Refinance Your Home

A Complete Guide to Refinancing Your Home

Interest Rates Displaying on LaptopFor the 8th straight week, home refinancing rates are below 3%. The low interest rates have increased the home equity in many markets. An average borrower gained $33,000 in home equity in the year 2021. Refinancing your home, when done right, can save you money in interest.

But what if you want to refinance your home multiple times. Does it work? How often can you refinance your home? This article will help answer these and many other questions as we cover the following main topics:

What Does it Mean to Refinance Your Home?

Refinancing refers to the mortgage that you obtain to replace the current one. Here, your lender pays off your existing mortgage, hence the term refinancing. As a result, you can shorten your loan term, lower your interest, or convert your equity into extra cash. There are two types of refinancing:

  • Rate and Term Refinancing: With a rate and term refinance, you get a new mortgage with a lower interest rate. And, if possible, a shorter payment term. The latter, however, depends on the market.
  • Cash-out Refinancing: With a cash-out refinance, you can borrow up to 80% of your home’s value for cash. However, even though you get lower interest rates, the loan amount could increase. This leads to larger payments or longer loan terms.How Often Can You Refinance Your Home? Man working with a calculatorHow Often Can You Refinance Your Home? Man working with a calculator

Is it Bad to Refinance Your Home Multiple Times?

Refinancing multiple times is not a good idea. However, you can do it, and if done right can benefit you in the long run.

In other words, you can refinance as many times as you want as long as it makes financial sense. And your lender should also allow it. But, furthermore, you need to be aware of the hidden risks and the associated costs. Otherwise, you are bound to end with more debt.

HOW MANY TIMES SHOULD YOU REFINANCE YOUR HOME?

There is no legal limit to the number of times you can refinance your house. But, it is not a good idea to refinance your home again and again in a short period of time. The decision, however, comes down to numbers. The general rule is that you should be able to save money. And for that to happen, you need to consider the following:

WAITING PERIOD

Depending on the loan type, your lender may or may not impose a waiting period.

For a conventional loan such as rate and term refinance, you do not have a waiting period. However, for a government-backed loan, you need to hold on to your mortgage for at least six months. In the case of cash-out refinances, you would have to wait for six months from the closing date. Additionally, you need to build enough equity in your home.

Apart from this, your lender may also have a “seasoning period”. During this time you cannot refinance with the same lender. The seasoning period is generally six months after the closing date. However, it doesn’t mean that you cannot refinance using a different lender.

LENDER’S STANDARDS

As with every other loan, first and foremost, you should be able to meet the lender’s standards. Anything may have changed from the last time you refinanced. You may have acquired more debt, less credit score, or reduced income. Whatever it may be, it can affect your eligibility. Other factors that make up the lender’s standards are the equity and DTI ratio.

CLOSING COSTS

Refinancing is quite similar to that of a mortgage. In that sense, you have to pay closing costs which may be anywhere between 2% to 5% of the loan principal. Some fees included are:

  • Appraisal Fees: Even if you had an appraisal in recent times, your lender would also require another before refinancing. This is done to ensure that they pay according to the value of your home and not too much.
  • Application Fees: No matter you receive a refinancing or not, you need to pay an application fee.
  • Attorney Review Fees: Few states require an attorney to review and finalize your loan. In such an event, you would have to pay attorney fees. The fees can change depending on the state you reside in.
  • Inspection Fees: Depending on the state, you may also have to get your home inspected. While a few states require an inspection every time you refinance, others every 5-10 years.
  • Title Search and Insurance: A new lender may require you to pay for the title search to confirm the ownership of the property.

PREPAYMENT PENALTIES

Most lenders penalize you if you pay to settle your mortgage before the loan term ends. For example, say your lender has a clause that says you cannot pay off your loan within five years. If you refinance your mortgage loan within five years, you may have to pay everything you have saved in interest.

This may cause you issues if you have already refinanced and reset your loan term. Read the loan documents before applying for new refinancing.

LOAN-TO-VALUE (LTV) RATIO

The loan-to-value (LTV) ratio is essential when you seek a cash-out refinance. Most mortgage lenders require you to maintain an LTV ratio of 80%. And hence they restrict the amount you withdraw from your equity. Unfortunately, they do not allow you to withdraw 100%.

How Long Do You Have to Wait Between Refinancing?

Depending on the home loan and refinancing, you may or may not have to wait in between refinancing. Refinance rules vary depending on the mortgage, whether it is a conventional or government-backed loan.

REFINANCING FHA LOANS

FHA loans are those insured by the Federal Housing Administration. It has a few refinances on its own, governed by different rules.

  • Rate and Term: Lenders require you to wait for seven months (six monthly mortgage payments). All the mortgage payments within this time period should be paid on time. And one late payment before that.
  • Cash-out: You must own and occupy the home you are refinancing. In addition, you must have had a mortgage for at least six months and without any late payments.
  • FHA Streamline: It is one of the easiest FHA refinances since it doesn’t have much paperwork. And no appraisal either. You must have held a mortgage for seven months with at least six monthly payments. All payments should be on time.

REFINANCING VA LOANS

VA loans are those that are backed by the Department of Veterans Affairs. The rules are the same for both the IRRL or VA cash-out refinance. You have to wait for seven months (210 days) or six monthly payments, whichever comes first.

REFINANCING USDA LOANS

USDA Loans are financed by the U.S. Department of Agriculture. They have two loans, and the refinancing rules differ for both of them:

  • Guaranteed loan: You must have held the mortgage for a minimum of 12 months.
  • Direct loan: There is no waiting period.

Does Refinancing Your Home Hurt Your Credit Score?

Refinancing Multiple Times Hurts Your Credit ScoreYes! Refinancing does hurt your credit scores. However, any credit hit is likely to be short-lived and can revive soon after. The primary reason for the credit hit is the hard credit inquiry your lender does as a part of the qualification process. Any hard inquiry is recorded and affects your score for the time being.

Another factor that affects the credit score is the new loan itself. It affects the length of the credit history with the new term and the amount owed. Finally, closing the current loan may also reduce your score.

Is it Worth Refinancing Your Home Now?

Experts say it is worth refinancing your home if the mortgage rates are lesser than your current interest rate by at least 1%. While it is a broad generalization, you may also consider the below reasons:

  • Pay off the existing loan faster.
  • You have enough equity built up to refinance into a new mortgage without mortgage insurance.
  • Tap into the equity with a cash-out refinance.

Why Do Homeowners Refinance Multiple Times?

There are many reasons why homeowners may want another refinancing. The most important of it all is the low interest rate and monthly mortgage payment. Here are a few other reasons why homeowners refinance multiple times.

TAKE A LOW-INTEREST MORTGAGE

The interest rates have been the lowest in recent times. Make use of the current situation and refinance your mortgage to your advantage. Moreover, by not changing the duration, you can save money owed on interest payments.

LONGER-TERM LOAN

Utilize refinancing to increase the repayment period if you have trouble making the minimum payment. By increasing the duration of the loan, you can ease the strain until your financial situation improves.

A point often overlooked is that the longer your term, the more amount you pay in interest.

LOWER MONTHLY PAYMENT

With a mortgage refinance, you can also lower monthly payments by increasing the term. That, combined with a low interest rate, can ease your financial burden.

REMOVE PRIVATE MORTGAGE INSURANCE (PMI)

Remove Private Mortgage Insurance Lenders require you to have Private Mortgage Insurance (PMI) if you put down a down payment of less than 20%. You can refinance into a conventional loan provided you have a 20% equity built in your home.

CONSOLIDATE DEBT

With refinancing, you can consolidate a high-interest debt such as:

  • Student Loans
  • Personal Loans
  • Credit Card Debt
  • Car Loans

You can save money from the interest payments by exchanging these debts for one with a low interest rate. However, the potential savings are affected if you are increasing the terms. Unless you are careful, it may even bite into your credit cards, leaving you with more debt.

TAP INTO EQUITY

Refinancing your existing mortgage into a new loan allows you to tap into the home equity. You can either use the loan balance after paying off your old loan to:

  • Consolidate Debts
  • Sponsor Home Improvements
  • Build Emergency Funds

How Often Can You Refinance Your Home Loan?

You can refinance a mortgage as often you’d like. However, you may have to meet the eligibility standards every time you refinance.

  • A credit score of 600 – 620, depending on the refinancing
  • Steady income
  • A low debt-to-income (DTI) ratio
  • Good home equity of at least 20% (for better refinance rates)

What Is the Average Time to Refinance a Mortgage?

The average time taken to refinance a mortgage is 30 days. However, it can be as low as 15 days and can go as high as 45 days depending on the below factors:

  • Appraisals
  • Inspections
  • Your Financials
  • Credit Checks
  • Lender’s Ability to Handle Loans

Then there are circumstances like the pandemic when the average time increased. The uncertainty and the changes in credit requirements led to unexpected delays.

How Much Money to Borrow When Refinancing Your Home

You can borrow anywhere between 75 – 90% of the value of your home when refinancing. The amount, however, depends on your eligibility and the lender’s rules. You cannot borrow the remaining 25 – 10% as it is retained as equity.

Drawbacks of Refinancing Your Home Multiple Times

Pitfalls of Refinancing Your Home Multiple TimesIt is a known fact that refinancing helps you save money. However, there are potential risks and pitfalls when you are refinancing your home multiple times:

HIGH CLOSING COSTS

Refinancing doesn’t come free but rather with closing costs and prepayment penalties. Unless you calculate the break-even point, you will end up losing more on these expenses.

INCREASED INTEREST EXPENSES

You are losing too much money on interest expenses over the period of your loan. Your payments in the initial years go towards interest rather than building equity.

LONGER LOAN PERIOD

Your savings will be high if you have a low repayment period along with a low interest rate. However, with a longer loan period, you will end up paying more than you borrowed.

LOSING PROTECTION

States like California provide buyers with extra protection. According to this, the banks cannot sue if you go into foreclosure. With refinancing, you tend to lose a layer of protection. Check the loan documents if the refinancing does so too. If not, it is better to back off.

LESS FLEXIBILITY TO MEET OTHER FINANCIAL GOALS

If you refinanced your home loan for lower terms and interest rates, you might want to think again. Due to increased monthly payments, you would not be able to save anything much, even a retirement fund.

Conclusion

The current interest rates may tempt you to refinance multiple times. According to the rules, there’s no limit to the number of times you can refinance the loan. However, you may want to proceed, only if it makes any financial sense. The below factors may affect the financial benefits you reap from refinancing:

  • Closing Costs
  • Prepayment Penalties

Homeowners can pay these as cash or wrap them into the loan, increasing the loan principal. The refinancing loan will also have a slightly higher interest rate.

If tapping into the equity is your goal, you can take out a home equity loan or a home equity line of credit (HELOC). They generally have low interest and also lets you borrow against the built-up equity. Another option is a personal loan. It is also an excellent way to borrow without risking your home.

Other related articles you may enjoy:

Home equity loans Tucson

How Do Home Equity Loans Work?

How Do Home Equity Loans Work?

Home equity loans Tucson

Did you know that the usable home equity in the US totals 5.5 trillion dollars? And somewhat surprisingly, it has continuously grown throughout 2020 and beyond despite the advent of a worldwide pandemic. Here is a guide to home equity loans that let you know everything you want.

You know all about the first mortgage which you used to purchase your home. But are you aware that you can take an additional loan on your home?

This article takes you through everything you need to know about a home equity loan, how to calculate home equity, equity lines of credit, and much more.

What is a Home Equity Loan?

A home equity loan is a loan that is obtained by using your home as collateral. Just like your mortgage, you pay it back in fixed monthly payments for the life of the loan. If you don’t pay it back, the lender can foreclose your home as payment, and you could lose your home.

This kind of loan is dependent on the:

  • Current market value
  • Mortgage balance

How Does Home Equity Loan Work?

Sometimes called a second mortgage, a home equity loan allows a homeowner to borrow a lump sum amount against the equity. Equity is the difference between the current market value and the outstanding mortgage. The interest rate depends on the payment history and credit.

Once approved, the lender and the borrower agree on a set payment term. The borrower then makes monthly payments covering both the interest and the principal.

To start with, you might decide to contact a credit counselor to determine your creditworthiness and to find out how much your home is worth.

Is it a Good Idea to Do a Home Equity Loan?

A home equity loan is a good idea if:

  • You use the funds to make a home improvement that increases your home’s future value.
  • You cover your debt with a low fixed interest rate.
  • You have investment plans with guaranteed returns.

However, it’s usually a bad idea to secure a home equity loan to:

  • Shift your debt around
  • Purchase a new car
  • Pay for vacation

If you cannot pay for the above with your monthly budget, you cannot afford to borrow money on loans either.

Home-equity-loan-showing-dollar-on-white-background

How Much Can You Borrow on a Home Equity Loan?

The amount you can borrow really depends on how much difference there is between the value of your home and your current principal balance. Usually a loan of this type requires a minimum home equity of 20% or more to borrow. Additionally, most lenders allow you to borrow a lump sum of only up to 85% of the home equity.

To calculate the eligible loan amount, the lender divides the amount you owe on your mortgage by your home’s current value. It’s called the loan to value ratio, or LTV. The LTV should be 80% or less, which means that your equity would be 20% or more.

Shop around for a lender who gives you both a better fixed rate and higher LTV.

What Documents Do I Need for a Home Equity Loan?

With appropriate documentation, a home equity loan is a pretty easy and straightforward process. Here’s what most lenders will require to give you a loan.

  • W2 earnings statements or 1099 DIV income statements (for the previous two years)
  • Federal tax returns (for the previous two years)
  • Paycheck stubs for the past few months
  • Recent bank statements
  • Proof of investment income
  • Proof of additional income

Depending on your lender, you may need other documentation not listed here, but having these in hand can speed up the process.

Can You Get a Home Equity Loan at Any Time?

Generally, the answer is yes! You can get a home equity loan at any time, but only once. You can’t take out another mortgage before closing out the others.

When you take a loan, you get a lump sum amount of money upfront. You can then repay it over time as previously agreed upon.

It should have a fixed interest rate which would remain the same throughout the loan term.

Are Home Equity Loans Available to Rental Property?

Yes! If you are a rental property owner, you can get a loan provided you qualify. Though you can obtain up to 100% LTV, lenders restrict the loan to 65% – 80% on a rental property.

Everything else is basically the same as for a primary residence.

When Should You Refinance a Home Equity Loan?

Refinancing a loan is ideal if you are looking for different loan terms or to refinance your mortgage for a lower interest rate.

You can refinance a loan when you:

  • Secured your first and second mortgage when the interest rates were high
  • Have a good amount of equity
  • Can afford the monthly payments
  • Plan to sell your home within few years
  • Save overall costs

What Is the Downside of a Home Equity Loan?

Any loan that uses your primary residence as collateral should be considered very carefully, so it’s a good idea to weigh the pros and cons before you apply for a home equity loan.

The downsides of home equity loans should also be taken into consideration.

  • A home equity loan requires you to use your home as collateral.
  • If you default on the loan, the lender can repossess your property, and you may end up losing your home.
  • If you are still paying your first mortgage, a second loan can be a financial burden.
  • There will likely be closing costs.
  • You can’t get a loan with poor credit.

How Much Equity Do I Have on My House?

Equity is the difference between your mortgage balance and your home’s value. Your equity increases when:

  • you pay down your mortgage
  • the value of your house increases

Your equity can also fall if the house falls in value faster than the rate at which you pay your mortgage.

Here’s an example to explain the above:

Imagine you buy a house for $200,000 with a down payment of $20,000. Your mortgage loan would be for the $180,000 remaining, and your equity would be about $20,000.

In about two years, your principal would be reduced down to $170,000 thanks to your timely payments (minus interest), but the value of your home shrinks down to $160,000. In this case, the equity in your home would be -$10,000 since your home has actually decreased in value.

However, if you build or substantially improve your home, the equity should increase in value over the years.

How Do I Use the Equity in My Home?

You have three ways by which you can use the equity in your home:

  • a home equity loan
  • a line of credit
  • a cash-out refinance

A home equity loan is usually a smart way to secure a loan and receive a lump sum. These loans almost always have lower interest rates than a personal loan. Your choice, however, depends on your need and also the situation. Contact your credit counselor to check if you have enough equity in your home to apply for a loan.

How Soon Can You Access Equity?

As early as six months after the purchase of your home, you may request a revaluation. A few lenders may require you to wait up to one year for access. Regardless of the required time limit, you should try to wait until you determine how much equity you have before you use your home to back the loan.

What Can A Home Equity Loan Be Used for?

There are few rules regarding what this type of loan can be used for. You can use it for:

  • Home improvements like kitchen renovation, a new roof, a garage, or building a patio
  • Funding college education for your kids (due to the lower rate of interest than student loans)
  • Manage emergency expenses
  • Cover wedding expenses
  • Consolidate your debts to a low-interest rate
  • Investment opportunities like a second residence or share market
  • Funding your business (if the interest rates are lower than comparable small business loans)

But it is safer to use the money for home improvement since it that’s what will increase your home’s value.

Will a home equity loan work for you?

Can You Use Home Equity to Pay Off Debt?

Yes! You can take out a home equity loan to pay off debts, especially high-interest or unsecured debt. Some homeowners use it to pay off credit cards or car loans. The downside is that your debt is now secured by your home.

Can I Use a Home Equity Loan to Buy Another House?

Yes! You can use the money to finance another house. But ensure it is an investment property and that you can make the monthly payments.

Using a home equity loan to buy another house allows you to:

  • Retain your existing investments
  • Get a lower rate of interest
  • Access a part of your net worth that would otherwise be inaccessible

When you use it as a down payment, it enables you to increase the cash flow from your new house. However, you would also run greater risk if real estate values go down instead of up.

What is the Closing Cost for Home Equity Loans?

The closing costs can range anywhere from 2% to 5%.

A few lenders may waive closing costs occasionally, but you might have to pay certain offsetting fees, as well as being expected to close the loan in a specific time period, generally three years.

  • Appraisal fee – $300-$700
  • Notary fee – $50 – $200 for every signature
  • Credit report fee – $30 – $50
  • Title search – $75 – $100
  • Attorney fees – Varies

Can Home Equity Loans Be Paid Off Early?

Yes! You can pay back your loan early, provided that you are prepared to pay any prepayment penalties.

Some lenders may charge you a fee if you pay back the loan in less than five years. Make sure you read the loan agreement carefully before making a decision.

Do Home Equity Loans Hurt Your Credit Score?

It’s true that some home equity loans may lower your score or hurt your credit, depending on your:

  • Financial situation
  • Ability to repay

Also, if you have a high credit utilization rate, your score may decrease. On the other hand, if you open a line but don’t use a lot of it, your score will probably increase.

Requirements to get the loan you are looking for

The requirements to get a home equity loan are:

  • Your credit score should generally be upwards of 700. Some lenders may accept scores between 621-700 too.
  • You should have enough equity in your home (at least 15%-20%)
  • Your debt to income ratio should be 43% or lower.
  • You need to have a good payment history.
  • Your income is sufficient to be a good credit.

What Credit Score Is Needed for a Home Equity Loan?

A higher credit score correlates to a lower interest rate. Aim for a score of 740 or higher for an optimum interest rate. Still, some lenders accept scores as low as 660 or even 620, but your interest rate will definitely increase with lower scores.

Do You Need Homeowners Insurance to Get a Home Equity Loan?

Most loans require you to carry a homeowner’s insurance unless you either:

  • Own your home outright
  • Have an old mortgage

Banks demand insurance as a requirement for a loan, just in case the unthinkable happens. It’s a good idea to have a home insurance policy in place beforehand.

Why Would I Be Denied a Loan?

You can have a good credit score and still be rejected for a home equity loan. Banks are more concerned than ever about getting their money back.

If you were denied, it may be because:

  • You accumulated unexpected debt
  • You have unreliable income
  • You filed for bankruptcy

Is the Interest on a Home Equity Loan Tax Deductible?

Interest on a loan is tax deductible only if:

  • The loan is for your first or second home
  • You use the loan to substantially improve the home
  • It is a construction loan
  • Both the lender and borrower enter an agreement to repay the loan

Home equity loan and how to get one

How Do I Get a Loan on a House That Is Paid for?

Homeowners with a paid-off house can secure loans the same way you would do with a mortgaged home.

A property that is already paid off is an excellent candidate for a loan due to the lack of liens. That means in the case of a foreclosure, no liens mean the loan is paid off first, which means a lower interest rate. However, this doesn’t necessarily guarantee a loan. Your payment capacity also comes into the picture. You may be able to borrow money only up to the max LTV of your lender.

What is a Home Equity Line of Credit?

A home equity line of credit or a HELOC closely resembles a credit card. You have a source of funds that you have access to when and as you choose. You can withdraw as little or as much as you’d like.

Much like a home equity loan, the rate of interest is much lower than the other loans.

Depending on the bank, you can access it via:

  • a check
  • an online transfer
  • a credit card

In a way, they act as emergency funds that you can access any time you want.

How Does Equity Line of Credit Work?

With a HELOC, you borrow the equity in your home with it as collateral. As you use the lines of credit, you can repay by replenishing them like a credit card.

You can borrow as little as you want or as much as you’d like within your draw period. At the end of the draw period, you begin to repay it back.

A home equity line has a variable rate of interest, which differs from month to month. This is a marked difference from a fixed-rate second mortgage.

Home Equity Loan or Line of Credit

Both the loan and the equity lines of credit are taken against the home. While the loan gets you a lump sum, the home equity line acts more like a credit card. Like credit cards, you can access the money whenever the need arises.

The loan has fixed interest rates with payments in regular intervals. The credit lines have a variable interest and often do not have any fixed payment plan.

Apart from these, both function the same. Which you use, however, depends on your financial situation.

Home Equity Loans or Mortgage

The notable difference between a mortgage and a loan is the time of purchase. A home equity loan is taken on a home you already own, while a mortgage is a loan that allows you to purchase the home in the first place.

Both are lending tools that are taken against your house. Both have tax deductions of up to $750,000.

Lenders generally offer 80% of value as a loan. The rate of interest is sometimes lower on a home equity loan when compared to that of a mortgage.

Home Equity Loans vs. Personal Loans

Both the loans vary vastly, both in the interest rates and in the loan limits and eligibility. They have different pros and cons.

A home equity loan has a low rate of interest since it is secured using your home as collateral. It often offers a lower interest rate than a personal loan would.

Personal loans may take days to close and fund, but home equity loans can take over three weeks.

 

Conclusion

Home equity loans are loans based on the equity of the house as security. The loan amount is calculated based on what you owe on your mortgage and what your home is worth. This type of loan offers lower interest rates than personal loans. You’d have to make a monthly payment in addition to your mortgage.

While you can use the money for any purpose, it is generally safer to buy, build, or substantially improve your home, prioritizing spending that will increase the property’s value for years to come.

Home equity lines are loans that act similarly to credit cards. You can then use it as and when the need arises. The loan amount and interest depends on the lender.

Securing a loan (home equity or otherwise) can be a daunting task. But with the proper research and preparation, your efforts can meet with success.

Find out more on home equity loans 

Steps to buying a house

Steps to Buying a House

Steps to buying a houseBuying a home is many American’s ideal goals, but the process involved in buying one is complex. Before purchasing a home, you need to make sure your credit and finances are in order. You’ll need to fill out different paperwork and submit various forms of verification before securing a home. Unless you plan on buying your home upfront, you’ll need to finance through a bank.

What type of home loan will you need?

The type of home loan you’re looking for impacts your approval odds. You should always hire the right real estate agent to help during the buying process. This alleviates much of the stress on you, so you can focus on getting your dreams home.

If you’re interested in purchasing a new home, continue reading to find out everything you need to know.

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TAKING HOME BUYING TO NEW HEIGHTS

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