Your Home Loan
Refinancing refers to the process of a homeowner replacing their home loan with a new one, that enables them to either capture the equity that has built up over time or save money in the long run. Because refinancing your home involves getting a brand-new mortgage, there is a full loan application and approval process involved. You will have to fill out an application. The lender and mortgage underwriter will request to see your credit history, proof of income, bank statements, as well as other supporting documentation. An appraiser will go out and evaluate your home to determine its current market value, and based on the report, a lender will approve you for a certain amount.
The good news is there are a variety of loan options to choose from, that based on your needs, can help you take full advantage of the opportunities refinancing provides.
Your Refinancing Home Loan Options
When refinancing your current mortgage, there are four main loan types.
Goal – To save money
Reducing the term with the goal of paying off the loan early and reducing the amount of interest paid over the term of the loan.
Interest rate – Usually decreases
Majority of refinancing loans
A rate-and-term refinance is when homeowners replace their existing mortgage with a new one that has either a more favorable interest rate, loan term, or both.
By securing a lower interest rate, as a homeowner you are able to lower your monthly mortgage payment and use the difference to pay for other expenses. Or, by altering the length of the loan, you can save money on interest over time.
Because the loan balance largely stays the same, there are subtypes of rate-and-term refinancing loans that waive the traditional income, assets, and credit history requirements called Streamline Refinances. These can be used on FHA, VA, and USDA loan types, the latter through Fannie Mae’s High LTV Refinance Option Program (HIRO).
Goal – Gain access to cash
New Loan Balance – Higher than the existing mortgage
Interest Rate – May or may not change
Applies To - FHA, VA, and conventional mortgages
A cash-out refinance is where a homeowner borrows against the equity in their home and receives a large amount of cash in return. For example, if you have a home worth $600,000, and have paid your current mortgage down to $200,000, you have the option to pull out cash from the difference, or $400,000.
This cash can be used to fund renovations, medical bills, your kid’s college education, and much more, and is especially popular when consolidating debt or combining an existing first and second mortgage into one.
The ability to secure cash-out refinances is heavily dependent on determining the value of your home, and your ability to repay that loan, which can make the application process as long as a traditional purchase home loan. Additionally, referring to our example, most banks and lenders won’t allow you to cash out the full $400,000 of your equity and will require you at least 20% of the home equity remain untapped.
Home Equity Line of Credit (HELOC)
Goal – Eliminate mortgage insurance or access equity in the property without touching the 1st mortgage loan.
New Loan Balance – 2nd lien on the property
Interest rate – Normally an adjustable rate based on a determined index. The minimum payment required is usually interest only for a set period of time.
Similar to a cash-out refinance, a home equity line of credit provides a way for homeowners to convert their home’s equity into cash. However, instead of receiving a lump sum payment, a HELOC operates more like a credit card. The amount you are approved for becomes a credit line that you can draw from whenever you need it.
The largest benefit to a HELOC is you only pay interest on the money as it is used, and only when it is used. Meaning if you only decide to use $10,000 of your credit line, you only pay interest on that amount. Additionally, as opposed to only being able to borrow up to 80% of your home’s equity with a cash-out refinance, you can borrow up to 90%.
However, with a HELOC, borrowers will be making two mortgage payments instead of one, and your monthly mortgage payment can fluctuate depending on when the money is taken out.
When Should You Refinance Your Home Loan?
Deciding when to refinance your home is heavily dependent on the right timing and your personal financial goals. In general, if your goal is to lower your existing mortgage payments, then the best time to refinance your home is when the prevailing interest rates are at least 1% lower than the rate of your current loan. At a difference of 1%, there’s typically enough room to offset the associated closing costs that come with refinancing your home and still achieve cost savings.
On the other hand, if your goal is to do a cash-out or a streamlined refinance, it’s best to wait until you’ve owned the property for at least 6 months. Most lenders impose a seasoning requirement to prevent buyers from over-shopping mortgages and ensure stability in the market. Additionally, if you’re anticipating making another large credit purchase in the future, such as a car or new furniture, it’s best to refinance your home either 12 months before or after. This is because refinancing a home results in a hard inquiry to your credit, negatively affecting your score for a year and staying on your history for 2 years. Spacing out your purchases and refinances on a set timeline, ensures your credit doesn’t drop significantly.
In the same respect, if your credit history has any errors, or is unusually low, it’s best to clear these items first before jumping in to refinancing your home in order to secure the best terms.
Refinancing Home Loans for Self Employed Business Owners
Lastly, prequalification and approval are often more challenging for self-employed business owners, depending on how your business is formed. Often, lenders will want to see the Profit & Loss Statements, Balance Sheets, and Tax Returns for both the business and the borrowers to get a complete picture. A licensed mortgage advisor who has experience working with business owners is vital to helping you navigate the process.
No matter what your financial circumstances may be, Jennifer excels in guiding California and Arizona homeowners through the process to select the best option available and ensure they achieve their goals when refinancing their home.