Should You Refinance to an Adjustable Rate Mortgage?

An adjustable rate mortgage (ARM) is a type of mortgage where the interest rate charged on the outstanding balance varies based on a specified schedule. The interest rate is initially fixed for a given period after which the rate is set periodically. There are many advantages associated with the adjustable rate mortgage especially when compared to the fixed rate mortgage. Below are some of the reasons why you should consider refinancing to an adjustable rate mortgage.

You want a lower interest rate

A lower initial rate is charged on an ARM when compared to the rate charged on fixed rate mortgages. While the initial rate is fixed for a given duration of time, the interest rate is much lower than the rate charged on a fixed mortgage at any given time. This works to your advantage as it frees up some money at the beginning of your loan term. This money can be useful in taking care of other expenses or can be invested in an income generating project.

You’re selling soon

An ARM is ideal for home buyers who wish to sell in the near future. For buyers who foresee a job transfer to another location or a need to upgrade to another house, for example when starting a family, the lower ARM initial interest rate provide a better and cheaper option. Once the house is sold, the loan can then be paid off in full. It is important to note that some contracts stipulate that a penalty is charged if the loan is paid off early. This should be considered while refinancing the mortgage.

You want to improve your financial standing

An ARM mortgage is ideal for homeowners who want to improve their financial standing. The adjustable rates provide short term stability as the homeowners anticipate a better financial standing in the future. The state of the economy also means that homeowners get some relief with the adjustable rate mortgage as they wait for the economy to recover.

Refinancing is not for everyone

It is important to note that an adjustable rate mortgage may not be favorable in some situations, for example where the homeowner is looking to stay in the house in the long haul. You should, therefore, take your time to examine your financial situation and get a professional to advise you on the additional costs to be incurred with refinancing and help you determine whether refinancing to an adjustable rate mortgage will make any economic sense both in the short term and in the long run.

Why Your Refinance Bubble Might Burst

If you have been following the home finance sector, it wouldn’t come as a surprise that mortgage rates are heading north. The climb is gradual but sure footed, making long term homeowners reconsider their financing strategy. Most of them are opting for refinance since it offers significant savings and lowers the burden of monthly payments. However, some homeowners haven’t been able to get their refinance application approved. If you are one such disappointed homeowner or find yourself the verge of applying for refinance, please read the following:

You Have Not-Too-Impressive Credit History

This is an open secret—lenders want to lower their exposure to risk. So they prefer people with solid credit histories. Mortgage lending follows this tradition too. A credit score defines your ability to pay back in the long term. Credit score expectations might be relaxed for the usual, purchase loans, but the housing sector is a different game all together. Your credit scoring is also affected by your choice of refinance, i.e. a VA or an FHA loan. Some loan programs are very strict about the credit score while some don’t think of such scores as a serious eligibility condition. However, the lenders, the folks who actually issue the loans are always on the lookout for better credit profiles.

You Have Over-compromised Your Home’s Value

If you owe much more than the current market worth of your house, a lender is less likely to offer you a mortgage—this is totally relevant for traditional lenders. They don’t refinance homes that are supposedly under the water. Recently, the government introduced some unique refinance schemes for distressed homeowners. However, such programs are numbered. They might not be available in your state. Still, it is better to check through popular refinance programs, like the HARP—Home Affordable Refinance Program. Homeowners can apply for refinancing their Freddie Mac and Fannie Mae loans here.

You Have Substantial Mortgage Insurance

Mortgage insurance continues to test the conventional mortgaging wisdom. Traditional lenders treat it as an additional liability. This is more relevant if the insurance is being paid by the mortgaging firm. More issues persist if the federal government’s HARP program mortgage is involved. The restrictions might have been relaxed by some lenders, but overall mortgage insurance presents a major deterrent to refinancing.

You Don’t Earn Enough

Yes, the economy is progressing, but salaries are still under stress. A recovery is in motion as businesses are hiring more, but the packages on offer, even for experienced and skilled workers, aren’t very inspiring. So, be guarded in how you spend. Not earning enough and paying through a pile of bills can damage your evaluation for a refinance. Lenders too are recovering from the hammering of the economic downturn. Mortgage providers are digging deeper into borrower profiles. Weekend jobs or any type of supplementary income can also work in your favor. Even a handful of mortgage non-payments can work against you.

You Have Jumbo Liabilities

Homebuyers who have spent a fortune on their new residences are at a bigger risk of not qualifying for refinance. Big-property owners often take jumbo loans. These aren’t the safest bet in the lending industry. The slightest indication of a downswing in property rates in the neighborhood can leave such homeowners without any conviction for a refinance.

Refinance and Remodel Your Home

Stuck between the options to go for a refinance or to hold back until home improvements are done? You might possibly be considering a construction loan as well to complete your addition, and then later refinance your mortgage. But there once again, you may feel stuck; should the value of your new addition exceed your appraised value? So, the bottom line is to go for improvement or refinancing? How about if we tell you that you could go for both!

Earlier, there were two distinct ways which people would opt for when they wanted to utilize the equity of their houses for house improvements. Based on their current appraised value, they’d obtain an equity loan. Or put some construction plans and specifications together, include some contractor’s bid and acquire a construction loan.

If you look at it, both the ways fall under second mortgage loans.

The amount for equity loans are based upon the ongoing market value of the home, and the construction loans are mostly set according to the “as finished” value of the home. In simpler terms, that’s the value of the home after the improvement work is done. We all know that while doing a major remodeling of a house, often the construction costs surpass the property’s current value. And when that happens, due to the absence of any equity in the home, lenders are not the party to offer their best programs.

Rates on second mortgages are often higher than the rates on a first mortgage. Also, in the instance of a line of credit or an equity loan, the interest rate is never stable. Initially, it’s lower but later it starts climbing higher. Problematic!

Then, if you were to acquire a construction loan or equity loan, the rates would be mostly higher than your current first mortgage finance. And if the construction phase goes on for two to three months, you can’t count on the interest rate to stay where it was earlier.

Problems, problems, problems… But not anymore.

There are lenders who offer a mortgage finance, which takes care of both the issues. You can now not only refinance a current first mortgage into a lower rate, but also simultaneously borrow more for home improvement. All at today’s lower rates, avoiding higher rates and variable construction loan terms. Fascinating!  

So, let’s say, you are looking forward to add an extra bedroom or an extra floor as an improvement to your home. For example, your current mortgage is somewhere $180,000 while the appraise amount for your house is at Rs. $200,000. Not much scope for equity loan here. The improvement you have in mind will cost $100,000. So after the completion of construction work your new value will be somewhere close to $300,000. Now, thanks to the new mortgage programs, you can borrow funds for your dream home improvements using the “future” appraised value of your renovated home, along with all the equity that follows with it. Plus, the refinance will be available at competitive rates. Exciting, huh?

However, the ratio of these lenders is low. You might have to check with a lot of lenders to come across the ones with the new programs. But to get a construction loan along with a regular finance is worth the effort. So don’t let old experiences stop you anymore from transforming your house into your dream house.

Things to Consider Before Getting a Refinance

Mortgage interest rates are falling and this has encouraged many homeowners to explore the possibility of getting a refinance. However, before submitting your mortgage refinance application, you have got to consider quite a few things.

Remember that low rates can't be the only reason to get a refinance. You need to consider several other factors as well. As a rule of thumb, you should get a refinance only if you plan to keep the home for a long time. If you can't figure out whether refinancing is good for you, you should ask your lender.

When to refinance

You should get a refinance only when the current rates are at least 1 percent lower than the rate you pay on your existing mortgage.

Refinancing involves closing costs. If you don't plan to live in the house for a long time, the monthly savings that you get from the lower rates may not justify the costs of getting a new mortgage.

The closing costs can run 3 percent to 6 percent of the total loan amount. Lenders might add these costs to your loan amount. In that case, you don't have to bring cash to the closing table. However, you will still be paying for it over the life of the mortgage.

Is refinancing right for you?

To determine whether refinancing is good for you, you need to know your current mortgage payment and the new payment. You should also estimate the length of the time you intend to stay in the house.

When you refinance, your monthly mortgage payments will be lower than what you are currently paying. But if you don't live in the house for long enough, you will not be able to recover the closing costs associated with getting a new mortgage.

So, for example, if the closing costs on a $100,000 mortgage are 4%, you will have to shell out $4,000. If your monthly savings after getting a refinance is $80, you have to live in the house for at least 50 months to recover the closing costs. If you sell the property before that, you will incur a loss. It gets better the longer you stay in the house. This also explains why refinancing is not the right option for people who plan to move out in a couple of years.

You should consider refinancing only if the new rate is at least 1% lower than your current rate. If you can get even lower rates, refinancing becomes a much better option. If the rates are lower, your monthly savings will be higher and you will reach your breakeven point in less time.

Some other factors, too, can make refinancing a better option. For example, your earnings might have improved since you took the last mortgage or your credit rating might have gone up. When your income or credit rating is high, lenders will be more interested in considering your application. In this case, you will be able to negotiate lower rates and lower closing costs. This will further shorten your breakeven period.

Bottom line

Don't get refinance just because everybody is getting it. Your financial situation might be different from theirs. When you get refinancing, you are getting an altogether new mortgage. So during the first few years, most of your monthly mortgage payment will go towards interest. This makes it difficult to build equity.

 

Refinancing? Here’s What You Need to Know

Homeowners who have decided to refinance this year have made a wise decision because mortgage interest rates are currently still extremely low. Whether you have already decided to refinance or you are in the process of making sure that it is a good choice for you, there are certain things you need to be aware of in order to make the best decision.

Refinancing can be a great option for homeowners like you, but for some, it may not the best time to do so. Factors that can dictate this are your credit score, the costs, and many more. Here are some things that you need to consider when making the decision to refinance:

Break-even point

Will you get ahead or break even by refinancing? If yes, then you refinancing will be a great option for you. You can calculate your break-even point by dividing the costs of the refinance by the monthly savings of the new home loan. The answer you get is the number of months it will take to gain back the costs of refinancing. A two or three year period is the usual amount of time.

Costs

While refinancing can potentially save you money, it is a long process that requires you to pay multiple costs. You will be paying many fees associated with refinancing, from application fees to loan processing fees and more. You want to be completely prepared to spend some money upfront in order to get the process going.

Credit score

Since your credit score is a huge factor in the mortgage rates that you can qualify for, it makes sense to know your credit score before you begin refinancing. Your score should be above average or high, and it will affect the rates you are offered.

Staying in your home

When you refinance, you need to remain in your home at least until you break even. For this reason, if you are planning on moving before then, refinancing will not be a good option for you.

Refinancing a mortgage loan can be a long and costly process, but if you are prepared upfront, you can budget accordingly and get the best refinancing results!

The Changing World of Refinancing

In the mid 2000's, getting a mortgage was a whole lot easier. Back then, borrowers were not required to have a good credit history. Even those who couldn't afford to make a down payment could get a home loan.

The underwriting norms were rather relaxed and more people could buy homes or get their existing mortgages refinanced. Some borrowers who saw good appreciation in the value of their homes drew out some of their positive equity and splurged that money on luxury cars or boats.

But then the recession arrived.

During the recession, several people lost their jobs and consequently many of them had to default on their mortgage payments. The value of properties, too, eroded. This forced banks to become more cautious and selective. Now getting refinance is not all that easy. Serial refinancing has become a thing of the past.

Recovering economy

The economy soon started showing signs of recovery and many people who lost their jobs during the recession are back to work. The value of homes, too, has increased. This has encouraged banks to relax their lending norms a bit. Now homeowners who are underwater on their mortgage payment are eligible to get refinance if the value of their home is slightly higher than their original loan amount. Even owners with negative equity are now eligible for refinance through HARP 2.0.

If you are planning to get a refinance, you should be prepared to deal with a lot of paperwork.

Refinancing now

Refinancing your existing mortgage is now difficult. It is still possible, but now banks have more stringent underwriting norms. Gone are the days when they would readily approve each and every application.

More paperwork

Refinancing now involves a lot of paperwork. Banks now require detailed documentation of your income because they are legally responsible to prove that you will be able to repay the loan. As a result, the borrower now has to submit additional documents like tax returns, pay stubs and bank statements.

Your credit score

Ten or 15 years ago, people who had little or no credit were eligible to get a home loan.  But now you need a good credit score. If your credit score isn't satisfactory, you should improve it before trying to get refinance. You should also get a credit report. There may be errors or inaccurate information in it. Your credit score will improve when you get those errors rectified.

Borrowers should also have a good idea about the value of their home.

Longer waiting periods

Now that rates are at their historic low, lenders are getting flooded with numerous home loan applications. Consequently, getting an approval now takes much longer. You can, however, speed up this process by responding quickly to document requests. Any delays on your part can cause your rate lock to expire. You will probably have to pay extension fee as well.

If you are paying too much interest on your fixed-rate mortgage, you are a good candidate for refinancing. When you refinance, you get to enjoy the lower rates. While choosing a refinancing deal, don’t forget to compare rates and fees. To get the best possible deals, you need to stay abreast of the latest happenings in the world refinancing.

Five Tips to Get the Best Refinancing Deals

Fears of recession and widening debt crisis in Europe have lowered mortgage rates in the US. In fact, the current 4% rate on the standard 30-year fixed rate mortgage is the lowest in almost 60 years. Needless to say, many homeowners are planning to refinance.

U.S. banks now follow tight lending standards. Gone are the days when anybody could qualify for a mortgage. That said, if you do a little search, finding a lender is still possible provided that you have a credit score of 740 or higher and at least 20 percent equity in your house. Here are 5 tips to get the best refinancing deals:

1. Shop around.

Mortgage interest rates can vary widely, so do some research before selecting a lender. Rates shouldn't be the only criterion. Processing fees, too, can vary between lenders. Contact lenders in your locality and also ask relatives or friends to recommend a lender to you.

2. Think about closing costs.

Today's mortgage rates are pretty low. But if you already have a low rate, you should perhaps skip a refinance because a new loan may carry closing costs amounting to thousands of dollars. So, if you already have a 4.5% mortgage, you probably have no reason to refinance and get a 4% mortgage.

Before getting a refinance, you should think about closing costs. Ideally, you should refinance only when you can get interest rate cut by 0.5% or more. You should also calculate how many months you will take to recover your closing costs.

3. Beware of hidden costs.

All mortgage refinancing options have closing costs even if they claim that there aren't any. You might come across ads that say 'no closing costs'. You will still end up paying costs in one way or another. Closing costs are typically 1% of your principal amount. Lenders can work these costs into your refinancing deals in several ways.

Some lenders, for example, require borrowers to make an upfront payment. You will have to bring a signed check to cover the expenses. The lending institution will tell you how much money you need to pay. By contrast, 'rolled in' closing costs are added to your loan amount. You won't have to make an upfront payment, but you will have to pay slightly higher EMIs throughout the tenure of your loan.

"No cost" refinancing deals do not usually charge any closing fees; however, they have higher interest rates. It is impossible to say if one option is better than another. So the key is choosing a method that will work best for you.

4. Think about 'cash-in' refinancing.

During the property boom, many homeowners refinanced their existing mortgages to get larger loans. Since housing prices were soaring, they had enough equity in their properties. The housing boom, unfortunately, was followed by the housing bust. Now many homeowners are interested in 'cash-in' refinancing. They are swapping their existing mortgages for smaller ones bringing money to the table to make up the difference. These deals are helpful to customers whose home values have plummeted. By getting a smaller loan, they can increase their home's equity. This also allows them to qualify for refinancing.

5. Get a "rate-lock" confirmation.

Now that mortgage rates are ridiculously low, lenders are getting flooded with refinance applications. To protect your interests, you should get a lock-rate confirmation in writing. A "rate lock" sheet confirms the rate you are getting. It also mentions when the rate expires.