Home Refinance 101 (everything you need to know about refinancing your mortgage)

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Mortgage rates are still very low in 2018, and yes homeowners are still refinancing their homes. This means if you got a mortgage a few years ago, you could really save a lot of money if you do a home refinance soon. Below is more information about the different types of mortgage refinances you may do as well information on how to refinance right.

Rate and Term Mortgage Refinance

This is the most common type of refinance. This type of refinance is simply where you replace your current mortgage with a new one with a lower interest rate and for the same term. For example, it is common for people to do a rate and term mortgage refinance from a 30 year loan with a higher rate into a 30 year loan with a lower rate.

There are some rate and term refinances that can be done quite easily. If you have an FHA loan, you can do an FHA streamline refinance. This means you can quickly be approved for a new mortgage without going through extensive underwriting, a credit check and income verification. If you are just refinancing for a lower rate with a government backed loan, this type of refinance is quick and easy. You may be able to get a new loan in just a few weeks.

It is required that you are saving money on your monthly payment when doing a rate and term mortgage refinance. Your lender will verify that you will be able to save money on your new loan.

If you have a loan from five or 10 years ago, you would be well advised to consider a rate and term refinance soon. Rates are artificially low and will probably rise towards 5% in the next year.

Refinance to Get Cash

Cash out refinances were a big thing during the last housing boom and helped to cause the crash. People took equity out of their homes, increased their mortgage balances, and then housing values crashed and many people lost their jobs, unable to pay their mortgages.

But you can do a cash out refinance on your home today and it is fine to do from a financial perspective. Your lender will only allow you to have an 80% to 85% loan to value, so the chances of over-borrowing are lessened.

For instance, if your initial loan was for $225,000 and you now have a balance of $200,000 and the home is worth $300,000 now, you may be able to borrow up to $240,000, and taking the $40,000 in cash.

It is wise to be careful when you borrow money out of your home with a cash out refinances. Make sure you can afford the new payments now and, in the years, to come. It also is wise to only borrow money that will pay you back. If you use your equity with a cash out refinance to rehab your kitchen, you may be able to get a lot of that money back when you sell.

Refinance to Reduce the Term

A less common reason to refinance is to reduce the term. Say you got a 30-year loan and you want to do a refinance into a 15-year loan. This could be a smart move if you want to have no mortgage payment sooner, such as if you are going to retire in 10 years.

Almost all lenders offer a 15-year mortgage, while a few offer a 20-year loan. If you want to refinance into a shorter-term loan, be sure you have the income to afford the higher payment. This type of refinance can allow you to save many thousands of dollars in interest.

Cash In Refinance

This is a rare type of refinance today where you refinance the loan with cash so you pay off part of the loan and reduce your loan balance. This type of refinance is more unusual today because the low interest environment makes us more likely to invest in something with a higher rate of return than a mortgage.

It is common for divorcing couples to use a cash in refinance, where one partner pays off part of the balance, and the other refinances the mortgage in their name alone.

Refinance to Dump PMI

If you made a down payment on your home with less than 20%, you probably have mortgage insurance payments. But now that you have 20% or more equity and a higher home value, you may be able to refinance without PMI.

This may be a requirement if you have an FHA loan. Most FHA mortgages underwritten after mid-2013 require homeowners to pay for PMI for the entire life of the loan. This is a rotten deal: Why should you pay for mortgage insurance when you have your home half paid off? The only way to get rid of mortgage insurance in this case is to refinance into a conventional loan.

If you are thinking about a refinance, take note of how long you plan to stay in the home. Every refinance comes with closing costs and fees. If you plan to live in your home for years to come, it is OK to do a refinance. But if you plan to move in two years, you probably will not come out ahead by doing the refinance. Most people find it takes at least three or four years to save enough in interest on a refinance to justify the closing costs.

With over two decades in the mortgage sectors, Mr. Dornan brings a lot of experience to the table. Bryan Dornan has founded several lending companies and written several hundred articles related to home financing, real estate and more.

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