A decrease in mortgage rates can coax many homeowners into refinancing their homes. Even a slight reduction in such rates can have a significant pay-off for your long-term savings. Refinancing soon after a house purchase requires you to go through the application process in the same manner as the one for the initial mortgage. Lenders such as Prime Mortgage typically reserve their “prime mortgage” category for those with exceptional credit scores. The term “prime” is a reference to the credit score of a potential borrower, rather than the interest rates that characterize such mortgages. A mortgage type determines how quickly you can refinance your home since different mortgage loan types have their own unique rules. These include:
1. Conventional Loans
Conventional mortgages have no specific timeline within which to refinance. Your financial situation (i.e. credit score and other relevant financial information) will significantly influence your chances of getting approved for refinancing.
Most individuals that choose to refinance their mortgage loans do so for the following reasons:
i. A lower interest rate. This is probably the most cited reason for seeking refinancing. The state of the housing market, economic growth and trends, and inflation are some of the major determinants of the interest rate.
The Federal Reserve looks at all the above factors, among others, to set the interest rates. A fixed interest rate of 15%, for example, can drop to 3% in subsequent years. Assuming a homeowner took out a mortgage at the initial rate of 15%, they can save tens of thousands of dollars over the entire duration of that initial mortgage.
ii. Adding or removing a name from the loan agreement. A divorce is one such scenario where this factor comes into play. Assuming both spouses took out the mortgage together, a spouse may decide to opt-out of the agreement due to divorce. Removing or adding a name to this agreement is not a simple matter of informing the lender.
A new applicant must undergo a separate appraisal process; a new mortgage is then issued to refinance the first one. The wavering nature of interest rates means that refinancing, for this reason, may not guarantee a lower interest rate.
iii. Altering the terms of the loan. A typical mortgage loan runs for 30 years, meaning complete repayment will occur within this time period. A shorter-term loan of, say 15 years, can be arranged in such instances. While this may offer lower interest rates, it usually means you will pay higher rates every month.
An adjustable-rate mortgage can also be converted into a fixed-term mortgage through refinancing.
iv. Taking advantage of home equity. Home equity is the valuation of your property after the valuation of all other claims has been subtracted. If your home’s value is $100 000, for example, and your mortgage totals $60 000, then $40 000 is your home equity. Refinancing your mortgage for an amount that exceeds your loan balance can enable you to pocket the difference, though such an arrangement is more stringent before approval.
2. FHA Loans
Federal Housing Administration (FHA) loans are preferred by new home buyers because of less strict credit score requirements. There are several types of FHA refinancing options:
i. FHA streamline refinances expedite the entire process by lowering the eligibility criteria. This option enables you to lower your monthly repayment plan while lowering your interest rates, all without a cash-back option.
ii. FHA cash-out refinance. To be eligible for this option, you must have a credit score of no less than 580 and home equity of 20% at a minimum.
This refinancing option empowers you to obtain a loan bigger than your current mortgage. After repaying the original loan, you can pocket the remaining funds.
iii. FHA refinance as a conventional loan. In this type of arrangement, you must meet the standards required for a conventional loan. Refinancing from an FHA loan to a conventional loan eliminates mortgage insurance, as long as you have the 20% equity requirement.
3. USDA loans
Backed by the US government Department of Agriculture, this was originally meant to help homeowners in rural areas although urban dwellers now benefit from it too.
The two methods for refinancing under this scheme include streamlined refinancing and streamlined-assist.
USDA streamlined refinancing has more lenient eligibility requirements; your initial mortgage has to be current for the 6 months prior to putting in the application. This scheme favors those who are mainly interested in getting lower interest rates.
The streamlined-assist scheme is easier because of no required credit assessment. However, your initial loan should be current for at least the past 12 months. You must also demonstrate that your new monthly payments will be less than your ongoing repayment plan, by an arbitrary figure of, say, $50.