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.

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Cash-Out Refinance Mortgage

Cash-Out Refinance

Cash-Out RefinanceExperts suggest that home prices are steadily climbing and could reach new heights in 2021, increasing by nearly 5.7%.

Buying a home is a costly affair and a big investment for the ordinary person, such that you’d want to make the space warm, cozy, and comfortable. However, with the rising costs, you are neither left with money to make the necessary changes nor be able to save up for it.

With cash-out refinancing, you can renovate, remodel and update your home without having to resort to high-interest loans such as personal loans and credit cards. Apart from that, you can also negotiate the payment terms, get a lower interest rate, etc.

This article takes you through everything you need to know about cash-out refinancing, including reasons, pros, cons, closing, how cash-out refinance works, and many more.

Cash-Out Refinancing

A cash-out refinance is where you take a new loan with a higher loan amount than the current mortgage. The new loan replaces your existing mortgage, and the remaining amount is handed over to you minus the closing costs. The lump-sum you get is yours to do as you please.

The cash-out refi depends on the home’s value. Most lenders let you borrow 80%, while you can take the entire home equity in the case of VA loans.

Also, the higher loan amount may result in higher interest rates.

Calculate Cash-Out Refinance

Cash-out refinance lets you take advantage of the equity you’ve built on your home. For example, if your home is worth $200,000 and you have paid off $60,000. You still owe $140,000 as a mortgage balance.

Let’s say that you want to make $20,000 worth of renovations to your home; You can take a cash-out refinancing to fund your renovations.

The cash-out refinance replaces the original mortgage. So, your new mortgage would be:

$140,000 + $20,000 = $160,000

You would receive the remaining $20,000 a couple of days after closing.

How Does Cash-Out Refinancing Work?

The cash-out refinance works similarly to any other loan process. You (the borrower) start with finding a lender with better interest rates and payment plans, submitting an application, and documentation.

Here are the detailed steps your lender may take you through:

Meet the Requirements Set By Your Lender

The lender first sets their terms and conditions, upon the qualification of which you are eligible for a cash-out refinancing:

  • You should have a credit score of at least 620.
  • Your debt-to-income ratio should be less than 50%
  • You should have at least 30% of the equity in your home.
  • No late payments on your mortgage within the last 12 months.
  • Refinance is available only for the primary residence.

Decide How Much Cash You Need

The next step is to determine how much capital you may need. If you are planning for renovations, it is a good idea to contact your contractor and get an estimate prior to the application.

For debt consolidation, sit with your bank statements, credit cards, etc., and work out how much cash you would need to cover your debts.

Complete the Application Process

To complete the application process, you may need to provide the following documentation:

  • Bank statements
  • W-2
  • Pay Stubs

After you get the approval, the closing process starts. You may have to wait for a couple of days after closing to receive your lump sum.

Reasons to Consider a Cash-Out Refinance

A cash-out refinance provides better financial benefits than a personal loan or a second mortgage. Here are some of the reasons why you may want to consider a cash-out refinance:

  • Funding renovations and home improvements

Constant upgrades and renovations are needed to maintain your home and also to increase the home’s value. From broken HVAC systems to kitchen remodeling, cash-out refinancing helps to use the home equity to fund your home improvements.

  • Consolidate and pay your debt

With a refinance, you can opt to consolidate your debts for a lower interest rate and pay them off.

  • Lower interest rate

Personal loans and credit card debt can have a higher interest rate, while mortgage and refinancing generally have a lower interest rate. Hence it makes sense to pay off your credit card debt and personal loan using a cash-out refinance.

  • Better investment opportunities

Refinancing may make sense to withdraw cash from refinancing for investment opportunities and retirement plans rather than having funds ties with your home. You can also use a cash-out refinancing towards financial needs such as college funds since the interest rate is lower.

Cash-Out Refinance: Pros and Cons

Cash-out refinancing provides you with a considerable amount of money when you require liquid cash and at a competitive interest rate. But the risk is real. Since you use your home equity to fund the refinancing, you run the risk of losing your home.

Hence it makes sense to evaluate the pros and cons:

Cash-Out Refinance Pros and ConsPros of a Cash-Out Refinance

  • The equity in your home is worth a significant amount, and tapping gives you access to a lump sum of cash. You can use the money to either further your/your child’s education or maybe invest in a business with assured success.
  • Mortgage rates are generally lower when compared to credit cards and personal loans since it is secured by your home.
  • Increase the monthly payments by replacing the original loan with a new one.
  • In case the cash is used to fund any substantial renovations that increase the home’s value.

Cons of a Cash-Out Refinance

  • Restarting the monthly payment terms increases the interest costs. Dragging out the payment does not yield the savings you expect from paying off a lower interest loan.
  • The loan is secured against your home. Failing to repay, you run the risk of losing your home. Do not withdraw more than you need.
  • Withdrawing up to 90% of your home equity increases the borrowing costs since you have to bring it back to the 80% threshold.
  • Mortgage loans have higher closing costs which run in hundreds to thousands of dollars. You can either pay them upfront or roll them into your loan amount.
  • You tend to use it as your personal piggy bank for lavish vacations or purchases with access to home equity. Consider seeking help for your spending habits through a non-profit counseling agency.

To Cash-Out Refinance or Not

Cash-out refinance is a good idea if you require access to your home equity for home renovations or something that gives you a better return for your investment. It also gives you a chance to lower your mortgage rate if you are in the higher mortgage interest bracket.

However, it may be a bad idea to avail yourself of cash-out refinancing if you plan on using the money for a new car or vacation since they do not have little to no investment.

Closing on Your Mortgage Refinancing

The final step in cash-out refinancing is the closing, where you sign documents, pay the fees, and then walk away with a new loan (hopefully a better interest rate). The process itself may take up to a few hours in the least.

Three days before the closing process, you get the Closing Disclosure which contains

  • Closing costs
  • New Terms
  • Monthly Payments
  • Miscellaneous costs and credits
  • Fees

The closing costs for a cash-out refinance would be 2% to 5% of the new mortgage, i.e., $4000-$10,000 for a $200,000 loan. You can either pay closing costs with a cashier’s check or roll them into your loan amount.

The closing costs may cover:

  • Early repayment fees
  • Discount points
  • Origination fees
  • Appraisal and inspection fees
  • Mortgage and title insurance fees

Once everything is signed, the “Right of Rescission,” the three-day grace period for the borrower, starts. It may take 3 -4 days to complete the transaction and get cash.

On a side note, you would be required to read and sign a lot of documents, affidavits, and declarations. Make sure that you read them meticulously before signing as they are legally binding.

Which Is Better? – Cash-Out Refinance vs. Home Equity Line of Credit

Cash-Out Refinance Versus Home Equity Line of CreditCash-out refinance and home equity line of credit both access your home’s equity and uses your home as collateral. But that is where the similarity ends.

Cash-out refinance settles the existing mortgage and kick starts a new mortgage with different terms and lower interest rates. It gives you a significant amount of liquid cash, which is yours to use as you wish. On the downside, they have high closing costs.

HELOC, on the other hand, is a new one in addition to your first mortgage loan. Considered to be a second mortgage, it has its payments and terms, which don’t influence the original loan in any way. Unlike refinancing, you get a line of credit from where you withdraw as you require. Home equity line of credit has very little to no closing costs.

Which Is Better? – Home Equity Loan vs. Cash-Out Refinance

Home equity loan and cash-out refinance lets you convert your home equity into cash. But both operate differently.

A home equity loan acts as a second mortgage and is secured against your home. The amount you get depends on the home’s equity. You will be responsible for the mortgage and also the new mortgage loan at the same time. With a home equity loan, the lender pays the closing costs.

With a cash-out refinance, you take out a new one to replace your mortgage loan with the home equity used to pay for the cash-out. It will have new terms, including a lower mortgage rate and more extended monthly payments.

The mortgage interest is lower for the cash-out, but the high closing costs more than makes up for it.

Conclusion

Cash-out refinance is the best option if you require a significant amount of liquid cash to pay off high-interest loans or home renovation. But the catch is that your home is used as collateral, and if you are unable to make payments, you may end up losing the home. And then there are the closing costs. But to your advantage, they also come with tax benefits. Your auditor should be able to guide you with these.

Tapping into your home equity is not a decision to be taken lightly. If you are not sure about cash-out refinancing, you may want to talk with your financial advisor or a home loan expert.

The people at Altitude Home Loans bring many decades of experience in doing loans the right way. If you are interested in purchasing a home, contact one of our Loan Officers today and we’ll help you through the Home Loan application process.

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Do you lose equity when you refinance

Do You Lose Equity When You Refinance?

Do you lose equity when you refinanceRefinancing your mortgage loan gives you the opportunity to reduce your monthly payments. But, there are several steps and processes you need to go through before you can finalize a mortgage refinancing. First, you need to determine how much equity you currently have in your home. Doing so enables you to determine if going through the refinancing process is something worth your time.

What many people fail to realize is that even when your home loan remains the same after refinancing, your actual equity still has the odds of decreasing or increasing. In what direction your equity goes depends on various factors. First, you’ll need to get an appraisal of your home to begin the refinancing process.

The current value of your home is compared against similar properties in your area during this process.

Determining your home’s current market value gives lenders the ability to provide you with the best-refinancing terms. That’s just the beginning; there are several other steps involved in the refinancing process.

Suppose you’re interested in refinancing your home but don’t know where to start. Contacting a lender like Altitude Home Loans can give you some solid footing. To learn more about refinancing your home, continue reading.

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