March 18th, 2021 4:22 PM by Jackie A. Graves, President
When someone thinks of refinancing, most often it’s because that person hears or reads that rates have dropped. Or the Federal Reserve makes a move at one of its FOMC meetings and decides to lower the Federal Funds rate. That makes news and consumers hear about it. Note, Fed actions won’t directly and immediately affect mortgage rates, but can have an impact. But getting a lower rate is not the only reason to refinance…there are others. What are they?
One of them is to get someone off a mortgage loan that was taken out jointly. This primarily means a couple got married, bought a house together and later on divorced. There might be a formal or informal agreement who will occupy the property but also make the mortgage payments. A formal agreement means who gets what and who pays what and listed and recorded in the divorce decree. The ex-spouse who vacates the property will still have that mortgage payment show up on the credit report. This can hamper the ability to qualify for a new mortgage to buy a new property. Yes, the divorce decree may highlight who is responsible for the old mortgage. But lenders aren’t obligated to erase that payment and approve a home loan for a new mortgage.
Further, lenders that do allow for a loan approval without the debt hit from the old mortgage will also want proof the occupying spouse has been paying the mortgage bill on time each month. If not, the other spouse that’s leaving the property will still not only have the mortgage payment on the credit report but now the credit scores are damaged. The way to avoid any of these situations is to have the occupying spouse qualify for a new mortgage by refinancing the existing one, removing the other spouse from the note and title.
Some mortgage programs have a ‘balloon’ payment. A balloon payment happens at the end of the initial loan term. A balloon loan can have slightly lower interest rates than prevailing fixed rates, thus the allure of the program. The initial period is fixed for say five or seven years and after that period the entire balance of the mortgage will be due. Refinancing out of a mortgage program that has a balloon payment is another reason to refinance that has little to nothing to do with lowering the rate.
Finally, refinancing a note can get someone who agreed to co-sign on a mortgage off the existing note. When some co-signs for a mortgage, it means that person agrees to make the mortgage payments if the other party does not. Often this can be a parent helping out a child buy a first home.
This arrangement should also be managed because the co-signer is not an occupying borrower and payments might be missed only to discover too late that their credit has been damaged without the knowledge of the parents.
Someone can also refinance to change the term of a loan. Switching from a 30-year fixed rate to a 15-year note means lower interest paid over the life of the loan.
Refinancing most often means taking advantage of lower rates, but anytime an existing mortgage is replaced, it is a refinance, regardless of the reason.
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