Mortgage refinance provides borrowers with the option to reduce home loan payments or obtain cash from accrued home equity. Prior to refinancing mortgage notes, homeowners should become informed of the various options and compare interest rates and closing costs of various lenders.
The first step of mortgage refinance requires borrowers to review their current home loan documents. The majority of housing loans include prepayment penalties when loans are repaid before the contract expires. Homeowners carrying a first and second mortgage could incur substantial costs which negate savings obtained through refinancing.
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Borrowers should conduct research to compare current home refinancing interest rates. Mortgage lenders recommend entering into mortgage refinance when interest rates decrease by 2-percent or more than the interest charged on original loan documents.
Homeowners engaging in mortgage refinancing are required to establish a new home loan. Funding is used to pay off outstanding balances of first and second mortgages. Borrowers holding two or more home loans and meet lending criteria can combine both loans into the refinanced mortgage.
The first step of refinancing involves submitting a new loan application. Borrowers are generally required to pay loan application, origination and settlement fees. Refinance closing costs typically range between 3- and 6-percent of outstanding principal sum and interest.
Borrowers who plan to refinance first and second mortgages are often shocked to discover they are responsible for prepayment penalties of current home loans along with closing costs of refinanced mortgages. These costs can quickly add up to several thousand dollars.
Reduced interest rates can eventually save homeowners more than the cost of home refinancing fees. However, loan origination for refinanced loans can be an expensive upfront cost.
Some banks offer no closing cost refinancing. The truth is there is no such thing as no-cost loans. Instead of paying refinance closing costs upfront, the fees are included in the principal sum amount. Homeowners pay interest on closing fees for the duration of the mortgage note.
Refinanced mortgages generally extend repayment terms. If borrowers have 20 years remaining on their current note and refinance into a 30-year loan, they are adding an additional 10 years to their loan. Before entering into a refi mortgage agreement it is crucial to calculate the true costs to compare long term savings.
In recent years, multiple changes have occurred within the lending industry. Homeowners must understand the advantages and disadvantages of refinancing to determine if entering into a new home loan is a financially sound decision.
The Federal Reserve Board provides numerous resources and consumer guides to refinancing via their website at FederalReserve.gov. Home loan refinance worksheets, eligibility requirements, lending resources, and federal agency contacts are available at no charge.
The United States Department of Housing and Urban Development (HUD) provides mortgage refinance resources and information via their website at hud.gov. Borrowers holding FHA loans are entitled to complimentary counseling through approved agencies to help them determine if refinancing is plausible.
The Federal Housing Authority offers the Streamline Refinancing program to borrowers holding FHA loans. Streamline allows homeowners with decent FICO scores and a solid payment history to refinance mortgages without undergoing income verification and credit checks.
Streamline Refinancing prohibits borrowers from obtaining cash through accrued equity and is only intended to reduce mortgage payments for borrowers struggling to make monthly payments or those facing foreclosure.
Regardless of the type of mortgage loan, borrowers should only refinance when they can significantly reduce monthly payments. For most people, their home is their most valuable asset. Careful consideration should be given before refinancing a home loan to ensure borrowers do not place their property at risk.
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