Now that you are a proud homeowner, the next major decision is whether you should refinance and lower your interest rate. The direction of market interest rates shouldn't impact your decision. Instead, you should refinance when it makes sense to you based on the following criterions: 1. How long are you planning to stay? You should consider refinancing when you can recover the closing costs in less than 5 years and that you are planning to stay at the property longer than 5 years. For example, if your new mortgage had costs of $5,000 and monthly interest savings of $200, then your payback period will be 25 months. 2. Lock in a fixed rate mortgage. If you have an Adjustable-Rate Mortgage or ARM's - your monthly payments can move up and down as interest rates fluctuate. The closer you are to the re-set date and the longer you plan to keep your home, the riskier the adjustable-rate mortgage is. You should consider refinancing it into a fixed rate. 3. Stop paying private mortgage insurance (PMI). If you have FHA loans originated in 2015 onward, refinancing to a Conventional loan is the only way to remove monthly PMI. Private mortgage insurance protects lender if you don't pay back your loan. It is required if you put down less than 20 percent of your home's purchase. Now that you have at least 20% equity, refinancing from a loan with PMI to a loan without PMI make sense even if your rate is higher because you won't have to pay the monthly mortgage-insurance premium. Your new total monthly payment will be less than what you were paying before. 4. Removing or adding a borrower. Whoever is named the borrower on a loan is responsible for making the payments. In a divorce agreement, the party who was awarded the house should refinance and remove the x-spouse of the deed of trust. Without refinancing - both names are still on the hook as far as the lender is concern. So potentially, if a spouse awarded the house defaulted, the ex-spouse's credit is equally destroyed. 5. Cash-out refinancing. You can draw down on your home equity for some cash-out for any reason. Another option is to get a home-equity line of credit. You can use the proceeds to invest in stocks or mutual funds as long as you are not relying on your investment gains, plan to keep your home for a long time and have an excellent credit. This strategy would work in rising home equity market and in positive Return-On-Investment (ROI) scenario.
You do not have to start over again with another 30 Year Fixed. Ask me about Fixed Mortgage products from 15 to 29 Year Fixed. Be advised that your monthly payment will go up if you choose a shorter maturity product. Use this online loan calculator to estimate your payment.
Unlike when you first bought the house - you do not have to have funds at closing. You have an option to finance your closing costs or pay for it at closing.
Negative equity seems to be declining nationwide. About 43 million homeowners now have positive equity while about 6.5 million are still negative equity. Homeowners equity rose by $2.1 trillion last year to $10 trillion. Positive equity makes it easier for homeowners to refinance and to sell their properties. California leads the pack with about 12.5% still underwater (13.3% nationwide) while Nevada tops the chart with 30.4% still underwater. Equity of less than 20% is considered "under-equitied" which is still better than negative equity but not as good as 20% equity. Call us if you in the "Under-Equtied" category for refinancing programs available for you. However, there is a flip side to the story. Homeowners are frustrated due to their inability to tap their home equity. Despite low interest rates, it's become harder to borrow. Banks are requiring pristine credit since the great recession of 2008. Banks must now hold more money in reserve for each home-equity credit line they extend. So home-equity lines have become a less attractive business for banks than loans that require lower reserves. Fannie Mae and Freddie Mac can now send home loans that default back to the banks that provided them inflicting losses on the banks. Fannie and Freddie also view cash-out refinancing as riskier now and have imposed higher fees to guarantee them. This makes such loans costlier for banks and consumers. Banks are increasingly focusing on the most credit worthy borrowers requiring an average credit score of 780 to get a home equity loan (barely 30% of households have scores that high).
Rates are at historic low. Thinking about refinancing your mortgage? Pay attention to these items:
Here are the highlights of the upcoming Home Affordable Refinance Program (HARP) 2 (program designed to help underwater homeowners to refinance):
If neither FNMA nor FHLMC owns your mortgage, call the U.S. Department of Housing and Urban Development (HUD) at 800-569-4287 or visit HUD approved counseling agencies for FREE consultation.
Some pointers regarding HARP refinancing:
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