a reverse mortgage. However, you are giving away homeownership by making it the collateral.
Short Refinance
A short refinance isn’t an option available right away. These are options for those who are late on payments or those who’ve defaulted on their loans.
Instead of losing all the money because of a default, they offer a loan with better terms. These are often at the lower principal and interest rates.
They do this to get a portion of their money back. In the case of a mortgage, the lender doesn’t lose as much compared to a foreclosure.
There is also the possibility that the home’s value would increase given enough time.
Choosing the Best Refinancing Option for You
There will be several factors to consider when you want to pursue refinancing. The most obvious one would be the loan type.
If you have a federal-backed loan, choosing one of their options would be beneficial as the process is much easier. In other cases, you’ll have to check in with the following:
- Your credit score
- Current income
- Ability to pay off closing costs
- Outstanding debt
- Home equity
- The reason for refinancing
- The type of mortgage loan
Depending on how you answer each of these, some will be open while others will not. Knowing your income sources are crucial because refinancing does come at a cost.
You can get a loan with much better terms, but you’ll have to pay the fees of the previous one first. If you are eligible to roll over those costs, it’s good but also means you’ll have more debt to pay off.
When considering if you have money to refinance, the costs you’ll have to pay for closing would be around 2-3% of the remaining balance. If you have that money, then you can pursue it.
However, that’s not the only consideration. Make sure that refinancing will end up better for your current situation.
Ensuring an Optimal Refinance
A refinance may not always provide you with the best option for a new loan if the terms aren’t there. You could end up paying more for the new loan because of the fees involved.
One way to avoid this is to take steps now to ensure that you get a better refinance when you need it. Here are some things you can do:
- Add to the Home’s Equity - Adding to the home’s equity means less risk for the lender to take, making them inclined to accept. You do this by continuously paying the mortgage or staying patient. When homes like yours begin selling in your area, there is a higher chance that the lender will accept a new deal. The asset is now more enticing, making them want it as collateral.
- Improve Your Credit Score - Your credit score is a notable factor in determining the options available for refinancing. It can open up low-interest rates or payment terms that free up your purchasing power so you can use them elsewhere. It will take time to improve them, so you’ll have to stay consistent with your payments.
- Compare Lenders - You should always check several options to get the best deal. It’s good to discuss with them because if they know you’re shopping around, they will be open to offering better deals to seal the deal. Don’t be afraid to let them compete with one another, so you get the best loan possible.
121 FCU: Your Option for Mortgage Refinancing
121 Financial Credit Union is one of your best options when finding refinancing. We have better terms and rates compared to those offered by traditional lenders.
Our goal is to help our members by providing them with the means to take control of their financial well-being. Consult us today, and see what we can offer you.