Helpful Tips to Refinance a Rental Property

Modern apartment building

Chances are that if you are paying on a mortgage for a rental property, you have probably at least heard about refinancing it. Refinancing a rental property means that you are paying off one mortgage by opening another one. You are basically exchanging one mortgage for another one. This may seem counterproductive, but it does have potential benefits. In this guide, we will discuss why you might choose to refinance a rental property, tips on doing it successfully- and smoothly- and alternatives of refinancing.

Common Reasons People Refinance a Rental Property

While there may be several different reasons to refinance a rental property, some are more common than others:

Lower Interest Rate

Often, under the right conditions, you can get a mortgage lower interest rate when you refinance a rental property. Everyone can benefit from a lower interest rate.

Pay a Mortgage Off Quicker or Give Yourself Longer

When you refinance a rental property, you can either extend or shorten your repayment term. For instance, if you currently owe 20 more years on your mortgage, you could refinance with a lower interest rate to a 15-year mortgage. You might also refinance when you only have 10 years left to pay to another 15 or 30-year mortgage.

Lower Your Monthly Payments

If you refinance a rental property, you can lower your monthly payments. If your interest rate is lower, your monthly payments will be lower. Also, if you extend your repayment term, your monthly payments should be lower. This makes it easier to repay.

Use Equity for Other Needs, Desires, or Investments

Some people also refinance to take care of other things, such as:

  • Paying off debts
  • Taking care of college costs
  • Purchasing a new investment property
  • Paying off their primary home’s mortgage
  • Paying for repairs to one or more properties

Tips to Refinance a Rental Property

Refinancing can seem overwhelming and complicated, especially if you are new to it. We wanted to give you some tips on how to make the process simple, quick, and successful.

Understanding Your “Why”

Why exactly do you want to refinance a rental property? Is it to lower your monthly payments? Is it so that you can get some work done on the property? Do you want to use your equity to purchase another rental property? By understanding your reasoning behind it, you can make better decisions, including how much you try to refinance it for and how long you choose to extend your mortgage. It may also help you decide what lender to refinance through as well as what program to use.

For instance, if you are just hoping to lower your payment, you can simply refinance the balance left on your current mortgage. If you are hoping to buy a new property or use the cash to work on the property, you will need to refinance for more than the balance. You do not want to end up owing more unless you have strategic plans for that money.

Check Your Equity

Equity is the amount of the home you actually own. It is the value of the property minus the balance you owe on your mortgage. In order to refinance a rental property, you need to have equity to work with, especially if you are attempting to refinance for more than your current balance.

Choose How You Want to Refinance a Rental Property

There is more than one way to refinance a rental property. There are two basic ways to refinance, and the way you choose to go will depend on your goals. They are as follows:

#1 Refinance for the Exact Amount of Your Mortgage

In this case, if you owe $30,000 on your mortgage, you would get a refinance loan for $30,000. This might be a little more or a little less depending on the closing costs and anything extra you need to pay. However, your new loan would be for around that $30,000 plus interest and so on. This type of refinancing is for those who are just looking to lower their interest rate or extend their payment term.

Something to remember here, though, is that if you only owe $30,000 at this moment, you will end up owing more overall. This is because that $30,000- money that already includes the interest from the original mortgage- will now have more interest added. It can still be beneficial, though, depending on the specifics of the loan. This is just something to factor into your decision.

#2 Cash-Out Refinance

A cash-out refinance is a refinance home loan in which you not only borrow enough to cover the balance of your mortgage, but also some of the equity you own in the home. Typically, the lender will let you borrow around 70 or 80 percent of your equity.

This type of refinancing gives you extra cash to use for other things, so it is the way borrowers go when they are looking to pay off debt or make other financial moves. The downside of the cash-out refinancing is that you are adding money onto what you owe. Again, this does not necessarily make it a bad move. It is just something to take into account when making your decision.

Know What You Need to Refinance a Rental Property

Before you go apply for a loan, know what you need. Typically, you will need items such as:

  • ID and Social Security Card:
    You have to prove you are who you say. Some lenders may require other forms of ID, but most will be fine with a driver’s license and social security card.
  • Tax Returns:
    They usually want to see one to three years of tax returns. Play it safe and take three with you when you apply. That way, you are covered.
  • Mortgage Statements:
    They will need to see what you owe and how much of the property you own to calculate a loan amount. Additionally, many mortgage loans and refinance loans require that you wait a certain period of time after your original loan is taken out before you get a new one. Take everything you have related to your current mortgage so you are prepared for anything the lender asks you for.
  • Proof of Income:
    Along with your regular income, taking proof of income from the rental property can help a lot. Obviously, if your only income is that from the rental, you will already be taking this. For most people, though, rental income is more of a side income or they have multiple properties that they rent out. Regardless, the more income you can show, the better chance you have of successfully refinancing.
  • Property Deed:
    The lender will need to see information related to the actual property, including any deed work or other paperwork showing that you are purchasing it.

There is a chance that the lender will require more, including proof of insurance, homeowners association membership, and more. Some require very specific breakdowns of the value of the property while others do not. Most will also require a new inspection to be done. When you have chosen a lender, be sure to find out everything they require from you so that you can minimize the amount of time it takes for approval.

Check Your Credit

When you are applying for any type of loan, your credit score is important except under very specific circumstances. Some lenders will take other things into account for some programs, but having a good credit score can improve our chances of success greatly. Good credit can also get you good interest rates and better repayment terms. And- let’s face it- if you are not getting a better interest rate, you are probably fighting against yourself. You want to experience benefits if you refinance a rental property. A higher interest rate will not help you reach that goal.

Before you begin applying, take a look at your credit. Call around to different lenders to find out the minimum credit score they will approve. Most lenders want to see over 600, but some will work with a 580. If your score does not make the cut or is at the lower end of that spectrum, take some time to work on improving it. Even a jump of 20 or 30 points can make a big difference in the interest rate you pay.

Shop Around

Just like shopping for an original mortgage, it is important that you shop around when you want to refinance. You want to be sure that you get the absolute best insurance rate you possibly can and the best terms. Never go with the first offer you come across. The first lender might have the best offer, but you should never just assume that. Do your research and check into at least a few lenders. By filling out this form below, you can get offers in a matter of seconds. Try it right now:

Lock-In Your Interest Rate

Usually, when you apply for a loan and get a preapproval, you can choose to lock in the interest rate. This means that for a certain period of time, often around 30 days, that interest rate is guaranteed. If you complete the loan after that time period, you are subject to the current interest rate, which can be higher than the one you were guaranteed.

Consider a Mortgage Broker

Many people find better success working with mortgage brokers than with a lender. Mortgage brokers are professionals who are associated with a group of lenders instead of lending money themselves. Their group of lenders tends to be a mixture that has different requirements and different products, so they can usually find a loan product that suits a borrower’s individual needs.

An individual lender usually has only one loan product- possibly a handful- but most have the same basic requirements. If you choose to refinance a rental property, talk to a mortgage broker. They may be able to find you a better loan product than your typical bank or other lenders could.

Understand the Downsides

You didn’t think it would be all good, did you? Unfortunately, everything has downsides. Sometimes they are worth it and sometimes they are not, but it is important that you know what they are so that you can decide. Here are some of the common downsides of refinancing a rental property:

Increase In Debt

If you are borrowing more than your current balance, you are increasing the length of time you will be paying the debt.

Closing Costs

You will be paying closing costs all over again. When you first purchased the property, you paid closing costs. You might have gotten lucky and the seller paid the closing costs, but either way, closing costs have already been paid. Refinancing means paying closing costs again- and this time, there is no seller that might take care of it. If those closing costs are added to your loan, that means more interest and more you are paying out.

Do some calculations. Determine how much you will be saving by refinancing a mortgage for a lower interest rate. Then, determine how much you will be spending out in closing costs. Will you be saving a lot more than you will be paying in closing costs? If not, refinancing is probably not the way to go. This is especially true if your only purpose of refinancing a rental is to get a lower interest rate. If the closing costs will cancel out the money saved, don’t waste your time.

Amortization

When you first took out a mortgage, your amortization schedule had most- if not all- of your mortgage payments going towards the interest. Over time, more of the payment began going to the principal. If you do decide to refinance, it is like starting that schedule all over again. You will start out paying more towards interest and eventually paying on the principal. It is almost like undoing all of the hard work you have already done.

Alternatives to Refinancing

If you have decided that refinancing is not the route you want to go, there are other ways to meet your goals:

Personal Loans, HELOC, and Other Financial Tools

Refinancing is not your only option if you are in need of extra cash. In fact, you have several other financial tools you should consider. Think instead of options like personal loans and HELOC (home equity line of credit). You can get a personal loan if your credit is decent. Even if it is not, you can get a secured loan by putting up some form of collateral- like the title to a vehicle, an investment account, or something similar.

A HELOC is getting a loan based on the equity you have in your home. Unlike refinancing, though, this is a completely separate loan. There is a chance that you can get a lower interest rate on a HELOC. Additionally, you only take out the money you need as you need it and only make monthly payments on what you have borrowed. This option can save you a lot of money over time- especially if you do not need the full amount of your equity.

Make Extra Payments

If your goal of mortgage refinancing was to lower the amount of interest you owe or shorten your repayment term, you can do both of those by making extra payments on your current mortgage instead. Did you know that making one extra payment a year can knock years off of your overall loan term? It is true. For some loans, you can knock three to five years off of your mortgage loan with just one extra payment. That is because you are paying more towards the principal, so less interest is charged overall.

The best part? It is not even as hard as it may sound to make that extra payment. All you have to do is change how you make your payments. Instead of making one monthly payment, make a payment every two weeks.

For instance, if your monthly mortgage payment is $600, pay $300 every two weeks. Why does this work? Just some simple math: If you pay once a month, you are making 12 payments per year. If you pay every two weeks, though, you are making 26 payments each year, which is the equivalent of 13 monthly payments. That puts an extra $600 a year going to your principal since you have already paid your interest. Doesn’t seem so bad, does it?

Additionally, if you can pay just an extra $5 with each of those payments, you are putting another $130 straight to the principal. If you just absolutely cannot squeeze any extra out of your income, you can make that extra cash through yard sales and other quick cash tasks.

Conclusion

If refinancing a rental property is the way you want to go, you want to take it one step at a time. Getting in over your head is not a desirable income, so you want to prepare as best as you can. Use this guide to help you along the way but do not be afraid to do more research if you are not yet comfortable with the idea.

Cash Out Refinance to Use Your Home Like A Bank

You may love your home and want to remain there. You may also need remodeling or renovation to make it livable or to meet a change of life. Maybe you need to widen doors to accommodate a wheelchair. Perhaps you need to add a mother-in-law apartment. Perhaps you need to replace your furnishings. One of the simplest ways to pay for these needs is a cash-out refinance mortgage to replace your existing mortgage. You can obtain a new home loan that provides funds for more than you owe for the home with the difference going to you in cash. A traditional refinancing mortgage simply gives you a mortgage loan in the same amount that owe, but a cash-out refinance lets you access home equity.

Everything You Should Know About Cash-out Refinance

Cash-Out refinancing loan differs from a home equity loan though. You can join the 8.2 million homeowners already benefitting from a cash-out refinance mortgage as of June 2019.

You will pay a slightly higher interest rate and the cash-out limit will range between 80 to 90 percent of your home’s equity. While you may wish you could get all the home’s equity, this does mean you can borrow against it without depleting it. That also means you still have a bit of equity for a rainy day. Do not laugh. You will have at least 10 percent left meaning that if you need to access a few thousand dollars quickly, you will still have that money to access via a home equity line of credit. It is like keeping a few thousand dollars in your back pocket. Still, if you really want the full 100 percent of your equity right away, if you obtain a cash-out refinance loan guaranteed by the US Department of Veterans Affairs.

You can add the costs of a new mortgage to the amount refinanced so you do not have to pay anything out of pocket at closing. You can end up with a higher interest rate or longer loan term though. Also, you could end up paying more in interest through the life of the loan.

Now, do not get too excited. You won’t get cash right away. You still have to go through an underwriting process, the appraisal and your lender has to approve refinancing. Once you close, you get three days to cancel the loan in case you decide you have changed your mind – guaranteed by the Truth in Lending Act. Three to five days after your closing, you get your cash.

Reasons You Might Need a Cash-Out Refinance Mortgage

While the most common expense for these cash-out refinance loans is home renovations or improvements, you can also use the money for many other reasons.

Debt consolidation: You can use the equity in your home for a very low-interest rate debt consolidation loan. This will also raise your credit score by letting you completely pay off your credit cards. This instantly reduces your credit utilization ratio.

Medical bills: Skip the medical credit card and its high-interest rates. You can use the equity in your home to pay medical expenses.

School expenses: Perhaps you want to attend a school or vocational program that does not offer financial aid packages. Leverage the home equity you have to pay for it.

Vacation: Take that trip around the world with your spouse or family. You can see Paris and enjoy it using your home equity.

Tax deductions: Use a cash-out refinance mortgage to leverage the interest deduction available if you use the money to buy, build, or renovate your home.

Reasons to Avoid Using a Cash-out Refinance Mortgage

To be honest, there are just as many reasons not to take out a cash-out refinance mortgage. You should only use this option for financing if you absolutely must.

Foreclosure risk: You open yourself to the risk of foreclosure because your home becomes the collateral. If you fail to make the payments, you lose your house. While it is possible to use the cash-out refinance loan to pay off your credit card debts, this is frowned upon in the financial world because you repay an unsecured debt with a secured one.

New terms: You completely reset your mortgage. It will have different terms than the original. You could end up with a higher interest rate and you will pay new loan fees. Read all documentation carefully before you sign anything.

Closing costs: Yep, it is just like when you bought your home initially. You pay closing costs again. This ranges from two to five percent of the mortgage.

Private mortgage insurance: Remember the private mortgage insurance (PMI) you had to purchase when you first bought your home? If you tap into more than 80 percent of your home’s value, you have to obtain PMI again. This costs between 0.55 to 2.25 percent of the loan amount annually.

Bad habits: Start a good habit by working and silently earning money to pay your bills, rather than continuing a bad habit of using a loan pay off your debts while you continue to charge to your credit cards.

An Example of How a Cash-Out Refinance Mortgage Works

In this example scenario, your home has a value of $300,000, but you still owe $100,000. Your lender requires you to leave 20 percent equity, so you can only get a loan for $160,000 or 80 percent of $200,000 of your equity. You can typically obtain a lower interest rate on your mortgage.

Example of How a Cash-Out Refinance Mortgage Works

Difference Between a Reverse Mortgage and Cash-Out Refinancing

A reverse mortgage lets you borrow against your home’s equity without mortgage payments. You accumulate the interest on a reverse mortgage and pay the full balance when you sell your home or move out. Your heirs must pay it when you die if you die before you have paid it off. That may sound morbid, but you must be aged 62 or older to qualify for a reverse mortgage and the home must be your primary residence. You also must have substantial equity in it or own it outright.

Difference Between a Home Equity Line of Credit and Cash-Out Refinancing

A Home Equity Line of Credit (HELOC) looks like a second mortgage on paper but works like a credit card. You can draw from your HELOC funds when you want to take money out instead of a mortgage that requires you to take funds out in a lump sum. For example, you can purchase the items for your wedding and use it again six months later to purchase a car. Unlike a credit card, you do not pay it back and re-obtain the credit. Once you use your credit limit, your HELOC closes. Until you pay it all back, your house is your collateral.

Two Kinds of Refinance

Rate-and-term refinance: You will get a lower interest rate and new loan terms, but only the same amount of money as you currently owe.

Cash-out refinance: You may get a lower interest rate, but you will also get at least 80 percent of your equity in the loan on top of your new mortgage. You must get your home appraised to determine the home’s value for the loan-to-value ratio which determines one variable in the formula to decide for what amount of loan you qualify.

Remember Your Credit Score Still Matters

While your equity helps you qualify, you still need to know your credit score and it still needs to be about a 620. You can do a few things to raise your score if it is not quite up to par.

Pay your bills early or on time six months in a row. This increases your score by about 20 points.

Check your credit report for errors. Correct the errors by filing a correction request or requesting an investigation of any piece of data that looks questionable. If you do not recognize a credit line or show that the debt was paid, then you need to file a request with the credit bureau through which you obtained the credit report. Each credit bureau provides its own copy of your credit report. Different creditors report to different bureaus so they do not all have the same information.

Pay off your largest credit card debt, if possible. Make a lump-sum payment. This instantly reduces your debt-to-income ratio.

Your credit score is one of the biggest influencing factors that determine the interest rate you obtain. The higher you can get your credit score, the more easily you can obtain a lower interest rate. So, you need a high credit score to save money in the long run.

Specific Requirements for a Cash-out Refinance Loan

Each and every financial lender sets its requirements for refinancing qualifications. Most banks do have some typical requirements though. These include credit scores, debt-to-income ratio minimums, and required equity level.

A Credit Score Of At Least 620

If you just want a new interest rate and loan terms, you only need a credit score of about 580. If you want to get a cash-out loan though, you need a credit score of at least 620.

A Very Healthy Debt-To-Income (DTI) Ratio

You will need a DTI of less than 50 percent. The term DTI ratio refers to the amount of monthly debts and payments divided by the total monthly income.

Here is an example. Let’s say you pay $1,500 in housing and other bills each month. Your monthly household income is $4,000. To calculate your DTI ratio, divide $1,500 by $4,000.

1500/4000 = 37.5 percent

That means you would have the required DTI ratio of less than 50 percent.

Equity in Your Home

Your lender will require you to have a sizeable amount of equity to qualify for a cash-out refinance. Keep in mind that you cannot cash out 100 percent of the equity without a VA refinance. Plan accordingly since you will need to calculate ahead of time that 80 percent of your equity will cover the amount you need.

If it is so you can renovate your home, make sure you would have enough money to do the work by obtaining a few estimates from area contractors first. You may need a different type of loan to cover all of the work.

Getting Your Loan Approval

By now, you have probably prepped yourself rather fully. You complete your application for a cash-out refinance. It could take a few days before your lender decides whether to approve the refinance loan. It could take a few weeks. You may have to provide additional paperwork including bank statements, pay stubs and/or W-2s to prove your DTI ratio. Once you are approved, you head toward your closing. A few days after it, you get the loan monies. Remember, you will still have closing costs, just as if you were purchasing a house again. Your loan check goes directly to the bank first since you have to pay off your original mortgage amount first. That includes the closing costs, real estate taxes, homeowner’s insurance and other items you may have bundled into the loan request. After that, the remaining funds belong to you.

Your Loan Terms Change Vastly

Lookout. Your new mortgage may not resemble at all your original one. You get all-new terms. If your credit score went down since you obtained your original mortgage, you will not obtain the favorable rates you once did. Your loan terms change, too, so you may end up with a different time period in which to pay back the loan. You start over with a new payment amortization schedule that ensures you will pay off the mortgage principal and interest in a timely manner.

Interest rates

You can get a cash-out refinance with a fixed-rate mortgage or an adjustable-rate mortgage. Which one you choose depends on your financial situation. With respect to HELOCs, you will get a variable interest rate that changes in tandem with the U.S. Prime Rate. You can learn this rate before applying by checking The Wall Street Journal. As the index decreases or increases, so will your interest rate.

If that option does not sound attractive, you can also obtain a fixed-rate loan so that throughout the life of the loan, you will have one interest rate that will never vary.

Combining Nifty Options

Let’s say you have a lot to do to renovate your home and you really need to get a new car. You can combine loan products to maximize what you can withdraw.

Combine a home equity line of credit (HELOC) with a cash-out refinance or rate-and-term refinance. You can leverage all of your home equity by combining the two without needing to being a veteran to qualify for a VA loan. If you choose a rate-and-term refinance, you will only get better terms. If you choose a cash-out refinance loan, you will get about 80 percent of your equity in cash from the loan. You can then obtain a HELOC for the other 20 percent.

You handily obtain all 100 percent of the equity this way. This lets you fully use what you have built up. While you will pay closing costs on the refinance loan, you will not typically on the HELOC.

Look for the Best offer

Do not pick a lender at random. You need to shop around for rates, but you also need an easy way to do that. You should visit Loanry. It’s not a lender. Loanry is a loan mall. You can find a loan for any need and any credit rating. If you need cash now for a loan, it is a great place to start.

Here’s how it works in a nutshell. You complete a short, simple form with essential information like your name, email address, desired loan amount, the last four digits of your Social Security number, your birthday, and zip code. Loanry sends you an email of the potential lenders that best match your situation. You choose for which loans to apply. If you’re interested, enter your information and see if you qualify for any of their loans:


Basically, Loanry just helps take the leg work out of finding a loan. Rather than you needing to phone every bank in town or look them up online, you can have Loanry do all the work.

In Conclusion

You have a number of options when it comes to refinancing your house mortgage. You might just adjust your interest rate and terms, or obtain a cash-out refinancing mortgage or take out a HELOC.  And you have a number of ways to fund household renovations, a new car or numerous other large financial needs. Start researching today at Loanry.

Mortgage Refinance – Everything You Need to Know About It

A mortgage refinance will replace your current loan with a new one. Many times, people decide to refinance to reduce their interest rate, tap into home equity, or lower monthly payments.

Mortgage refinance applications are a significant portion of all mortgage applications. The relatively low-interest rates have persuaded homeowners to reorganize their loans and finances. Whether or not a mortgage refinance is right for you will depend more on individual circumstances instead of just the rates.

Everything About Mortgage Refinance

Before everything, it is very important to know when is the right time to refinance your mortgage. And keep these things in mind before you decide if a mortgage refinance is right for you.

Home Equity, Credit Score, Taxes and Your Debt-to-Income Ratio

The first qualification you will need in order to refinance is your home’s equity. Many home values have been on the rise and the share of underwater homes has dropped. However, some homes haven’t regained value. You may not be able to refinance with little or no equity with a conventional lender. But there are some government programs available. The best way to find out if you qualify is to visit with a lender and then discuss your individual needs. If you have at least 20% equity, it can be much easier to qualify for a new loan.

Credit Score: Lenders have tightened standards for loan approvals. So you may be surprised to find that even if you have good credit, you don’t necessarily qualify for a low-interest rate. In order to qualify for some of the lowest interest rates, you need a score of 760 or higher. If you have a lower score, you can still qualify for a new loan but the fees or interest rate can be higher.

Debt-to-Income Ratio: If you have a loan, you may think that you can easily get another one. However, lenders have also become stricter when evaluating the debt-to-income ratio. If you have substantial savings, a stable job history, or a high income, it can be easier to qualify for a loan. Lenders want to keep the monthly housing payment under 38% of your gross income. You may want to focus on paying off some debt before your refinance in order to qualify.

Rates vs The Term

You don’t want to just focus on the interest rate but also establish some goals when refinancing to determine which product meets your needs. If the goal is to reduce monthly payments then you want to choose a loan that has the lowest interest rate for the longest term. Maybe you want to pay less over the length of the loan. Then look for the lowest interest rate at the shorter term. If you want to pay off the loan as quickly as possible then look for an option with a short term and payments that you can afford.

Liens or a Second Mortgage: If you have liens or a second mortgage then refinancing can be a challenge since the new loan is used to pay off the first mortgage. You want to resolve any liens or tax liabilities before you begin the refinancing process.

The Cost of Refinancing, Taxes, Break-Even Point and Insurance

Refinancing a home isn’t free. However, you can find different ways to cut down on the cost or wrap the cost into your loan. Some lenders have a “no-cost” refinance option. This means you pay a slightly higher interest rate in order to cover the closing cost. Don’t forget to shop around since some refinancing fees can be reduced or paid by the lender.

Taxes: Many people rely on the mortgage interest deduction to lower their federal tax bill. If you refinance and are paying less interest, your tax deduction could be lower. Very few people think of this as a reason not to refinance but it’s still something to keep in mind.

Your Break-Even Point: One calculation that plays into your decision is the break-even point. This is the point at which the costs of the refinance are covered by what you save monthly. If the refinancing costs you $2,000 and you are saving $100 every month then it takes you 20 months to recoup those costs. If you plan to sell or move within those two years then a refinance doesn’t make sense.

Private Mortgage Insurance: If you have less than 20% equity in the home, when you refinance you will have to pay private mortgage insurance. If you are already paying this, it shouldn’t make a big difference to you. If the home value has decreased since the purchase date then you may need to pay PMI for the first time. The lender you are working with can help you calculate whether you will need to pay this and how much it adds to your monthly payment.

Why You May Want to Refinance

There are a number of reasons why a mortgage refinance may make sense to you.

8 Facts behind Refinancing

Reduce the Monthly Payment and Pay Off the Loan Faster

If your goal is to pay less each month then you should refinance with a lower interest rate. You can also reduce the payments by extending your loan term but with this option, you will pay more interest in the long run.

If you refinance from a 30-year mortgage to a 15-year one then you can pay off your loan in half the time. Due to this, you would pay less interest over the life of the loan. There are pros and cons to a 15-year loan but one of the reasons why more people don’t choose this option is because your payments usually go up.

Get Rid of Private Mortgage Insurance and Avoid Balloon Payments

Get Rid of Mortgage Insurance: One of the top mortgage tips is to eliminate this when you can. Private mortgage insurance on a conventional home loan can just be canceled. But if you have an FHA loan then the mortgage insurance can’t be canceled. The only way to get rid of the insurance is to sell the home or refinance once you have enough equity.

Balloon programs like adjustable-rate mortgages seem like a good option for lowering the monthly payments and rate. However, at the end of the term, if borrowers still own the property then the mortgage balance can be due, which can be a lot. A refinance can allow you to avoid these balloon payments and instead continue on with affordable monthly payments.

Equity and Fixed-Rate Loan

Use equity, when you refinance to borrow more than you owe on the current loan. Your lender will give you a check for the difference This is called a cash-out refinance. Some people can get a cash-out refinance and a lower interest rate at the same time.

Switch from an Adjustable-Rate to a Fixed-Rate Loan. Interest rates on an adjustable loan can go up over time but the fixed rate stays the same. When you refinance into a fixed loan, you can have more financial stability and more steady payments.

Cash-Out Refinance

When you get a cash-out refinance, you can have cash in hand to spend on debt consolidation, financial needs, or home improvements. You need to have built up equity in your home. You aren’t able to pull out 100% of your home’s equity but you can pull out some. For example, if the home’s value is $200,000 and the balance is $100,000, you can refinance the $100,000 loan for $150,000 and then have $50,000 for renovations.

This type of refinancing may give you a lower interest rate if you bought the home when mortgage rates were higher. If you want to lock in the lower interest rate and don’t need cash then you can go ahead with a traditional refinance.

Good Things About Cash-out Refinance

A cash-out refinance can make sense for a few reasons:

  • Debt Consolidation: You can use the money to pay off your high-interest credit cards and save yourself money in interest
  • Higher Credit Score: When you pay off your cards, you can build your credit score since you lower your credit utilization ratio
  • Tax Deductions: The mortgage interest deduction may also still be available on this type of refinance if the money is being used to improve the home
  • In addition to the benefits, there will be some cons that you need to consider for this type of mortgage refinance
  • Foreclosure Risk: Since the home is used as collateral you are risking it if you aren’t able to make payments. If you are doing a cash-out refinance to work on paying down your credit cards then you end up paying for unsecured debt with a secured debt
  • New Terms: Your new mortgage has different terms so you want to make sure you check your fees and interest rate before you agree to the new terms
  • Private Mortgage Insurance: If you borrow more than 80% of your home’s value then you have to pay for private mortgage insurance
  • Enables Bad Habits: Using a cash-out refinance to pay off credit cards can backfire if you rack up debt again and don’t have this option to pay off the balance

When Can You Refinance the Home?

Most lenders and banks require that you maintain the original mortgage for at least a year before you are able to refinance. However, each lender and the terms are different. Don’t hurry, shop around and see which lender has the best offer for you. It’s recommended to check with your specific lender to see any details or restrictions. In many cases, it would make sense to refinance with your original lender but it’s not required. It’s easier for a lender to keep a customer than get a new one so some lenders don’t require a property appraisal or a title search if you are sticking with your current lender. Many will offer a better price to a borrower looking to refinance. You may be able to get a better rate when you stay with your original lender. But you still want to shop around just to make sure.

The Cost of Refinancing

Refinancing does come with some costs, just like with a typical house mortgage.

Application Fee: Lenders have this charge to cover their cost of checking your credit report and the initial cost to process your loan request.

Title Search and Title Insurance: This charge covers the cost of the policy and insures the policyholder for a specific amount. It covers any loss caused by discrepancies found in the property title. And covers the cost to look at the public records and verify the ownership on the property.

Attorney Review Fees: The lawyer or the company that conducts the closing charges the lender for fees and, in turn, the lender charges those to you. Borrowers may also be required to pay for other legal services and fees related to the loan.

Fees and Points Incurred in Loan Origination: Lenders will charge an origination fee for the work in evaluating and preparing the loan. Points are prepaid financial fees imposed by the lender at the time of closing.

Risks of Refinancing

A mortgage refinance can be a smart move but it’s not beneficial for everyone. Refinancing can be a risk if you aren’t able to lower the interest rate by that much or you incur a lot of fees.

Refinancing Isn’t Free: Your mortgage refinance comes with costs, such as origination fees, title insurance, taxes, and an appraisal. Just like your original mortgage. Even if the refinance comes with a lower monthly payment, you aren’t actually saving money until the monthly savings make up for the cost of refinancing. It’s helpful to do the math ahead of time and use a refinance calculator to see how many months it takes to reach this point. If you are even thinking about moving before then, this it’s not worth it.

Prepayment Penalty: Some lenders may charge you extra for paying the original loan amount off early. A high prepayment penalty may persuade you to stick with your original mortgage instead of refinancing.

Total Financing Can Increase: If you refinance to a new 30-year mortgage then you will pay more in fees and interest over the life of the loan than if you have kept the original mortgage.

Reasons Not to Refinance

One of the main reasons to not refinance is if you are going to be moving soon. You need to consider your break-even cost and know that it usually takes a year or two to break even on the cost of a refinance. If you will be considering moving then it’s not worth it.

If you are close to paying off your mortgage then it may make sense to wait instead of a refinance. This is true even if the terms of the refinance are better than the current terms. By refinancing, you might extend the term of the loan and increase the cost, which means that refinancing may not be worth it in the long run.

If you are having financial problems then you may want to reconsider. Refinancing may seem like a good way to consolidate debt but in some situations, it puts you at risk for further financial problems.

Step-by-Step Process to a Mortgage Refinance

If you are ready to tackle the mortgage refinance process, here are the steps you want to take:

  1. Set the goal. Whether it’s lower payments, a shorter loan term, or getting rid of the insurance, knowing why you want to refinance is an important step
  2. Start shopping around for the best refinance rates. In addition to looking at interest rates, you also want to look at the fees. When you shop mortgage lenders, you can be sure to get the best deal
  3. Apply with different lenders. You want to get information from about three to five lenders but apply within a two-week period so you can minimize any impact on your credit score
  4. You need to choose a lender after you have compared the loan estimate documents you receive. The loan estimate also tells you how much cash you need for any closing costs
  5. Lock in your rate. When you do this, your interest rate can’t be changed during a specific period. You and the lender then try to close your loan before this expires
  6. Close on your loan. During this time, you pay the closing costs listed in the closing disclosure. Closing on a mortgage refinance is very similar to closing on your purchase loan but no one is handing you keys at the end of it

About this second step, maybe we can help you. Try here to find the best options to refinance your mortgage loan. Put in your information below and see what suggestions you will get. Good luck!


Conclusion

A mortgage refinance can be a great option for you if you are trying to lower your monthly payments. And eliminate your mortgage insurance, tap into the home’s equity, or pay off your home early. There are plenty of things to consider before you start the refinance process. Consider your credit score, your financial situation, and if it really makes sense to go through the refinance process. You want to make sure you have goals in mind when starting the process since refinancing is not free and you will have to pay some closing costs.

There are certain situations where refinancing doesn’t make sense and you want to consider all your options. When you are ready to start the mortgage refinance process, know that the process is similar to getting an original mortgage and you want to shop around for the best rates.

Refinance Your Mortgage At Historically Low Rates

Refinancing is a process of obtaining a new mortgage to substitute your current mortgage. The new funds you obtain are used to pay off the remaining payment of your current mortgage, and then you will be accountable to repay the new loan. Like with the current mortgage, the new loan will need application charges, title searches, and an assessment.

How will you know it’s time to refinance your mortgage? Is refinancing your mortgage a smart idea? If it’s the best decision, how will you refinance, and what are the requirements for refinancing a house? First, make sure you know your financial objectives. The moment you determine what you intend to achieve, then you will start thinking about refinancing alternatives.

Common Types of Refinancing Mortgages

There are three main types of refinancing mortgages in the market. They include rate-and-term, cash-out, and cash-in.

Rate-and-term

The most popular form of refinancing is the rate-and-term. It implies that the rate or term of your loan or even both are dissimilar from the existing mortgage. The terms of the mortgage might chance for a period of a 30-year fixed rate to a 15-year fixed rate. Or you might be required to refinance from a 30-year loan at a 5% rate of interest to a 15-year loan at a 4 % rate of interest. That will lead to significant savings in the long run.

Cash-out

This refinance alternative allows homeowners to refinance for a mortgage of a larger amount than the original loan. The homeowner takes the reminder. Therefore, if you begin with a loan worth $100000 on your existing loan and you refinance the mortgage of $120000, you will get a cash-out if $20000. Typically, banks consider this as a riskier option, but when utilized well, it is an effective plan for homeowners who intend to repay high-interest loans or improve their home equity.

Cash-in

Cash-refinance is the opposite of cash-out refinance. Instead of receiving money in return, the homeowner gives money to repay the loan balance. This assists homeowners to get lower rates on their mortgages that are accessible for lower loans or get rid of mortgage insurance premiums. This allows you to save a lot of money.

Note that the form of refinancing you select will depend on your personal financial condition and your objectives.

Since you know what refinancing is, you need to define if refinancing your home is a good option for you.

When To Refinance Your Mortgage

Once you’ve signed your home loan, it might feel like you made a wrong move, but as a homeowner, that is a myth. The move to refinance your home loan offers you the chance to save on the interest, cash out the home equity or reduce your mortgage term. If refinancing reduces the interest you are supposed to pay on the home loan; then this option is for you. Not certain that refinancing your loan is the smartest financial decision? Here are some signs that help you know refinancing is the best decision.

When You Can Get Low Interest Rates

The rate of interest for mortgage tend to fluctuate every day. Numerous aspects influence the rate of interest, such as inflation, the economy, market, Federal Reserve, and monetary policies in the US. If you realize that the interest rates are lower than what you pay, it’s time to refinance your home.

Substituting your home loan for a mortgage that has an affordable rate of interest with the same terms is known as rate-and-term funding. Is the difference in rate sufficient to opt for refinancing? Typically, if you find a mortgage that is 1 or 2% less than your current rate, its better you refinance the mortgage. However, no rule of thumb applies to every person and condition. Even though a 1% interest rate might lead to a huge amount of savings for a homeowner with a multi-million dollar home loan, the same might be different for a homeowner with a mortgage worth $100000.

You might opt for refinancing when the percentage rate of interest is less than 1%. While professionals recommend for at least a 1% decrease, that rule of thumb was used in the 50s when mortgages were small, and homeowners continued to stay in their houses until they die. Nowadays, with big loans, a negligible percentage decrease will still lead to huge savings.

Take your time to look at the updated rate of interest while comparing it to the original rate. Bear in mind that your credit rating will determine your individual rate of interest. That means that a lower interest rate is not always a must.

If You Want To Improve Credit

If you have been striving to rebuild your credit, refinance your mortgage as this will help you. Typically, a higher credit rating means you will have a lower rate of interest. Bear in mind that personal lenders define the worth of your credit rating. So, people with a credit score that is above 700 get the lowest rate of interest. However, you can still get a better deal if when your credit score falls in 600-700.

With the help of a saving calculator, you can compute your APR, cumulative interest, and monthly reimbursement. The calculation is completed based on your credit rating, a form of a loan, the principal amount of loan, and where you stay. 30-year financing for an amount of $100000 at the credit rating of 620-639 will offer you APR of 5.0006 %. That will add up to the monthly reimbursement of $537 and a cumulative interest amount of $93,388.

What will happen if you raise your credit rating to 760-850? The APR will reduce to 3.417%, the monthly payment will reduce to $444, and the cumulative interest paid will be $59.993. That is a difference of $33395.

One of the essential aspects that mortgage lenders look at is credit history. Even a single point increase in your credit score will decrease your loan fees. Luckily, there are numerous ways to increase your credit rating to make sure you get a better interest rate on your loan.

How to Improve Your Credit Score

Get a Rapid Rescore

A rescore will remove all mistakes that are affecting your credit rating. That will boost your credit score from a couple of points, even 100 points within a few days. Mortgage creditors can utilize this approach to assist homeowners to boost their credit rating.

Ask for Credit Reports

Before you start mortgage loan shopping, make sure you know your credit score by requesting a free credit report from the three leading bureaus. They include TransUnion, Experian, and Equifax. Report all errors you might find immediately. If you want to improve your score over many months, you can ask for the free credit report after four months from any of the leading bureaus. Thus will allow you to know how your credit score is progressing.

Pay Your Bills on Time

Both the present and past payment habits are considered to be a dependable pointer of your upcoming payment habits to creditors. Making your payment late or missing any payment is a fast way to damage your credit score. Therefore make sure your payment is consistent, and they are made on time. Utilize automated payment to make sure you do not forget paying any bills.

Enhance Your Debt-to-Revenue Ratio

You will improve your credit rating by paying off your loan and keeping your credit card balances at a minimum. The overall recommendation is to maintain your credit usage at 30%. That means that your credit line usage should not exceed 30%.

Leave Unused Credit Cards Open

By keeping the unused credit cards that don’t cost you any yearly charges open, you will have a chance to maintain your credit mix and credit score. You will also keep your usage ratio low.

Have you improved your credit score? Do you believe that you are eligible for a low rate of interest on your home loan? Then you can refinance your mortgage. If you think refinancing might be a lucrative option for you, make sure you do the calculations well. That is because the mortgage rates tend to oscillate and might reduce even further.

How to Improve Your Credit Score Without Crying

When You Have Experienced an Increased Revenue

An upsurge in revenue might be perfect if you want to refinance your mortgage to a short term. Shifting from a 30-year home loan to a 15-year loan term will save you a lot of cash in interest.

For example, a 30-year fixed mortgage of $100000 at a stellar credit rating of 760-850. The loan will give you a monthly reimbursement of $444, $59,993, and a 2.845% APR. If you decrease the mortgage term to 15 years, the APR will change to 2.845%, and the interest will reduce to $22, 967. That is a huge difference of $37,026 that is a huge increase in your savings.

When You Have Issues with Your ARM Adjusting

Adjustable-rate mortgages tend to differ over the lifetime of a loan. The rates are based on the market situations and also the form of loan to get. Most ARMs amend once every 12 months, while others will adjust after up to 7 years. Mostly, you will pay less interest with ARMs and attract lower monthly disbursements early in the mortgage term.

If your current mortgage has a fixed rate, and you expect the rate of interest to fall further, you may opt to switch to an adjustable-rate loan. If you intend to relocate within a couple of years, switching to an ARM might make sense for your condition. That is because you will not be in your house for many years to wait for the rate to increase.

On the other hand, the most upsetting thing about the adjustable-rate mortgage is when adjusting the loan, the rate of interest and payment might increase. Switching to the fixed mortgage rate might be a viable option if you believe you won’t be able to afford to make the payments once you adjust the loans. You can also refinance your mortgage.

When The Value of Your House Goes Up

From 2011, the value of houses in the US has increased from $250000 to $394000. Hitherto, the majority of homeowners ignore refinancing their mortgages once the value of these homes rises. Once you notice that the value of your home has increased, refinance your mortgage since it will be beneficial. If you want to repay other higher interest loans fast or finance massive purchases, these options will be appealing.

Cash-out refinancing is a funding alternative that lets you get a new and bigger loan so you can get the remainder. For instance, perhaps it was initially valued at $250000. You offer 20% on the upfront. Your home loan of $200000 is now $140000, after a couple of years of reimbursement, but the value of a house has gone up from $250000 to $300000. You might decide to refinance your mortgage for over the difference of $40000. If you decide to refinance the home for $165000, you will use a $25000 difference to repay a high-interest loan, remodel your house, or finance other purchases.

Also, if you are in a good financial condition whereby you are sure you can repay the extra $25000 of mortgage loan with ease, this might be a good move. If you plan to utilize the funds to repay other higher interest loans, make sure you define if you will be required to pay additional interest for that loan than for the mortgage. If you ultimately pay extra interest other higher interest loans, then the cash-out mortgage refinances might be a good option for you. In case you are required to pay additional mortgage interest, you might need to remain with the old mortgage.

Make sure you check your home value to get an accurate approximation before you opt to refinance your mortgage. Undervaluing or overvaluing your property might make you overpay and save less.

In case you experience any of the mentioned signs. It might be the right time to refinance your mortgage.

Questions to Ask Yourself Before You Decide to Refinance Your Mortgage

Every person would like to save money, particularly when it comes to a mortgage. Perhaps, you want to reduce your bills by refinancing your mortgage. Or you want to refinance your mortgage since you are worried that the rate of interest will increase ad it’s your only chance to get a good deal.

Mortgage rates are generally low, and you might have numerous loan alternatives. However, you will need a lot of time to find out if refinancing is your ideal option now. The period you intend to stay in the house, your financial goals, and your credit score will play a vital role when deciding whether to refinance your mortgage.


Here are some of the questions you need to ask yourself before you decide to refinance your mortgage.

Are Mortgage Rates Going to Increase Any Time Soon?

Once the Federal Reserve increases interest rates for short term loans by 0.25 percent, the majority of homeowners fear an increase in mortgage rates. However, rates for a mortgage are not affected by an increase in short term rates.

Alternatively, never expect a fast increase that will prevent you from refinancing your mortgage. You will still have time to repay the high-interest loans and improve your credit profile, and increase your chances to qualify for a high refinance mortgage.

Provided the mortgage rates are still low; people will continue refinancing their homes. The majority of homeowners who bought at a market peak, only to experience the prices go down, have now regained sufficient equity in their properties to benefit from refinancing their mortgages. Many homeowners are taking advantage of the lower rate of interest with cash-out refinancing to finance their home remodeling projects.

You will get a competitive rate of interest provided you have a good credit score, and you provide evidence of steady revenue.

How Much Can I Save On the Payments Made Every Month?

To compute your possible savings, you must add all your expenses for refinancing, like evaluation, a credit check, initial charges, and closing expenses. Make sure you find out if you have a penalty for repaying your original mortgage early. Once you know what rate of interest could qualify you for a fresh mortgage, you can compute your monthly payment to find out the amount you can save every month.

Additionally, you will need to consider if you have no less than 20 percent equity in your property. That is the difference between your debt and the market value. Check the value of your home in your estate to know how much your property may appraise now. Never depend on the online property value estimates as they are always of the real value. However, online websites will give recent selling prices of the same properties in your area. Also, a local realtor will share ideas if what your property is worth.

The amount of equity is essential since creditors will need mortgage insurance if your equity is below 20 percent. This safeguards the lender’s financial interest in case you fail to repay the loan. Mortgage insurance is extremely expensive, and it will be included in your payments every month. Therefore, make sure you include them when making calculations for possible savings.

Will the Savings be Sufficient to Make Mortgage Refinancing Worthwhile?

You will need to spend 2-3% of the mortgage in closing expenses. Therefore, you find out the number of days your savings will go towards recovering the expenses. For example, it will take you 30 months to cover $3000 in closing expenses if your payments every month reduces by $100. If you relocate during that period, you risk losing cash in a refinance.

Is it the Right Time to Get Another Loan Option?

Predict how long you want to stay in your old house and think of the details of your old mortgage. The way these aspects play off one another will have a huge role in your decision.

Let’s assume you purchased a house with an adjustable-rate mortgage for the first term of 5 years at 3 percent. You intend to stay in the house for many years. If notices that the adjustable-rate can get to normal and go high, you may benefit from refinancing your mortgage to 15 or 30-year fixed loan to have a set rate that doesn’t fluctuate.

If you think that you will be relocating in a couple of years, refinancing your mortgage to an ARM from a long term fixed mortgage will allow you to save more cash since lenders provide low rates in the mortgage.

How Does My Credit Score Look Like?

Check out if your payment history and credit rating has improved from the time you obtained the mortgage. If yes, you may be eligible for a competitive rate of interest, and this will assist you to save a lot every month.

Furthermore, experiencing some financial hardships will hinder your capability to qualify for a refinance mortgage and also the rate you will be given. If you are late on paying your credit card, purchases a new vehicle, or obtained a student loan, your credit rating will be low than it was when you obtained the first loan. Make sure you do credit repair before you refinance your mortgage.

If you are finding it hard to make payments, try to automate all of them to ensure you do not forget any. Additionally, check the difference between the outstanding credit balance and credit limit. If the report indicates outstanding balances are close to the limits, it means higher usage. Make sure you maintain the ratio at a lower level by repaying your credit card balances every month. This will determine if you are eligible for a new mortgage.

Steps of the Refinancing Process

There are numerous reasons you may need to refinance your mortgage. You want to reduce your monthly payments, reduce e rate of interest, or get some cash to repay a high-interest loan. Irrespective of your reason, you need to know what to expect from the refinancing procedure before making a decision. To refinance your mortgage, you will need to through these steps:

Ensure You Will Benefit from Refinancing

Your initial step when to refinance your mortgage is ensuring that refinancing will be helpful to you. Set your financial goals and determine if you can achieve them. Are existing rates cheap to allow you to save? If you decide to cash-out, ensure the cash you get will outweigh the additional years you spend on the loan. Every homeowner has a unique financial situation and priorities, and for that reason, you are the one to choose what is best for you.

Call the Mortgage Lender

Get a lender who will make the refinancing procedure as fast and stress-free as possible. A good lender will allow you to get reapproved within 15 minutes, with a free rate quotation and no onus quote.

Finding the right lender is very important. One of the best places to look for reputable lenders online is Loanry. This is what we do. We connect you with credible lenders and help you go through this process a bit quicker. Start here:


Fill the Loan Application

The moment you are ready to refinance your mortgage, start your application with one of the leading lenders

Sign Your Disclosure

The lender will send you the original disclosure to sign, and you might take advantage of that chance to look at the terms of the loan. This will help you make sure you achieve your goals of cashing out or reducing your rate.

Offer the Required Documentation

Once you sign, you will need to give your paperwork to the lender, including your income and property verification.

Submit the Mortgage Conditions

The lender will send your documentation to the underwriters who will check if there is anything else required.

Sign the Final Documentation

Once the mortgage is approved, you will need to sign with a lawyer.

Remember to Check Back with the Creditor

After 72 hours, whereby you are allowed to cancel the refinance mortgage without any charges, your mortgage will be financed. At this moment, your old mortgage will be repaid in full.

Start Repaying the Loan

Since you’ve completed the refinancing procedure, you can begin repaying the current mortgage that will be due in one-two months after the financing process.

Bottom Line

A good refinance must benefit the homeowner by reducing his or her monthly mortgage payment or reducing the term of their home loan. Unluckily, some complexities tend to trip up the gullible borrower, resulting in a sore deal. So, make sure you understand the process. This article shares some mortgage tips to help you make an informed decision.

Before you decide to refinance your mortgage, get your creditor, and do the calculations. This will help you to find out if the payment term is sensible to allow you to save. Take a comprehensive inventory of your financial objective and contemplate how your existing house will achieve your location and space needs.

Saving some dollars on your mortgage will help you accumulate wealth, and everyone loves doing that. If you think that it’s not the right time to refinance your mortgage, continue paying your old mortgage. Maintain your credit score such that you can be prepared when the time comes. However, doing a bit of rate shopping is important as you will have a guarantee that you will get an affordable rate.

How to Do a Cash Out Refinance to Consolidate Debts

If you are a homeowner and have found yourself in need of funds at any point, you have probably heard of a home equity loan or home equity line of credit, both of which are very helpful options under the right circumstances. However, there is another option that many find even more helpful: a cash out refinance to consolidate debts.

This may be your first time hearing that term. You are not alone if that is the case. It is not mentioned anywhere near as much as home equity loans, but a cash out refinance can be more helpful in many situations. One great time to consider a cash out refinance is when you want to consolidate debts. So let’s explain how you can do this.

What is a Cash Out Refinance?

If you are currently paying off a mortgage loan and have been for some time, there is a good chance you have some equity in it. Equity is how much of the home you actually own. For instance, if you bought a $100,000 house and you have $25,000 equity in it, then you currently own $25,000 worth of the house while the other $75,000 is still being paid with your mortgage payments. As you pay more, your equity increases. You have the ability to borrow money on the amount of equity you have in the home.

You may be saying that this sounds an awful lot like a home equity loan. They are similar, but they are also different. A regular home equity loan actually becomes a completely separate loan from your current mortgage, meaning that you end up with two separate payments.

A cash out refinance puts your current mortgage loan and your equity loan into one lump sum payment, leaving you with one loan. In other words, the cash out refinance loan will cover the full $100,000 again (minus any costs, fees, and so on). It will pay the $75,000 to your current mortgage loan, and you get the remainder. You then have to repay the one $100,000 loan.

Will That Not Just Add Debt?

If you are anything like me, your initial reaction to paying down debt is, “Whew! I am not getting into debt again!” So the idea of doing a cash out refinance to consolidate debts or for any other reason sounds a bit counterproductive, especially if you barely got your mortgage paid down. There are, however, some potential benefits to a cash out refinance to consolidate debts, and for other purposes. Let’s break it down some.

A Cash out Refinance to Get Out of Debt

A loan to get out of debt? Is that a thing? Yes, it actually is. So how can doing a cash out refinance to consolidate debt help if you will still be in debt? It is actually simpler than it sounds, so we will keep the numbers simple as well. Let’s say your debts look something like this:

 

While yours may look different, you get the point. The above debts are just some that I have seen recently.

These payments come out to $975 per month- and that is with the minimum payments on credit cards. If you are not aware, paying only minimum payments on credit cards is going to keep you in debt- forever- so those balances do not decrease each month. They actually increase- every…single…month.

At this moment, your debts come to a total of $81,900. Remember that this includes your mortgage. If your home cost a total of $100,000, $40,000 of which you have paid down and own. You could go do a cash out refinance to consolidate debts in the amount of $81,900. $60,000 of it would go to the mortgage and $31,900 would go to your debts.

Now, let’s say you also got a lower interest rate this time of 5% instead of 10%. If you chose a 30 year mortgage, your payment would go down to around $300, which would cover EVERYTHING, not just the mortgage. If you have paid off your debt with that loan, you now only owe your refinance loan. So you have gone from paying out $975 a month on debts- including credit cards that you will not be paying off with the current payment- to paying out about $300 per month. Even if you do a 15 year mortgage instead and have around a $500 payment per month, you are still winning. As you can see, this can be a great way to get your finances in order. 

If you choose to, you could get a loan for more than what you actually need, but we are trying to stay out of debt, remember? Getting more than you need is probably not a good idea unless there is a good purpose for it, like sending your kiddos to college or something similar. Shopping sprees? Probably not a good idea.

7 Careful Steps To Consolidate Debt Without Tripping

 Why Would I Want to Do That?

Some people’s initial reaction to this information will be utter astonishment that someone would want to do such a thing. Yes, it sounds a little crazy- until you consider what it can do for you. But there are good reasons for a cash out refinance. Some people do a cash out refinance to consolidate debts. Other common reasons are home remodeling projects, college costs for their kids, buying a new car, tax deduction, better terms, lower or fixed rate, pay off high-interest debts, buying an investment property or second home, investments, starting a business, illnesses or emergencies not covered by insurance or emergency funds etc.

Резултат слика за cash out refinance infographic

What is Your “Why”?

Why are you considering doing a cash out refinance to consolidate debts? Obviously, yes, to consolidate debts, but why do you want to consolidate them? Is it to lower your monthly bill total? Improve your credit score? Start a business? Send your kids to college? Go on vacation? Invest?

The thing is that it is still a loan, and a loan has to be repaid. If this loan will, logically speaking, but you in a better financial spot, it is probably a good idea. To help you determine if this is the case, answer the following:

  • Will it save me money every month?
  • Will it lower my interest rates or eradicate high-interest debt?
  • Is the money going into starting a business or other money-making venture that will generate additional cash flow? Will that cash flow be larger than my loan payment?
  • Will I owe out more or less after I get the loan?

Is It In Line with Your Beliefs and Values?

This may seem like an odd question, but there is a purpose. If the money is going toward something you completely believe in, like college funds or ministries, it will seem like a lot less hassle to repay it than something you care nothing about. For instance, I firmly believe in providing my kids with what they need, including a head start in adulthood, sending them to college, and supporting ministries that help those in need.

This means that, for me, I would be more inclined to get into debt and repay a loan if I were doing it for college costs, to help my kids buy their first home, or to donate to a ministry that helps build homes for the homeless and feeds the hungry. That debt would not seem like such a burden. If you are considering the refinance option, make sure you believe in what you are doing. If you do not, even doing a cash out refinance to consolidate debts is going to feel miserable over time.

Benefits of a Cash Out Refinance to Consolidate Debts

Though the benefits may change from person to person, some of the potential main benefits include:

  • It might lower your monthly payments.
  • You might find lower interest rates than you currently pay.
  • Paying off debt helps to improve credit scores.
  • It can help build better credit by paying off debts and it opens up a new account. If you pay on time, your credit will continually improve.
  • If you pay off your debts and are no longer paying those monthly payments, you increase your cash flow, which is always nice.
  • You can stop debt collection agencies from calling you- talk about relief.

Резултат слика за pros cash out refinance infographic

Risks of a Cash Out Refinance to Consolidate Debts

As many benefits as there are, there are also risks and downsides to doing a cash out refinance to consolidate debts. It is important to be aware of these before making a decision.

  • Most, if not all, cash out refinance loans will require you to pay closing costs….again. It probably was not very fun the first time, so it is probably not something you want to do a second time. Ask around and read the fine print to find a lender that does not charge closing costs.
  • If you are not careful, you could wind up with a higher interest rate than before. Obviously, this is not what you want, so make sure you are paying attention to the loan terms.
  • You might be putting off retirement to pay off your loan. I do not know when you plan to retire, but if you are getting another 30-year mortgage, you might be working longer than you wanted.

Still Not Sure?

You could also speak with a financial advisor or a loan officer. Word of warning on that, though, if the person you are speaking to will be affected in some way by your choice, do not just take their advice and run with it. Weigh out what they say against what you have learned. Have them show you- preferably in very easy to understand numbers- how exactly this cash out refinance to consolidate debts could hurt or help.

Maybe I am asking too much, but I personally prefer looking at numerical information through charts and graphs to see how something will affect me. I am not so sure every loan officer and financial advisor feel the same way though. As long as they can show it clearly so you can fully understand, you should be good to go.

Also, try not to just jump into a decision. Again, this is a big move. Rushing into it might put you in a worse financial state than you are now. Take the time to really consider your options before you decide.

How to Do a Cash Out Refinance?

First, you have to understand that not everyone will get approved for a cash out refinance to consolidate debt. It is still a loan, so your credit will need to be checked as well as your payment history up until this point. If you have not been so good at paying your first mortgage on time, there is a good chance that the lender will not want to lend to you.

If your credit and payment history are good enough, though, your next step is to go back over all of the information above and be 100% certain this is what you want to do. Once you are sure that you are sure, it is time to start looking for your loan.

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How to Shop for a Mortgage

Understanding the mortgage process is pretty important if you’re thinking about getting into it. If you just jump online and type, “how to get a consolidation loan”, you are going to be bombarded with results and quickly overwhelmed. However, online is typically where to shop for a mortgage loan because you have a gold mine of options.

Whether shopping online or going to the bank, it is important to find a lender who is credible and who is trustworthy to keep their word when it comes to following the terms and conditions of the loan agreement in the initial stage of the application. Here, on Loanry, you can find it! By putting in your information here, you can check if you qualify for a loan with one of the carefully selected reputable lenders:


It is important that you find an interest rate that is lower than the one you currently pay. If it is higher, you are costing yourself money that you do not need to. You can always consider a cash out refinance later when rates drop. If you are using your money to consolidate debts, it might be okay if the interest rate is the same- though you would really need to do some calculations. Regardless, you do not need one higher. Even lower your rate by ½% saves you a lot of money over the life of the loan, so search until you find the best rate possible.

As you can see, knowing how to shop for a mortgage, or any other type of loan is important so you can make the best decision for yourself.

Conclusion

As you can hopefully see, a cash out refinance to consolidate debts can be a really good idea, but you have to think it through to make sure that it is good for you. Consider your entire financial state at this time, and how long you are willing to pay on your new loan. Get advice if you need to, and definitely talk it over with your spouse if you are married. Weigh out the pros and cons, then make the best decision you possibly can with the information you have.

When Is The Right Time to Refinance Your Mortgage?

Buying a home is one of the most important decisions that people make during their lifetime. However, the process makes for an expensive investment, making it necessary to ensure proper financial planning before making the purchase. With property prices going up by the day, a good number of people turn to mortgages to help them acquire the home of their dreams.

While taking out a mortgage is a great way to start the homeownership journey and pay for the property over time, there comes a time that homeowners may choose to refinance their mortgage. This step is always accompanied by significant financial implications. This is why any mortgagor should ensure that refinancing is done for the right reasons and at the right time. Here are a few things to know to help you make an informed decision when the right time to refinance your mortgage comes.

Mortgage and Mortgage Refinancing

A mortgage is a loan that is taken to buy a house, with the money being paid back over time along with a specified interest rate. One of the features that differentiate a mortgage from a simple loan is that the home to be purchased is used as collateral. This means that the lender will have the right to take the house in the event that the borrower falls behind on their payments.

This also means that the borrower will not fully own the property until such a time that they have made the last payment. Since the property is used as collateral, interest rates are usually moderated. However, rate shopping will still help borrowers to identify the right lender and go for the most affordable mortgage.

More and more people are refinancing their homes in order to solve their financial problems. Simply put, refinancing a mortgage is repaying off an existing loan and replacing it with a new one. This is mostly done in cases where the loan is either too expensive or too risky to handle. The details of the new mortgage loan are based on mutual agreement by both the lender and the borrower and can be customized to meet the needs of the borrower. In order to benefit from the exercise, it is important to know the right time to refinance your mortgage.

How to Increase Your Chances of Being Approved For a Refinance

Once a borrower has submitted their application, it can be very frustrating if it gets rejected. By this time, most homebuyers will have made numerous plans and will be excited at the prospect of owning a home. When it is finally the right time to refinance your mortgage, you will want to do everything to ensure that your loan is approved. Here are a few steps you can take to help increase your chances of being approved.

Improve Your Credit

Once borrowers have checked their credit score, they should take time to establish whether the credit report has any errors or inconsistencies. Any errors and inconsistencies should be reported to the credit reporting agency. Borrowers should also pay their bills and outstanding debts on time if they are to improve their credit score. As you know, having a better credit score saves a ton on the interest you pay. Getting a mortgage with good credit is always the best route.

Getting a Mortgage with Good Credit: Interest Approved

Increase Your Income

Increasing income is one of the easiest ways to ensure you will afford the mortgage loan you intend to borrow. Borrowers who have been at their jobs for a while can consider requesting a raise. Some of the other options include obtaining a part-time job to supplement the current earnings or to start freelancing.

Use a Cosigner

Using a cosigner can help boost the creditworthiness of the borrower, effectively increasing their chances of getting approved. It is important to choose a cosigner with good credit and sufficient income. Borrowers should also evaluate whether they will be in a position to make all the payments in time.

Put Up Collateral

In case lenders think that there are high chances a borrower will default on the loan, they are less likely to offer the mortgage. However, putting up collateral will provide a guarantee that the borrower will repay the loan. Some of the tangible assets that can be used include vehicles, land, stock, and bonds.

Even as borrowers work out various ways to increase the chances of being approved, they should always be mindful of how daily mortgage rates will impact them. This will help them to determine the best time to apply for the loans.

When to Refinance Your Mortgage

Knowing the right time to refinance your mortgage will go a long way in helping you to make other decisions. Here are some of the reasons why people choose mortgage refinance.

To Secure a Lower Interest Rate

This is one of the most common reasons why people choose to refinance their mortgage. By replacing a high-interest mortgage with a low interest one, borrowers are able to save a significant amount of money. This decision will be influenced greatly by the prevailing daily mortgage rates.

To Shorten or Increase the Loan Term

Negotiating a new loan term will have a direct impact on both interest and monthly payments. While a shorter loan term will reduce interest and increase monthly payments, a longer term will have the opposite effect.

To Lower the Monthly Payment

In case borrowers experience a cash flow crisis, they may consider refinancing their mortgage so as to lower the monthly payments. This helps them to repay the loan without straining and avoid the possibility of the lender selling their home due to defaulting.

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To Tap Equity or Consolidate Debt

Although this can be a slippery slope to never-ending debt, it is still a common reason why people refinance their mortgage. It is possible to access the equity in your home to cover major expenses such as home remodeling or college education. Some homeowners refinance their mortgage to consolidate other debts, making it easier to pay them off.

To Switch Your Mortgage Type

There are different types of mortgages that borrowers can apply for. In case a borrower finds a mortgage type that meets their needs more effectively or their financial situation changes, they can refinance their mortgage to take advantage of the new opportunities.

Smart Money Tip!

There are many more reasons why homeowners choose to refinance their mortgages. Before taking this step, it is important to ensure that the reason for doing so makes economic sense. This will help borrowers to avoid sinking deeper into debt and to protect their investment.

Bad Reasons to Refinance Your Mortgage

Just like there are good reasons to refinance a mortgage, there are also bad reasons for making this move. While it may be the right time to refinance your mortgage, a borrower may end up in financial trouble if they do it for the wrong reasons.

  • To take advantage of no-cost finance: generally, a no-cost mortgage loan does not exist. While the prospect may be exciting, borrowers will still end up paying for closing costs and the applicable fees. If these are wrapped into the loan, the size of the principal will increase.
  • To take cash out: there are times when borrowers will experience cash flow issues, making it necessary to cash out. However, the purpose to which this money will be put will determine whether taking cash out was a wise decision. Considering that the home is used as collateral when taking out a mortgage, it is important to take the associated financial obligations seriously.
  • To save money for a new home: some people will choose to go for low monthly payments in order to save money for a new home. While there is no problem with making such a decision, borrowers should calculate how much a refinance will cost and how much it will save them every month.

Types of Mortgages

Before mortgage loan shopping, it would be important to familiarize yourself with the different forms of mortgages. This will help you ask the right questions to potential lenders and make the most appropriate decision as you do mortgage loan shopping.

Fixed-rate Mortgage

This type of mortgage keeps the same interest rate over the term of the loan. This means that the monthly mortgage payments that borrowers make will stay the same throughout the life of the loan. Some of the adjustments to the payments may be due to changes in taxes or insurance.

Adjustable-rate Mortgage

Adjustable rate mortgages have fluctuating interest rates, going up and down depending on market conditions. In some cases, these mortgages start off with the borrower committing to a lower initial interest rate for a specified period of time before allowing market forces to take effect.

Balloon Mortgage

A Balloon mortgage is not very common. For a given period of time, the borrower pays very little. At the end of the period set out by the terms of the loan, the full balance becomes due.

Interest-only Mortgage

Under this type of mortgage, borrowers will pay only interest for a predetermined period of time, before they start paying back the principal as well. These are a great option for first-time homebuyers who are starting their careers.

The type of mortgage you take out will influence your decision when it is finally the right time to refinance your mortgage. In addition to finding out whether you will be required to pay a down payment, you should also keep abreast of daily mortgage rates.

Other Payment Factors

Some of the factors borrowers have to keep in mind in order to determine the cost of a loan are the principal and interest. In fact, this is why most borrowers will do rate shopping before taking out a mortgage. However, insurance and taxes are the other important factors that are usually packaged with the mortgage.

Since the home serves as collateral for the loan, most lenders will require borrowers to purchase insurance to cover the cost of the property in the event of a fire, floods, or other risks. Lenders will also want to protect themselves by ensuring borrowers can pay the property taxes relating to the home. These will not only affect how much you pay monthly but also influence when the right time to refinance your mortgage would be.

Mortgage Loans and Credit Scores

One of the advantages of mortgages is that borrowers do not have to wait until they earn perfect credit or save the money to buy a home outright. Bad credit mortgage loans can come in handy in case of poor credit scores. However, it may take more planning and additional time to secure funding.

A subprime mortgage loan is a type of loan that is offered to borrowers considered to pose a higher risk to lenders. Some of the factors that lenders consider in order to categorize a borrower as a subprime borrower are the credit score, the amount of debt load and income. Subprime mortgages are usually extended to people with no credit or poor credit.

Even as you think about the right time to refinance your mortgage, you should understand how subprime status affects interest rates. Generally, subprime mortgages will have higher interest rates, meaning that the loan will cost more. The loans are also likely to have higher fees for applying and prepayment penalties. It is important to compare the interest rates charged by your preferred lender with the daily mortgage rates to determine whether taking out a subprime mortgage will help you meet your goals without unnecessary financial constraints.

What to Know About Interest Rates

The importance of rate shopping when seeking to take out a mortgage cannot be denied. Similarly, it is clear that credit score has a direct impact on the interest rate that a borrower receives. Generally, the better the credit score, the lower the interest rates that a borrower will enjoy. This is why it is important for borrowers to take the necessary steps to improve or maintain their credit score. In the end, a poor credit score can prevent you from getting the home of your dreams or result in a mortgage with high-interest rates that you cannot afford to pay.

Understanding the relationship between credit score and interest rate is not enough. Homebuyers who want to take out a mortgage have to know how interest rates impact them. Since interest is what is paid back in addition to the principal loan amount, it will determine the total amount you will pay back to the lender.

Regardless of the term of the loan, the interest will also impact how much you pay back as monthly installments. By looking at this figure, it will be easy to determine whether you will be able to repay back the loan based on your income and other outstanding debts. When looking to determine the right time to refinance your mortgage, you should be mindful of the interest rate on your current loan.

Bad Credit Mortgage Alternatives

Government Mortgage Loan TypeMortgage loan shopping helps borrowers to identify the various options available to them and make comparisons. Apart from taking out a subprime mortgage loan when they have poor credit, borrowers who can manage a small down payment can explore these options.

  • Federal Housing Administration (FHA) loans: The FHA provides loans to people with a credit score of below 620 and can make a down payment of three percent.
  • Veterans Administration (VA) loans: VA loans are low-cost mortgage loans that may not require any down payment.
  • 2/28 Adjustable Rate Mortgage (ARM) loans: these loans offer a low-interest rate for the first two years before the rate rises sharply. Since this will affect the monthly installments, the two-year point would be the right time to refinance your mortgage.
  • Bad credit loans: There are times when borrowers will have no option but to take out a bad credit loan. There are several factors that will determine whether you will need to apply for this type of loan.

While there are loans available for people with bad credit, they attract high-interest rates and take longer to get approved. The best way to avoid such frustrations would be to improve your credit score before applying for a mortgage loan. Those with excellent credit score should also strive to maintain it. This will ensure you enjoy affordable interest rates on the loan, a factor that will minimize the need to refinance your mortgage at some point.

Fees Involved In Buying a House

It costs a lot of money to buy a house. Apart from the purchase price, those who want to buy through a mortgage may end up paying several fees. The good news is that having a good credit score can help to cut down the home-buying costs significantly. Here are some of the extras that prospective homebuyers can expect.

Additional Fees

Some of the basics of mortgage loans are that you will have to pay back both the principal loan amount plus the accrued interest. In case the money you have borrowed is more than 80 percent of the value of the property, you may have to buy primary mortgage insurance. In addition, the lender may want you to have homeowners insurance and pay the applicable property taxes. Depending on the neighborhood, the homeowners association may also have monthly or annual fees.

Upfront Fees

There are certain fees that property buyers will be required to pay at closing. It is important to understand these fees in order to have a seamless purchasing experience and avoid frustrations. The origination fee is charged by the lender for handling your loan. The fee covers administration costs such as application fee, processing fee, underwriting fees, and other relevant charges.

Third-party Costs

Some of the other expenses you will incur are third-party costs. In case an appraiser or title insurance was involved in helping you with the mortgage, you may have to pay the fees they charge. However, you can negotiate to pay the fees at a later date as opposed to at closing. Homebuyers should not be surprised in case they are required to pay taxes on the real estate transaction.

Considering the costs involved in buying a house, it is clear that refinancing a mortgage is a major decision. When looking to determine the right time to refinance your mortgage, you can talk to a financial expert to help you make the right decision.

How to Know You Are Ready to Buy a House

Although buying a house is a big milestone, it is not something that should be taken lightly. It is critical that prospective home buyers ensure they can afford the house they intend to buy. In case you plan to take out a mortgage, it is important to establish whether you will be able to repay the loan every month.

Here are some of the indicators that you are ready to embark on the journey that is home ownership.

Are You Living Paycheck to Paycheck?

There is no doubt that owning a home is bound to be costly. Some of the expenses you will have to be ready to include the down payment and other added expenses. While some are one-off payments, others will have to be paid periodically. You should also consider putting aside some money for unexpected expenses.

Are you ready for stability?

Buying a home is an investment that will require you to stay in the home for a while. While you do not have to spend the rest of your life living there, you may have to spend at least five years in that area. You will have to consider this carefully before purchasing the property.

Do you know what you want?

With the huge investment that goes into acquiring property, you should ensure that the home you buy will meet your lifestyle needs and offer you the satisfaction you seek. Take time to think about the size of your family as well as whether you plan to raise your family here or sell it in the future.

Mortgage loan shopping can be complicated and confusing. Without the expertise and experience required to choose the right loan for your needs, you may end up making a number of mistakes. The good news is that mortgage refinance gives you an opportunity to make the necessary adjustments. However, you will have to know the right time to refinance your mortgage.

Shopping For a Mortgage

Although mortgage loan shopping can take up a considerable amount of time, the information available today can help make the process faster and easier. Before the exercise can begin, borrowers should start by finding out their credit score and determine how much they wish to borrow. This should then be followed by how much they have for the down payment and the amount they can afford to repay. Once these have been determined, borrowers can proceed to look for a lender that meets their needs.

Rate shopping will be an important step at this stage. One of the most common ways of shopping for a mortgage is to approach traditional lenders such as banks. However, some people may opt to work with a mortgage broker in order to save time as well as avoid the hassle of doing the work on their own.

Over the past few years, a majority of homebuyers have been doing mortgage loan shopping online. This method allows consumers to see rates from mortgage rate tables, a factor that helps to simplify the process. We make it easy for borrowers to find the lender that will meet their unique needs through our platform. We also ensure that consumers work only with reliable lenders to avoid falling victim to common online scams. When you feel it is the right time to refinance your mortgage, work with us to enjoy a great and hassle-free borrowing experience.

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Key Considerations Before Refinancing Your Mortgage

Like many other financial transactions, mortgage refinancing is an important process that requires homeowners to do due diligence. Once you have determined that it is the right time to refinance your mortgage, you should ensure that you are aware of several factors. These include your home’s equity, your credit score, your debt-to-income ratio, the cost of refinancing, and the refinancing points. If you are to make the process hassle-free, you should also know your private mortgage insurance as well as your taxes. The last step would be to do rate shopping to ensure you do not end up paying significantly more in interest.

When done right, mortgage refinancing can offer borrowers numerous benefits. With the important role that credit scores play, this step can help to ensure that you repay your mortgage loan more comfortably, moving you closer to your financial goals. However, in addition to identifying the right lender, you have to know the right time to refinance your mortgage.

The last consideration you will need to keep in mind is the daily mortgage rates. With the numerous lenders willing to offer mortgage loans, it will help if borrowers can identify reliable ones. We make it easy for consumers to find lenders who offer mortgage loans at affordable rates. As a third party that is not involved in the loan business, we also make it possible for borrowers to work with reliable and professional loan companies.