When interest rates are low, like they are right now, it’s a good idea to consider refinancing your mortgage. Mortgage rates decreased to 2.65% in January 2021, the lowest level since July 2016. They will, however, certainly begin to climb again at some point. What impact should this have on your decision to refinance? That, of course, is contingent on the current interest rate on your mortgage.
Even if interest rates are rising, an older mortgage may have a higher interest rate than those currently available. Also, if you think rates will climb significantly, it could be a good idea to lock in the current rate.
There are advantages and disadvantages to refinancing a mortgage in this low-interest-rate environment. For instance, a better credit score—or a decision to change the length of your mortgage—could result in better refinance conditions, saving you money in the long run. However, it’s possible that you don’t intend to stay for the long haul. For those who qualify, several special refinancing schemes might be extremely beneficial. Here’s how to get started with your decision-making.
Should You Think About Refinancing Your Home Mortgage?
Low interest rates have in the past sparked a refinancing frenzy in the market. However, in any economy, the best way to determine if a refinance is right for you is to think about the specifics of your circumstance.
How much lower are the rates than the ones you’re paying now?
To refinance, how much do interest rates drop? That isn’t the appropriate question. Rather than following “rules” regarding how much of a percentage change in interest rates you should search for before refinancing, consider how much money you’ll save. A 1% rate reduction means a lot more if you have a $500,000 mortgage than if you have a $100,000 mortgage.
Are you planning on keeping the mortgage for a long time?
You will have to pay closing costs on your refinance, just like you did when you bought your house. If you expect to sell your home in a few years, refinancing may only get you close to breaking even (or possibly put you in the red). Why is that?
You’ll lose money if the monthly savings for the rest of your mortgage aren’t larger than the closing fees involved with the refinancing. You’ll need to add this expense into your break-even calculation if you roll closing expenses into your mortgage rather than paying them up front, because you’ll be paying interest on them.
Is it possible to refinance into a shorter-term loan?
If your mortgage has 20 years left on it and you refinance into a new 30-year mortgage, you may not save money in the long term (even with a lower rate).
If you can afford to refinance that 20-year mortgage into a 15-year mortgage, the lower interest rate and shorter term will significantly cut the total amount of interest you’ll pay until you buy the house free and clear.
Closing fees are being overcharged.
You’re paying too much in interest because you don’t want to pay any closing costs.
Equity is dwindling. It has a negative effect on your long-term net worth. 1What Can
Do You Expect to Profit?
When done correctly, a refinance can provide immediate and long-term benefits. You might be able to complete the following tasks:
Get a More Beneficial Loan
Perhaps your financial situation has improved since you took out your previous mortgage. Refinancing might help you get a better interest rate or make an already good mortgage even better. In any case, you’ll improve your short-and long-term financial security, as well as your chances of not losing your house in a downturn.
In the long run, increase your net worth.
You’ll pay less in interest thanks to the money you’ll save by refinancing your mortgage. That’s money you could put toward retirement or another long-term financial goal.
Increase Cash Flow in the Short Term
You’ll have more money to work with on a month-to-month basis if your refinance lowers your monthly payment. This can ease your family’s day-to-day financial stress while also giving you more money to invest in other things.
The Risks of Refinancing
Refinancing a mortgage adds new variables to your financial picture. Your original mortgage’s risks are still present, plus a few new ones have surfaced.
Paying Too Much for Closing Costs
Several unneeded and/or inflated fees might be added to the cost of your mortgage by unscrupulous or predatory lenders. Furthermore, some of these charges may not be disclosed upfront in the hopes that you will be too committed to the process to pull out.
Paying Too Much Interest Because You Don’t Want to Pay Closing Costs
Closing a refinance may not necessitate any cash. Lenders compensate for this cost by charging you a higher interest rate. Consider the following scenarios: a $200,000 refinance with no closing costs and a 30-year fixed interest rate of 5%, or a $200,000 refinance with $6,000 in closing costs and a 30-year fixed interest rate of 4.75 percent.
In scenario A, you’ll pay a total of $386,511 if you keep the loan for its entire period. You’ll pay $381,586 in scenario B. Over the life of the loan, having “no closing expenses” costs you $4,925.
The only part of the house that is truly yours is the portion of the mortgage you’ve paid off, or your equity in the home. Eventually, you’ll own the whole house and be able to get all the money when you sell it.
When you perform a cash-out refinance, however, you reduce the amount of your house that you truly own by rolling closing fees into the new loan or prolonging the term of your loan. Even if you live in the same house for the rest of your life, poor refinancing decisions could result in you making mortgage payments for the next 50 years. If you do it this way, you risk wasting a lot of money and never truly owning your home.
Your Long-Term Net Worth Negatively
Although refinancing can lower your monthly payment, if you’re adding years to your mortgage, it’ll almost always cost you more in the long run. If you need to refinance to keep your home, paying a higher interest rate may be worth it in the long term. If your primary goal is to save money, keep in mind that a lower monthly payment does not always equate to long-term savings.
There are a few special refinancing options that may be especially good for people who qualify.
Fannie Mae’s High LTV Refinance Option and Freddie Mac’s Enhanced Relief Refinance (FMERR)
The amount owing on the mortgage is approximately equal to or surpasses the home’s appraised market value in high loan-to-value (LTV) mortgage loans. Because a failure or nonpayment by the borrower could result in the lender losing money if the bank forecloses and sells the home for less than the loan amount issued to the borrower, these high LTV loans are considered high-risk by lenders.
Unfortunately, mortgage loan refinances under the high loan-to-value (LTV) programs have been temporarily halted by Fannie Mae and Freddie Mac. All high LTV refinance applications must be postmarked no later than June 30, 2021, and must be purchased or securitized no later than August 31, 2021. The Home Affordable Refinance Program (HARP) was set to expire on December 31, 2018, and these Fannie Mae and Freddie Mac initiatives were created to replace it.
HARP was created to assist homeowners who were unable to refinance their properties due to a drop in value.
Its purpose was to help people avoid losing their houses to foreclosure by improving the long-term affordability of a loan. Only Fannie Mae (High LTV Refinance Option) and Freddie Mac (FMERR) mortgages were eligible. They did, however, have to have a loan origination date of Oct. 1, 2017 or later, and borrowers had to be current on their payments.
Fannie Mae’s RefiNow and Refi Possible (Freddie Mac)
Fannie Mae began offering low-income mortgage borrowers a new refinance option named “RefiNow” on June 5, 2021, with the goal of lowering their monthly payments and interest rates. Freddie Mac will begin offering the same scheme, dubbed “Refi Possible,” beginning in late August 2021. To be eligible, homeowners must earn less than or equal to 80% of the area’s median income (AMI).
The RefiNow program from Fannie Mae has various advantages for homeowners. First, the homeowner’s interest rate must be reduced by at least 50 basis points, and the homeowner’s monthly mortgage payment must be reduced by at least $50. Second, if an appraisal is done for the transaction, Fannie Mae will give the lender a $500 credit at the time the loan is bought. This credit must be passed on to the homeowner by the lender.
To be able to use Fannie Mae’s RefiNow program, a homeowner must meet the following requirements:
You have to own your home.
A Fannie Mae-backed mortgage secured by a single-family primary dwelling.
Have current income of less than 80% of the AMI (not the income as of the origination of the original loan).
In the last six months, you haven’t missed a mortgage payment, and in the last year, you haven’t missed more than one.
Have a loan-to-value ratio of up to 97 percent, a debt-to-income ratio of no more than 65 percent, and a FICO score of at least 620.
Eligible borrowers with a Freddie Mac-owned single-family mortgage can benefit from a lower interest rate and monthly mortgage payment through the Freddie Mac Refi Possible program, which can save them $100 to $250 per month.
Qualifications for a Refinance
If you own a home, you must meet these rules to be able to get a loan from Freddie Mac’s Refi Possible program.
Be the owner of a Freddie Mac-owned mortgage backed by a single-family home with one unit that is their principal residence.
Have a household income of less than 80% of the regional median income. never
missed a payment in the previous six months and no more than one in the previous year.
A loan-to-value ratio of 97 percent or less is required, as is a debt-to-income ratio of 65 percent or less and an indicator score of 620 or higher.
Streamlining the Federal Housing Administration’s (FHA)
A Streamline refinance with the Federal Housing Administration (FHA) is for homeowners who already have an FHA mortgage. Its purpose is to give a new FHA mortgage with improved terms, lowering the monthly payment for the homeowner.
Expect the process to be simple and painless, with no new financial documents or income requirements.
A home appraisal, termite inspection, or credit report are not required for this sort of refinancing. An FHA streamlined refinance does not allow cash out, which may be a disadvantage for some homeowners.
The Department of Veterans Affairs (VA) of the United States has streamlined its processes.
This scheme is similar to an FHA streamline refinance and is known as an interest rate reduction refinance loan (IRRRL). Unless you’re refinancing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, you must already have a Veterans Administration (VA) loan and the refinance must result in a reduced interest rate. An appraisal and a credit report may be required by the lender, but the VA does not.
In November 2017, the VA and the Consumer Financial Protection Bureau issued a warning notice alleging that military members and veterans have been getting a slew of unsolicited offers, including false information regarding these loans. Before acting on any offer of a VA IRRRL, check with the VA.
It is possible to pay few to no closing fees upfront with the VA streamline and the FHA streamline. These charges, however, will either be incorporated into the mortgage or you will be charged a higher interest rate in exchange for not having to pay closing costs. So, while you won’t be out of any money up front, the refinance will cost you money in the long run.
Important Points to Remember
If you refinance your mortgage, it should be based on your unique circumstances, not just on whether interest rates are rising or falling.
When you refinance, you’ll get a better interest rate, make your home more valuable, and improve your short-term cash flow.
Paying too much in closing fees, getting stuck with a higher interest rate because you don’t want to pay closing costs, losing equity on a cash-out refinance, and lowering your net worth are all disadvantages.
Fannie Mae, Freddie Mac, the FHA, and the VA all have special programs that can assist some homeowners in obtaining cheaper mortgages.
Borrowers should benefit from a proper refinance by lowering their monthly housing payments or shortening their mortgage term. Unfortunately, these complications can trip up the unsuspecting buyer and result in a disastrous bargain, just as they might with any significant financial transaction. Knowing how the process works will aid you in finding a lender and a refinancing program that are the best fit for your needs.