The Basics Types of Refinances Refinancing to Save Money Refinancing to Get Cash Simple Online Calculators

The Basics

There are only two basic reason to refinance; one is to save money and the other is to get cash from your equity (or a combination of the two). Sometimes, if the interest rate drops enough or you are paying off credit cards & autos, you can do both. You should always write out some goals for the refinance. List what are you trying to accomplish and prioritize them. Lenders use a term of "Net Tangible Benefit" to be sure you are gaining financially in some way from the refinance. Don’t over borrow but don’t under borrow either In Payment Calculator you can enter different amounts of loans at the same interest rate and see how much it will change the payments.

There is no free lunch though. All mortgages have costs which are usually financed into the loan. "Zero up front costs!" or "We pay for your appraisal!" doesn't mean that your loan or appraisal are free. It just means that the lender is financing the costs, which is standard procedure, and is something that we do on most refinances. Appraisals are always paid for by the lender as we hire the appraiser. We don't collect deposits from you upfront for this. Appraisal costs are part of the closing costs and are on your GFE and final settlement statement. Some mortgage advertisers say they don't charge any costs at all. You borrow $200,000, you get $200,000. All they have done in this case is to charge you a high enough interest rate above the more normal PAR rate to absorb the costs. There are always costs, it is just how they hide them. Be wary of lenders that try to convince you there are not any on their loan.

A lot of consumers base their decision on the lower payment or the cash they are able to get. You need to base your decision on whether or not the benefits outweigh the costs. Another question we often hear is, "Are the interest rates at the point I should refinance or should I wait for them to go lower?". If you are saving enough at the interest rate today to accomplish your goals or recover the costs in a reasonable time (see below), then do it. Timing the interest rate market is difficult. There is a common misconception that you need to save 2% - but this applied when consumers owed $30,000 to $40,000 on their homes. At the average home in the $150,000 range today, even a 1% savings may be worth while. If you are consolidating bills or paying off a second mortgage, the mortgage interest rate could even rise and save you money. Look at the entire picture of your finances as they are now and look at all the refinance options an experienced Loan Officer can offer. Then choose what puts you in the best financial position.

Some questions to ask yourself:

• Is your current interest rate at least 1% higher than the loan you are considering?
• Is your current loan an ARM (Adjustable Rate Mortgage) and you're thinking of converting to a low fixed rate?
• Are you planning on staying in your home at least another three years?
• Do you have a second mortgage or line of credit at a high or adjustable rate?
• Do you want to consolidate some credit cards or car loans to lower your total monthly payments?
• Do you want to do some major home improvements?

If you answered "yes" to one or two of the above, you should probably consider refinancing. If you answered "yes" to three or more, you should call us for sure.

Read a newspaper article on "Tips to Avoid Mortgage Fraud" by Steve Emory.

Types of Refinances

There are basically five different ways to structure a refinance.

• Rate & Term
• Cash-Out
• Streamline
• Conversion
• Modification

Rate & Term
Rate & Term is when you pay off an existing 1st mortgage with a new refinance. The guidelines allow you to roll the new closing costs into the loan and get a very small amount of cash back. The cash back is limited to 2% of the new loan amount or $2,000, whichever is smaller. You cannot pay off credit cards or installment loans as part of a Rate & Term. You can pay off an existing second mortgage with a Rate & Term, as long as it was used to buy the house originally, i.e. Purchase Money 2nd like an 80/15/5. No other 2nds can be paid off with a Rate & Term. Frequently, appraisals are not needed on Rate & Term refinances. The best rates apply to Rate & Terms.

Cash-Out
Cash-Out refinances are when you pull out some money from the equity in your home, hence "Cash-Out". You can use the money to pay off credit cards, autos, consolidate 1st & 2nds, do home improvements, pay for tuition and more. You can let us know how much cash dollar amount you would like to get after paying off your 1st mortgage or choose a percentage of appraised value you want the loan amount to be (Loan To Value "LTV"). An 80% LTV Cash-Out would be for a loan amount of 80% of the appraised value. Example, if your house appraised for $200,000 and you borrowed a new loan at 80% LTV, you would get a loan for $160,000 ($200,000 X .80). You would pay off your current mortgage(s), deduct costs, and get a check for the balance. Cash-Out refinances have the best rates to 70% LTV, about .125%-.25% higher to 80%, .25%-.5% higher to 90% and even more to 100%. Mortgage Insurance is usually required when you borrow over 80% LTV but there are ways to avoid this and some loans do not require it. Cash-Out refinances almost always require a full appraisal less than 90 days old.

Streamline
Streamlines are a special refinance loan. They are Rate & Term only (No Cash-Out) and use the old appraisal, no matter how old. They only apply in very limited circumstances. Most of the time, you must place a streamline back through the same lender that wrote the current loan, or at least the same agency (FannieMae/FreddieMac/FHA/VA). You need to discuss with your loan officer if a streamline will work in your situation or if it's even the best way to go. Many times you are trying to get rid of mortgage insurance with a refinance and want the loan approved using a new appreciated current value. This will not work with a streamline as you're using the original old appraisal and value. You cannot pay off a second mortgage with a streamline. You must do a 30 or 15 year fixed rate loan, no ARMs of any type. They can be a good option though if it will work in your situation and save you time and money.

Conversion
Conversions are not truly a refinance. Some Adjustable Rate Mortgage (ARM) loans come with an option for you to "convert" your ARM to a fixed rate loan at some future point. Usually these conversion options are more expensive overall than a normal refinance. You need to read your Note carefully to understand your conversion option or bring it in to us. Most conversions can only be exercised on certain dates of your loan and expire after a few years. You don't usually get the current best rate available; instead you pay a margin over some index for your new fixed rate. Typically the rate you get on a conversion is about .75% higher than the rate you could refinance for. There is also usually a fee from $300-$1500 to do it. Also, your payments are only spread over the remaining loan term instead of starting again at 30 years. Refinancing frequently gets you a lower payment than a conversion option. You need to come in to an experienced loan officer and compare the loan if you convert it against a new refinance to see which is best for you.

Modification
Modifications are very rare. Most lenders do not do them. Very simply, the current lender just adjusts the terms of your loan. This can be the term left, rate or whatever else you both agree to. Many people do not understand why they need to refinance when the current lender could "just lower my rate and not lose me as a customer". They don't want to go through the paperwork and costs of a refinance. Unfortunately, your current lender will more than likely have to fill out new paperwork, appraisals, title work, etc. with new loan costs, just as another lender would do for your refinance. All loans are written to guidelines to make them "salable" to FannieMae or FreddieMac. This is why you get such a low fixed rate today as opposed to an individual loan from a bank 20+ years ago. These guidelines require certain paperwork to make the loan salable. Modifications aren't usually offered. Small portfolio lenders are usually the only ones who will offer a modification, and they charge for them.

Refinancing to Save Money

If your goal is to save money by lowering your payments, you need to take the costs of getting the loan and divide that by the monthly payment savings. This will tell you how many months it will take you to break even on the costs and start saving money over the long term. If you plan on staying in the home past this future date, you should refinance. A good rule of thumb is if the cost break-even point is under 36 months, you should jump at the refinance. If it takes 36-60 months, weigh your decision carefully. If longer than 60 months, it may not be advisable to refinance at this time. If your goal is to refinance to a shorter term loan (i.e. go from a 30 year to a 15 year) and pay off your house faster, be sure the rate is dropping enough to recover the costs as if the refinance was a 30 year loan. If it doesn't, you should just start pre-paying principle on your current loan at the 15 year payment amount instead of refinancing and paying costs. An experienced Loan Officer will do these calculations for you so you can understand them to see if you are truly saving money.

Refinancing to Get Cash

The most common refinance is to get cash to consolidate bills. Consumers do this to lower their total payments, get the lower rate home loans have than credit cards or auto loans, possible tax benefits, pay off everything including the house faster and many other personal reasons. You can get cash for any purpose you want, including: home improvement, auto/boat or RV purchases, investments, family needs and anything else you need cash for. For years, the common 30 year fixed 1st mortgage has allowed you to borrow up to 80% of the appraised value for the refinance loan amount, pay off your existing mortgages & costs and keep the cash difference. Now there are loan programs that go to 90% of the appraisal at slightly higher rates and even 100% of the appraisal at even higher rates. If you are looking to get a lot of cash and are considering the 90% or 100% program, be sure to compare the payments against the extra cash. You may find the 80% of the appraisal loan amount is a better value for what you want and still leaves you spare equity if needed.