Selecting A Refinance Loan
When you decide to refinance, you might be surprised that there are many types of refinances from which to choose.
Your refinance depends on factors such as
- The type of loan you currently have
- Your home’s value compared to loan balance
- Whether you currently hold mortgage insurance
Following is a brief synopsis of each loan type and for whom each type is best.
A conventional loan is good for those who have decent credit and equity in their homes. Conventional financing does not require mortgage insurance with 20% equity. You can refinance into a conventional loan no matter what kind of loan you have currently.
FHA Streamline Refinance
Current FHA loan holders might consider an FHA streamline refinance. Going from FHA to FHA requires much less paperwork: no appraisal or income documentation is required.
These are high-LTV loans backed by Fannie Mae and Freddie Mac, and offered by local lenders. If your loan was opened prior to June 2009 and you have little or no equity, the HARP loan might be right for you.
A VA streamline refinance replaces an existing VA loan with another VA loan with a lower rate. It’s called a “streamline” loan because it requires no appraisal, and no verification of employment, income, or assets to qualify.
Current USDA mortgage holders can refinance with no appraisal. This program was recently rolled out in all 50 states.
You take equity out of your home in the form of cash by opening a larger loan than what you currently owe. The difference is forwarded to you at closing.
Conventional cash-out: Use conventional lending to tap into your home’s equity.
Cash out a rental property: Grow your real estate portfolio using equity from your existing investment property.
Home equity line of credit: Should you get a cash-out loan or a home equity line of credit? It depends on whether you want to leave your first mortgage intact.
FHA cash-out: No matter which kind of loan you have currently, you are eligible to use an FHA cash-out mortgage up to 85% of your home’s current value.
VA cash-out: Eligible military veterans can take a new loan up to 100% of their home’s value. Proceeds can be taken as cash or to pay off debt. You can also refinance out of any loan using a VA cash-out loan.
7 ways to get a better refinance rate
1. Increase your home’s equity
By increasing your home equity, you create a lower loan-to-value ratio (LTV). This is the amount that you’re borrowing as a percentage of your home’s value. LTV is key to getting approved for a refinance — and getting a lower interest rate — because lenders consider loans with low LTVs less risky.
There are three ways to increase your LTV.
- Pay down your mortgage
- Make improvements
- Wait for similar homes to sell in your neighborhood
According to Fannie Mae, cutting your mortgage from 71 percent LTV to 70 percent could drop your rate by 125 basis points (0.125%). That’s a savings of $8,000 over the life of a $300,000 loan. If your LTV is just above of any five-percentage-point tier, consider paying down the loan just enough to get to the tier below.
You can also make small improvements to increase your value, thereby lowering your LTV. Focus on bathrooms and the kitchen. These upgrades come with the most bang for the buck.
Lastly, stroll your neighborhood and look for homes that are on the market. A high-priced sale near you can increase your home’s value; appraisers base your home’s value on sales of similar homes in the area.
2. Improve your credit score
In general, borrowers with credit scores of 740 or higher will get the best interest rates from lenders. With a score less than 620, it can be difficult to get a lower rate or even qualify for a refinance.
What’s the best way to improve your credit score? Pay your bills on time, pay down credit card balances, delay major new purchases, and avoid applying for more credit. All these things can negatively affect your credit rating.
It’s also wise to order copies of your credit report from the big three credit reporting agencies – Experian, Equifax, and Transunion — to make sure they contain no mistakes.
You are entitled to one free credit report per year, per bureau.
3. Pay closing costs upfront
Closing costs can be substantial, often two percent of the loan amount or more.
Most applicants roll these costs into the new loan. While zero-closing-cost mortgages save out-of-pocket expense, they can come with higher interest rates.
To keep rates to a minimum, pay the closing costs in cash if you can. This will also lower your monthly payments.
4. Pay points
Points are fees you pay the lender at closing in exchange for a lower interest rate. Just make sure that “discount points,” as they are known, come with a solid return on investment.
A point equals one percent of the mortgage amount – e.g., one point would equal $1,000 on a $100,000 mortgage loan.
The more points you pay upfront, the lower your interest rate, and the lower your monthly mortgage payment. Whether or not it makes sense to pay points depends on your current finances and the term of the loan.
Paying points at closing is best for long-term loans such as 30-year mortgages. You’ll benefit from those lower interest rates for a long time. But remember: that only applies if you keep the loan and home as long as it takes to recoup the cost.
5. Pit lenders against each other
As with any purchase, refinance consumers should comparison shop for the best deal.
This applies even if you have a personal relationship with a local banker or loan officer.
A mortgage is primarily a business transaction. It shouldn’t be personal. A friend or relative who “does loans” should understand that.
Even if your contact suggests he or she can give you a lower rate, it can’t hurt to see what other lenders offer.
Lenders compete for your business by sweetening their deals with lower rates and fees, plus better terms.
And, don’t pre-judge a company just because it’s a banker or broker. If a bank isn’t presenting tempting offers, consider a mortgage broker, or vice versa. Brokers may obtain a wholesale interest rate for you, which can be cheaper than the rates offered by banks. On the other hand, many banks offer ultra-low rates in an effort to undercut brokers.
You can benefit when lenders fight for your business.
6. Look beyond APR
Two mortgages with the same APR are often unequal.
For example, some mortgage rates are lower only because they include points you’ll have to pay upfront. Others may have an attractive Annual Percentage Rate (APR), but cost more overall because of various lender fees and policies.
It’s possible for two mortgages to have the same APR but carry different interest rates.
Shopping by APR can be confusing, so it’s best to focus on the total cost of the loan, especially the interest rate and fees.
It’s also important to check out competing loans on the same day because rates change daily.
7. Know when to lock in the rate
Once you’ve found a new mortgage that meets your needs, consult with your lender to pick the best date to lock in low rates.
Loan processing times vary from 30 days to more than 90 days, but many lenders will lock in the rates for just 30 to 45 days.
Avoid expensive lock extensions. An extension is needed when you don’t close the loan on time.
Ask your lender to determine the best day to lock the loan based on a conservative loan processing time frame. Otherwise, you may end up spending more money than you originally planned.