Even though mortgage interest rates have started to edge up, home buyers and existing homeowners considering a home refinance loan with good credit can still get a competitive interest rate in today’s market. But there are still many home refinancing options out there.
Which home refinance program is the best and which offers the best rates?
Every refinance mortgage program has its own rats and rules, so you need to do research to determine which is best for you.
#1 – Traditional Refinance
Most mortgage experts say that a conventional home refinance is best for the home owner who has a minimum of 15% home equity and credit scores over 700. Conventional mortgages are guaranteed by Fannie Mae or Freddie Mac and there are three basic types:
- Rate and term refinance: You are going to change the rate, the term or both. The size of the loan will remain mostly the same. For example, a rate and term refinance would be when a homeowner reduces his 30 year mortgage rate from 4.5% to 3.75%. Or you are changing your 30 year loan to a 15 year loan.
- Cash out refinance: The homeowner is increasing the loan balance by 5% or more. He typically is getting that amount as cash at closing. Some people use a cash out refinance to consolidate debts, while others use it for home improvements. Also ask about 2nd mortgages, like HELOC loans for cash back.
- Principle Pay-Down: The homeowner brings cash to settlement to reduce the amount of the loan. This is often done to get a loan to a lower LTV or loan to value.
A conventional refinance is one of the options to do a cash out refinance. So if you want to pull out equity, you will be looking at conventional financing or possibly FHA financing. FHA is generally better for people with lower equity and lower credit scores.
Conventional refinancing also is a good way for an FHA lien holder to get rid of their mortgage insurance. This could reduce your monthly payment by $100 or more per month.
#2 – FHA Refinance
An FHA refinance is often the best option if you already have an a FHA-mortgage, but not in every case.
If you have average to bad credit, a multifamily home, or a small amount of equity, getting an FHA refinance could be the best option for a lower rate and payment.
FHA does not increase the interest rate for higher risk loans as Fannie and Freddie do. So you can save 200 basis points or more on a refinance.
If you have an existing FHA lien, you could be in luck: The FHA streamline is a fast, simple way to get a lower interest rate. FHA will waive the need for a current appraisal, and many lenders will also waive income and credit score reviews.
Note that an FHA streamline is not for pulling out cash; you need a conventional refinance or a conventional FHA insured refinance to pull out your equity.
You can do a regular FHA cash out refinance if you like, but remember that you will still have to pay mortgage insurance – both up front and each month. A plus however is that you will usually have a lower rate especially if you have average credit than a conventional loan.
Also, if you have an FHA loan and have 10% equity, you should probably refinance into a conventional mortgage to get rid of your mortgage insurance. The costs are lower with the conventional mortgage and it makes sense to do this if you have substantial equity.
#3 – HARP for Underwater Mortgage Refinancing
The Home Affordable Refinance Program or HARP is a unique government program that is suitable for homeowners with a Fannie or Freddie backed loan.
The HARP loan is designed for people who are underwater on their mortgage and have credit problems. You may be able to save money by refinancing your underwater mortgage if you do a home refinance with HARP. Before you get too excited, please check the government website to determine HARP eligibility.
#4 – Subprime Home Refinancing
People with having difficulty documenting income or past problems with their credit may need to consider a sub-prime mortgage. In many cases, the lender will use your original appraisal so that you are able to refinance your house. The US government runs this program so that people in trouble on their mortgage do not default. Make sure that you check with several companies as we continue to hear about new programs offering mortgage loans for bad credit.
As you think about refinancing, a lot of your choices will come down to your current credit score, your income and how much equity you have.
For borrowers with good debt to income ratios, substantial equity and credit scores above 700, you should look strongly at conventional mortgage refinancing.
If you have a lower credit score and your ratios are not as good, you may want to look at FHA refinancing. And of course, if you are underwater on your mortgage – owing more than the home is worth – HARP is one of your few options.
Whether home refinancing is worth it at all depends upon the rate you are paying and the current rates when you apply. Generally, experts advise refinancing your loan when you are able to drop at least one percentage point on your interest rate. If it is less than that, your closing costs and other costs may outweigh the advantages of doing a refinance.
More Do’s and Don’ts When Home Refinancing This Year
Refinancing your home can be very tricky and sometimes hard to fully understand. Most homeowners will only refinance a few times in their lives, it is understandable if you do not know everything you should and should not do when going for a mortgage refinance.
Home refinances are getting very popular again. With rates still in the 4% range, there is a good chance that your mortgage from several years ago could have a higher rate than you can get today.
We all want our mortgage refinance to go smoothly. No list will be able to cover every single scenario, but the list below should give you a good idea of what you should and should not do during your next mortgage refi.
Deciding on a Home Refinance Loan
- Review your credit report for mistakes. It is a fact that up to 80% of credit reports have at least one error. You should never allow mistakes on your credit report to stop you from getting a low interest rate.
- Calculate what the break even point is on your home refinance. You will need to know how much your closing costs will be. Depending on closing costs and fees, it will take several years for you to recoup what the refi cost you before you really benefit from a lower rate.
- Spend time collecting your financial and personal information before you apply. When you go into the application process with all of your documents, the home refinance has a better chance of going smoothly.
- Ask if you need to pay a prepayment penalty if you pay off your loan early.
- Show up at the lender with a box full of documents. If you show that you are disorganized, you probably are going to end up paying more.
- Go into a home refinance loan without really understanding what the consequences are of paying off your first mortgage. If you have to pay a big penalty, maybe it isn’t worth it.
- Think you will get the best rate by shopping at your current lender or where you have your bank accounts. Only a few banks offer discounts to their customers.
- Assume that every lender has the same programs and rates. Every mortgage loan at every lender has its own terms and rates.
- Assume that your lender must charge the same fee for a credit check, appraisal and other items. You will find that different lenders charge different fees.
- Open new credit lines during the home refinance process. This can hurt your credit score and could torpedo the deal.
- Be sure that you are very comfortable with your loan officer and whatever mortgage loan you are getting before you turn in the application.
- Be certain that you have all of your finances in order before you submit the application. This will include a review of your credit report, going through your financial documents to see that they are complete, and putting aside funds for closing costs.
- Start your home refinance process with one lender and then start several applications with other lenders. Once you have decided on submitting an application, we recommend that you only do that one application. The time to shop around is before you turn in the application.
- Stall your loan process by not having your financial documents in order. Once you turn in an application, you should be ready to complete it.
Escrow and Appraisal
- Understand that every lender has to provide you with a HUD-1 settlement document. This document will show all of the fees that you have been charged with at the loan closing. You should carefully compare this document to your good faith estimate that should have been provided when you turned in your application.
- Be realistic about what your home is worth. Many homeowners do not pay attention to the falling home prices in their area and this can prevent you from refinancing.
- Ask the lender to help you understand your escrow process, and whether an escrow account has to be set up for home refinancing.
- Sign the mortgage documents until you really understand what is expected.
- Bribe your appraiser! Don’t even try it. If you want to refinance, you should have time to make some improvements to the home that can boost the value.
The Last Word
Home refinancing is becoming more popular again as interest rates are very low. Also, more banks and lenders are doing refinances again; after the mortgage crash, many companies got out of the refinance business as the federal government would fine mortgage lenders heavily for not following the rules.
Today, more lenders are starting to do home refinance loans again. More competition is always good; you can find many very low rates even if your credit is only average. You also may shop around and compare what different lenders are charging in terms of fees and closing costs.
Just follow our do’s and don’ts above to ensure a smooth home refinance process.