When you first bought your home, refinancing may have been the last thing on your mind. However, times and interest rates change. There are many great reasons why refinancing may be the right option for you to consolidate debt, get a lower interest rate, renovate your home, or free up money to invest.
This guide will teach you everything that you need to know about refinancing your home, how to get the best rates, and what refinancing means for your future as a homeowner.
What Are Your Refinancing Options?
Do I Qualify to Refinance My Home?
What Should I Do If I Don’t Qualify?
When Is The Best Time to Refinance Your Property?
Is 2023 A Good Time To Refinance Your Property?
How Long Do I Have to Wait to Refinance My Home?
Why Do You Pay Closing Costs When You Refinance?
Top 5 Reasons That You Should Not Refinance
Refinancing: how often can you do it?
Does Refinancing Cause You to Lose Equity?
When people think of refinancing a home, they typically imagine acquiring a new mortgage that pays off their prior one (often with the intent of obtaining a lower interest rate and taking equity out of their home).
However, that is only one of many refinancing types, and homeowners must select the option that best fits their needs.
As you read through our in-depth guide, consider your refinancing goals: do you want to pay for a home renovation, get a lower interest rate, lower your monthly payment, or consolidate debt? Believe it or not, there are specific refinancing loans to meet each of those goals!
When you’re looking to refinance, your options as a homeowner are as varied as your needs are many. Learn about rate and term refinancing, cash-in/cash-out refinancing, USDA/FHA/or VA streamline refinancing, no-closing cost refinancing, reverse mortgages, short refinancing, and more.
Let’s explore these options one by one to see which is right for you!
Cash-Out Refinance
When to use It: Cash-Out refinancing is the type of refinancing that many homeowners first learn about through their friends and family. Borrowers who refinance in this manner “cash out” once they’ve gained equity in their home.
This happens when their home increases in value or the homeowner pays off their mortgage principal. By selecting a cash-out refinancing option, some of your equity is included in the new refinancing loan, but you receive back any additional equity within days of closing.
Your lender will not allow you to cash out 100% of your equity, and the numbers have to make sense for a borrower to go through with the refinance.
When to use it: If you own a home and want to complete a home renovation – but lack the additional funds – a cash-out loan may be right for you. This option will also work if you need to pay off your student loans, credit card debt, or medical bills. This type of refinancing may also help you avoid relying on the use of additional credit cards or help you avoid needing to take out a second mortgage.
Expert Tip: A cash-out refinance is different from a second mortgage. For a cash-out refinance, the new loan refinances your home at a lower interest rate, allowing you to pay off the original loan and use the equity for anything you want!
Find out how much money you can get from your cash-out refinance here.
Cash-In Refinance
When to use it: A cash-out loan allows you to take out the equity in your home and use it … a cash-in refinance means that you are contributing more money to pay down the loan than your monthly loan payment requires. This provides you with the ability to significantly reduce your loan-to-value ratio (LTV) or the measure of an appraisal of the property against your mortgage.
Expert Tip: By lowering your LTV, your equity in your home increases, which may give you the ability to lower your interest rate and your monthly payment.
Short Refinance
When to use it: While you may not have planned on ever defaulting on your loan, if the unexpected happens and you default on your mortgage loan payment, a short refinance may be the option that helps you the most.
It works like this — your lender will allow you to replace your current loan with a more affordable loan that enables you to make the monthly payment more easily. If you’re interested in this option, ask your loan officer how it can impact your credit score before proceeding.
Expert Tip: Why would a lender want a short refinance? When a homeowner completes a short refinance, the original lender actually loses out on less money than with a foreclosure.
No-Closing Cost Refinance
When to use it: When you refinance with a no-closing cost loan, you do not have to pay for your closing costs at the signing of your mortgage loan. Rather than paying up-front, closing costs are added to your loan’s principal or covered with the interest rate on your loan. If you need to refinance but can’t afford closing costs upfront, the no-closing cost refinance may be your best option.
Expert Tip: This type of refinancing loan is frequently used by borrowers who plan to sell their homes within the next few years. Refinancing without closing costs allows them to continue to live in their home at a lower interest rate and (hopefully) walk away with equity when they sell their home in a hot market!
Rate And Term Refinance
When to use it: If you like doing business with the lender you currently have, but just want a lower rate … a rate and term refinance may be right for you. You’ll change your loan terms and interest rate with your existing lender. Ask your mortgage representative if you’re a candidate for this type of favorable loan term: here.
Expert tip: This is a great option if you’re looking for manageable payments at a lower interest rate. Use the money you save to improve your home, or even consider paying off your mortgage more quickly!
USDA Streamline Refinance
When to use it: The USDA streamline refinance can be a dream come true for some borrowers, especially those who don’t have a lot of equity. Through this United States Department of Agriculture loan, homeowners can adjust their loan terms and take advantage of lower interest rates without needing an inspection or even a home appraisal. Within this umbrella of USDA refinancing exists a standard streamline and a streamline-assist refinancing. The difference in the latter is that it does not require your credit score or your DTI.
Expert tip: Not all lenders offer USDA Streamline Refinancing. Before you begin the refinancing process, ask your mortgage company if they can offer you this type of loan.
FHA Streamline Refinance
When to use it: If you purchased your home through an FHA loan, you could apply for an FHA streamline refinance. The term “streamline” comes into play as the refinancing options are broader than some other loans.
For instance, you will not need to have an appraisal on your home, and you can shorten the length of your mortgage term, which can save you money on interest. You can also reduce the amount of money you pay if your credit score has improved since you first obtained your FHA loan.
Other options include a no-cost option, where the lender pays your closing costs, or the low-cost option, where you only pay the closing cost with fewer associated costs to process the loan (such as not needing the home appraisal).
Expert tip: To add to the ease of the FHA streamline refinance, no income documentation is required, including W2s or tax forms. The processing time for this loan is one of the quickest, given the reduction in the required documentation.
VA Streamline Refinance
When to use it: For Veterans with a VA loan that wants to reduce their mortgage interest rate, the VA streamline refinance is a great option. This type of refinancing is accelerated and can be used to replace an existing VA adjustable-rate mortgage with a fixed-rate mortgage to help lower the interest rate and monthly payment, as well as shorten the loan term.
Expert Tip: Pay attention to the closing costs on the VA streamline refinancing loan and compare those costs with the equity that you have. Other options for Veterans include a VA cash-out refinance, conventional cash-out refinancing, and more.
Reverse Mortgage
When to use it: A reverse mortgage is most often used by older homeowners who want to continue to live in their homes without making a monthly mortgage payment. If you select this option, you’ll still be responsible for homeowners insurance and property tax. You’ll also be able to access the equity in your home and pull cash out, but payment is deferred until you move out of the home, sell the property, or die.
Expert Tip: This type of loan does have its drawbacks. As you are not making payments monthly, the interest will continue to be added to the loan balance each month. If a homeowner wants to leave the property to their heirs, their heirs will be left repaying the reverse mortgage and lose equity. Otherwise, the property will be foreclosed upon, and the bank will own it.
Mortgage Insurance
While mortgage insurance is not a refinancing loan, refinancing can allow you finally ditch expensive mortgage insurance. Here’s an example: if you purchased your home with less than 20% down, then you were likely required to get private mortgage insurance alongside your loan. This type of insurance can be expensive, and most home buyers can’t wait to rid themselves of these additional costs.
Expert tip: Upon reaching 20% equity in your home, you can request that your lender automatically cancel the mortgage insurance. At this point, you’ll be able to refinance from one loan type to another so that you no longer need private insurance.
Whether you want to renovate your home or spend your daydreaming of what you’ll do with the money after you refinance … before you start making plans with a contractor, let’s find out whether or not you qualify!
Credit Score
First, you will need a qualifying credit score of at least 580. If that score sounds lower, know that some lenders will require a higher credit score. Your mortgage officer will explain the requirements to you in greater detail once you apply for your loan.
Expert Tip: For a VA refinance loan, you may be able to gain approval if your credit score is 580+. However, that is only the case if you will have at least 10% equity left after you refinance. This does not apply if your credit score is 620+, only if it’s between 580 and 620.
Debt Vs. Income Review
Next, lenders will look at how much you spend on your monthly expenses, including your bills. This figure is called your Debt-to-Income Ratio (DTI). The calculations that lenders consider positive is less than 50%
Expert Tip: If you have a higher debt-to-income ratio, you may still be able to refinance with a VA or FHA loan, depending on your circumstance.
Application
The most obvious step you’ll need to complete is a formal application to initiate the process of refinancing a home loan. When you apply, your loan officer will ask you for any documents they need to determine whether you qualify. These documents include W-2 statements, pay stubs, bank statements, Federal Tax Returns, and more.
Learning that you did not qualify for a loan can be a blow to your financial plans and goals, especially if your current payment or interest rate feels unsustainable to your long-term plans. If you find out that you do not qualify, remember that determination is not forever.
Talk to your mortgage specialist to find out exactly why the lender did not approve a refinancing loan and the steps that you can take to improve your chances next time. There may also be other types of refinancing options that are a better fit for your needs. Ask a loan specialist: here.
Some of the reasons why your refinancing loan may not be approved are because your loan-to-debt ratio is too high. Consider whether you’ve missed any payments on your credit cards or other loans. While many home borrowers want a cash-out loan, this won’t be possible if you don’t have enough equity to meet the requirements of the refinance loan.
To improve your chances for next time, continue to build equity in your home, make your payments on time, and pay more than your credit card minimums to lower debts. To help you ensure that your credit card payments are made on time, consider auto-scheduling your credit card, phone, and other bills.
Another tip – if your low credit score is an issue – make sure that you aren’t applying for credit cards that you don’t need or with too much frequency. Receiving or applying for multiple credit cards can drop your score for up to a year, with your score more typically recovering within about 3-6 months.
When you refinance your property, you may be able to save money with a lower interest rate that allows you to pay off your mortgage more quickly. If owning your home outright and with no mortgage is your dream-then it’s wise to explore your refinancing options.
While each homeowner has unique needs when they refinance, many homeowners find out that at least one option is the best for them.
It’s no secret that the Federal Reserve has increased the interest rate as of late; however, home ownership is still a great way to recession-proof your expenditures.
When you apply for a refinance, you lock in your loan against higher, rising interest rates. While the best time to refinance your property is generally when interest rates are low, there are exceptions.
Both low and high-interest rates are relative to when you first purchased your home, your current credit score, and other factors. For some borrowers, refinancing may provide them with significant benefits and money in their bank account.
While refinancing doesn’t have a set period of time that you have to wait, the lender that you secured the home loan with may ask you to wait six months. That waiting period is typically advised, as it is mandatory to wait for 6-months after closing if you want a streamline refinance or plan to complete a cash-out refinance. Some borrowers refinance multiple times in one year to take advantage of lowered interest rates.
Expert Tip: If you’re on the fence about whether or not to refinance, review the lifetime and monthly savings of your loan, the interest rate, how much equity you have, if you can afford closing costs and the benefits of cashing out of your loan. Some homeowners choose to refinance at a higher rate to get cash out of their equity and then refinance later once rates are lower.
To calculate the rate of your refinancing loan, call us at (888) 762-7808. Our quick, easy application process can be completed online or directly by speaking with one of our talented loan officers.
Similar to when you signed your original home mortgage loan, you will need to pay for closing costs when you refinance. These costs include title insurance fees, appraisal fees, and more. While some homeowners opt for a no-closing cost refinancing loan, you’ll still need to pay between two and six percent of the value of your to refinance.
Expert Tip: Beware, as no-closing cost refinancing may cost you more money in the long run. Ask our mortgage team if this option is right for you!
Talk to one of our loan specialists to determine whether you are a candidate for any 5 reasons not to refinance.
Even if this is true for you, let your mortgage representation know upfront. That way, they can recommend a refinance loan that may avoid closing costs.
If you don’t have enough equity to make a cash-out refinance worthwhile, hold off until refinancing makes more sense.
While there are circumstances when a homeowner would like to refinance even if they will (temporarily) have a higher loan payment, work with your mortgage company to find a refinance loan that doesn’t raise your payment.
If you can’t afford your payment, discuss loan types that can help you to refinance before the bank forecloses on your property.
As you’ll be taking on a new loan, the terms of the new loan may not work out to be the same amount of time that you originally calculated. This could mean paying for your home for longer than you originally planned.
As discussed above, there are no hard and fast rules as to how often you can refinance your home loan. This is helpful when your circumstances change or if you find yourself struggling to make your monthly payment. Refinancing can be limited by the mortgage lender’s requirements in situations where you want cash-out refinancing.
Refinancing is not only about the equity that you have in your home but also about reducing the long-term costs of an increased interest rate. The goal of refinancing is usually to put more money in your pocket in the short term and over time.
However, refinancing loans include closing costs, and cash-out loans will use some of the equity you’ve placed into your home—partner with the right mortgage team to increase equity with a great interest rate.
You may have planned on closing costs the first time you got a loan, but closing costs are an aspect of every loan, even when refinancing. While there are a few exceptions (such as a no-closing cost refinancing), closing costs run from 2% to 5% and will cover property tax, appraisal tax, home inspection, and more.
Refinance closing cost:
All the costs can vary depending on the loan type and amount.
Closing costs should never come as a surprise.
Before you approve your loan, your lender must provide a detailed outline of your loan and closing costs. You will receive this information early on in the loan process through your closing disclosure. Never skip through these forms. While your loan officer or a real estate agent can review the documents carefully, you must read through them.
At Promise Home Loans, we don’t let any aspect of the loan process take you by surprise. We move with speed and precision to get to know your loan and refinancing needs, then introduce you to the best fit for your financial situation and long-term goals.
