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Mortgage Refinancing Guide

As a homeowner, you may be aware that you have the option to refinance your existing mortgage. However, you may not be certain what is involved in this process or why it may be beneficial to you. Mortgage refinancing is often considered as an alternative to applying for a home equity loan. With a better understanding about what a mortgage refinance loans, you will be able to make a more informed decision about how to proceed with your home loan plans.

What Is Refinancing?

If you are like most homeowners, you may have a first lien or a combination of a first and second lien in place on your home. When you refinance your mortgage, you essentially are applying for a new loan that will replace the first lien. In some cases, you may be permitted to keep your existing second lien in place when you refinance your first lien, but it is more common to refinance to replace your first and second liens. Keep in mind that you may also refinance your home even if you do not have an existing lien in place. A refinance loan is a home mortgage that is collateralized by a property that you already own.

Types of Mortgages

There are several different types of mortgages that you may apply for when you refinance, and your home lender or mortgage broker can provide you with more assistance to determine which programs you qualify for. Some of the more common types of home mortgage loans available to you include:
  • FHA Loan: An FHA loan generally provides homeowners with low interest rate financing, and these loans are designed to take the first lien position. They are only available for real estate that is occupied as a primary residence, and they have maximum loan amount restrictions that may make them unsuitable for some borrowers.
  • VA Loan: A VA loan is a loan that is guaranteed by the Veterans Administration, and these are available only to veterans, active duty military professionals and surviving spouses of fallen soldiers. These are known for having low interest rates and low fees, but they also have loan limits in place.
  • Conventional Loan: Conventional loans are another option, and they may have more flexible underwriting guidelines than FHA and VA loans. They are available with fixed rate, adjustable rate and interest only options, and you may request a term of 15, 20 or 30 years. These may be available with very low interest rates if you meet minimum credit score requirements.
  • Jumbo Loan: A jumbo loan is a loan with a loan amount over $417,000, but in some markets with high real estate values, the minimum loan amount may be higher. These are generally designed for high net worth borrowers, and the underwriting guidelines may be more stringent than with conventional loans.
  • Reverse Mortgages: These are unique mortgages that are becoming more popular with retirees in recent years. They allow you to obtain cash payments that draw from the equity in your home, and you may not have to make payments on the funds you draw until after the house sells.

How to Compare Loan Terms

Because of how significant a home mortgage payment can be on your budget, it is wise to compare loan terms offered by different lenders. Typically, the interest rates offered to you for a VA loan, an FHA loan and even a conventional loan or a jumbo loan may vary by only a small amount. However, when you apply an eighth percent, a quarter percent or more to a large loan amount, the fact is that the difference in your mortgage payment and the amount of principal reduction with each payment can be significant. In addition to the loan terms, lender fees can also vary considerably. In fact, some lenders may charge several thousand dollars more than others in fees. Because of this, it is important that you obtain written quotes from several lenders. Ensure that you are comparing all facets of the loan request at the same time, including rate, term and fees. Pay attention to terms like interest rate versus APR. APR is a more comprehensive way to compare loan terms, and this is because it takes into account interest charges, loan fees and other fees that you may incur with your loan request.

How to Qualify for a Mortgage

When you begin working with a mortgage broker or lender, you will initially be asked to provide basic information about yourself and your financial situation. This may include everything from your social security number and residency status to your income, assets and monthly expenses. Typically, the lender or mortgage broker will pull a copy of your credit report at this stage in the loan process. A preliminary review will be conducted to ensure that you meet basic underwriting criteria for your loan request. In many cases, a loan applicant will meet the criteria, and you may obtain a pre-qualification letter if you are buying a new home. For a refinance, you may obtain a statement showing preliminary loan terms. This may give you basic information about the loan so that you can make the decision about how to proceed. If you choose to proceed with the loan that you have been pre-qualified for, you will typically then need to provide your lender with additional documentation. This can vary from lender to lender, but it may include:
  • Two years of tax returns and W-2s or 1099s
  • Paystubs
  • Bank statements
  • A copy of your driver's license or social security card
  • A copy of the sales contract if you are buying a home

At this stage, an appraisal will be ordered on the property, and you may opt to obtain a property inspection or other optional reports if you will be purchasing the property.

Is It a Good Time to Buy Now?

You may be wondering if now is a good time to buy or if you should refinance your existing mortgage. The fact is that interest rates remain near historic lows. If it has been more than about five years since you last refinanced or since you purchased your home, you may benefit financially by applying for a new mortgage and locking in a lower interest rate. However, before you make a decision about whether to buy or to refinance, you may consider a few points:
  • Does your current home meet your needs?
  • What is the housing market like in your area? You may need to speak with a real estate agent to learn more about this.
  • What are your future plans regarding relocating, up-sizing or downsizing?
  • What are the costs associated with renovating or improving your current property, if necessary, versus relocating to a new home?

There are generally pros and cons associated with remaining in your existing home and refinancing versus relocating to a new home with a real estate purchase. In order to make a decision that is best for you and your family, you may need to thoroughly analyze the financial costs of both options as well as the physical factors associated with your home and other homes available on the market today. This is a major decision, so you do not want to rush into a hasty decision.

A mortgage refinance is an option that many homeowners will proceed with at some point, and many homeowners refinance their home every few years to take advantage of the many benefits associated with it. If you are interested in learning more about refinancing, you can speak with a mortgage specialist about the options available to you.

Interest Rates in Various US States

You can view certain lender Rates, and get quotes directly from specific lenders. Choose your state from the list below. Then, on the next page, refine the form on the to match your mortgage needs to view the lenders who can help you:

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Government Links mortgage guide
HUD: Department of Housing
CNN Real Estate news
Federal Housing Administration
Fannie Mae
Freddie Mac
Department of Veterans
Wells Fargo Home Refinance