Refinancing Options

The first thought that comes to mind for a lot of homeowners when they hear the term mortgage refinance is “interest rate.” But there is more to mortgage refinancing than interest rates. This apparent deficit in information has which had resulted in homeowners making refinancing decisions without realizing that their current position puts them at a disadvantage. If you are seeking to learn about mortgage refinancing or want to know the ideal mortgage refinancing options for you, then this article will give you inside knowledge on how to go about it.

What is Mortgage Refinancing?

A Mortgage refinance involves homeowners taking their existing loan and replacing the mortgage with a new loan. Refinancing is usually done to obtain reduced interest rates, and save money through lower mortgage payment. The cost accrued during the refinancing is rolled into the loan balance, thereby increasing the amount. Despite its benefits, refinancing does not make sense at all time. Sometimes it can be a terrible thing to do. One of the common issues that cause refinancing is the difference between the two mortgage refinancing options.

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Understanding Mortgage Refinancing Options

Depending on your financial goal, there are several refinancing options available when you wish to update your loan. However, the two primary options are the fixed-rate mortgage and variable or Adjustable-Rate Mortgages (ARM).

Fixed Mortgage Rate

Fixed rate mortgages provide the same interest rate, monthly principal and interest payment throughout the life of the loan. They usually come with a longer repayment period of up to 15, 20 or 30 years long. The fixed rate mortgage is beneficial, as you already know what your monthly principal and interest payment will be through the loan span. Hence, you won’t need to worry about the mortgage rate rising in the future. It also enables you to spread your repayment over a longer period, allowing you to pay a lower monthly principal and interest amount.

Adjustable-Rate Mortgages (ARM)

If you are looking for loans with short-term or more flexible repayment options, then the ARM will be your ideal choice. Due to the shorter payment period, it offers lower interest rates within the first five to seven years, after which the rate will be dictated by the market index. Compared to the fixed rate, ARM offers a lower rate in the early years of your loan, which saves you money. However, your rate becomes unpredictable when determined by market forces. If the market rate increases, you will pay a higher rate and if it reduces, you enjoy a lower interest rate. However, there are caps to limit how low or high the rates can go.

Other Mortgage Refinance Options

Asides the fixed interest rate and ARM, there are other payment options for various classes of people. These include;

  • Federal housing administration loans (FHA): If you are looking for a mortgage with little down payment, then the FHA will be the right choice. They allow down payment as low as 3.5%.
  • Veterans Administration loans (VA): the VA is a great mortgage option that allows veterans and military personnel to refinance their mortgages. It may not require down payments or mortgage insurance.
  • Alternative loan terms; mortgages typically range up to 30 years, but if you wish to repay your loan within a lesser period, then you should choose a short-term loan.
  • There are also other refinancing options for people who don’t want mortgage insurance, people with bad credit scores and home to embark on home renovation.

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Harp Refinancing

The Home Affordable Refinance Program (HARP) was created to allow homeowners to refinance their mortgage without running into any difficulty due to a decrease in the value of their home. It provides financial flexibility either through a reduction in payment or a change in loan terms.

However, for you to be eligible for this program, you must have originated your loan on or before May 31, 2009. Your mortgage investor must also be either Freddie Mac or Fannie Mae. Those who mortgaged through other major investors (VA and FHA) have options for significant relief.

If you are eligible for HARP, you can leverage on it to lower your rate and payment. You can also utilize this program it to change the terms of your loan, like to shorten or increase the payment period and lower your monthly fee.

Choosing the Best Mortgage Refinancing Option

When refinancing your loans, it’s essential to do plenty of research. Amongst the three benefits of refinancing; lower interest rates, shorter payment and reduced loan amount, choose one that best suit your situation and work to get a refinancing option that offers that. Compare interest rates from various sources, check the prevailing rates at the local unions, check with banks. The bank that currently has your mortgage may reduce the fees associated with refinancing, which can save you lots of money. Ensure there is no penalty in making additional principal payments.

Mortgage Refi Trends for 2019

What is likely to see in the mortgage industry?

  • First-time buyers dominating the market – first-time buyers have dominated the industry for the past ten years, and we don’t see that changing in 2019. According to the Urban Institute, first-time shares have been over 60% lately.
  • A continuous increase in interest rate – Interest rates have been going up for a long time now, and the trend isn’t expected to change in 2019. Experts projects that the Federal Reserve will raise rates at least twice this year.
  • Purchase loans to dominate – With the expected continued rise in rates, we expect a decline in refi activities. As a result, the market will consist mainly of purchase loans with a little fraction of refinancing loans.
  • More borrowers to choose ARM: Due to rising rates on a fixed mortgage, 2019 will see more borrowers opting for the adjustable rates, despite its risks. According to Ellie Mae, ARM had just 5.5% interest in the past 12 months, but rose 8.2% in October.

Pros to Refinancing Your Home

The primary reason people refinance their mortgage is to enjoy a lower interest rate. The discrepancy in rates may be small, but it does make a big difference. The lower interest rates can shave thousands off the total loan amount, reducing the monthly payment. Other benefits include.

  • Lower monthly mortgage payment
  • New loan term
  • Reduced total loan cost
  • Drop mortgage insurance
  • Cash-out home equity

Cons to Refinancing Your Home

The significant shortfall to mortgage refinancing that most homeowners do not realize is that it entirely restart the loan amortization clock. For instance, when you make your monthly payment, a large portion of it covers your interest rate with just a fraction applied to the principal. As your mortgage advances, the percentage applied to the principal increases. As you approach the conclusion of your mortgage period, almost all payments will apply to the principal. However, when you refinance your mortgage, you trigger a restart. Majority of your payment will start applying to interest rates instead of the principal.

  • Upfront fees
  • Lengthy application process
  • Also, you may also be required to pay closing costs like loan origination fees and in some cases, home appraisal and a few other fees that may make up to 1 to 3 of the loan amount.

Conclusively, it is essential not to go into refinancing based on assumptions. You have to consider various factors in making your choice. Also, it’s essential you look through different options and choose the one that best suits your situation.