November 10th, 2019 9:57 AM by Jackie A. Graves, President
A home mortgage
refinance may sound like a good idea in theory, but it’s not
always possible or desirable.
starters, lenders have tightened up the approval process, making it more
difficult to get a loan.
today need to be triathletes to qualify for a loan, with great income, great
credit and great value in their home,” says Anthony Hsieh, founder and CEO of
loanDepot.com, headquartered in Irvine, Calif.
In addition, a refinance may not make sense financially,
particularly for borrowers who plan to sell their homes in the next few years.
Before taking the leap and opting to refinance, homeowners should
ask themselves the following six questions.
Do I have equity in my
Homeowners need to have at least 20 percent equity in their home
to qualify for a new loan without paying private mortgage
insurance. Adding PMI to the cost of a new loan could negate the
benefit of a refinance.
many homeowners are underwater — meaning they owe more on their mortgages than
the house is worth. However, being underwater or having little equity does not
necessarily rule out a refi.
should still apply for a refinance even if they have low equity, because there
are some Fannie Mae and Freddie Mac programs and FHA loans that
may accept them,” Hsieh says. “The best way to find out if you fit into a
program is to go to a lender.”
Meshel, district vice president for W.J. Bradley Mortgage in Phoenix,
recommends homeowners refinance quickly in case the housing slump deepens,
causing values to depreciate even more.
Patrick Cunningham, vice president of Home Savings & Trust
Mortgage based in Fairfax, Va., recommends an increasingly popular approach —
the so-called “cash-in”
“Some people are
opting to bring cash to the settlement in order to pay down their loan balance
to qualify for a refinance,” he says.
Do I have good enough credit?
Borrower credit scores play a big role in securing a good mortgage rate. In fact, you’ll need a good
credit score to qualify for any type of mortgage at all.
operate on a sliding scale, with the lowest rates going to applicants with the
highest credit scores of 720 or higher.
scores below 620 will have trouble qualifying for a mortgage at any rate.
What are my financial goals?
Many homeowners refinance to lower their monthly payments. A mortgage
calculator can give borrowers a sense of what their new payment
would be after a refi.
Others choose a
shorter-term loan with higher monthly payments so they can reduce overall
interest payments and own their homes faster.
“Some people are
restructuring their loans to a 20-, 15- or 10-year mortgage, which works well
for people with plenty of disposable income,” Cunningham says. “But I worry
that people are too focused on paying off their mortgage and not integrating
this decision with their overall financial plan.”
borrowers to make sure they contribute to retirement savings and college
savings, pay off high-interest debt, and save six to 12 months’ of expenses
“before opting for a shorter, more expensive mortgage.”
Meshel says people
should consider whether they want to retire without a mortgage before opting
for a new 30-year loan. Those who have employment concerns may want to
refinance into the lowest possible payment in case they experience a job loss.
How long do I plan to stay in this home?
Mortgage professionals generally tell borrowers to expect a home
refinance to cost 3 percent to 6 percent of the loan amount. A simple
calculation shows how long it will take to reach the break-even point when the savings outweigh
“If the break-even
is at 15 months and you plan to stay in the home for five years or longer, it
is probably worth it to refinance,” Cunningham says. “But if you plan to move
in two years, it may not make sense.”
long-term homeowners who are close to paying off their mortgages might not want
to refinance because of the costs incurred.
What are the terms of my current loan?
Borrowers with adjustable-rate
mortgages or interest-only loans should consider the potential
benefit of switching to a fixed-rate loan. Hsieh says all borrowers with ARMs
should switch to a fixed-rate loan unless they intend to move within one year.
says some borrowers can benefit by sticking with their current ARM.
“Consumers with a
subprime ARM should definitely switch to a new loan,” Cunningham says. “But
some with conventional ARMs may find that they are in a good loan and that
their rates are actually dropping.”
While new loans
today rarely have a prepayment penalty, many homeowners still have loans with
that restriction, which could reduce the financial gain of a refinance, Meshel
Do I have a second mortgage or line of credit?
Cunningham says borrowers with a second mortgage will face additional
complexity when refinancing.
can either pay off the second loan or combine the two loans into a larger first
mortgage,” Cunningham says. “Otherwise, the lender holding that second loan
must agree to stay in second position behind the lender of the first mortgage,
which the lender may or may not be willing to do.”
Source: To view the original article click here