It’s no secret that mortgage rates are rising in the new year. What are your refinance options in a higher-rate market?
Should I Refinance My Mortgage?
“Refinancing still makes a ton of sense for a lot of people,” says Quicken Loans Capital Markets Pricing Director Jeremy VanBuskirk. With home values rising across the nation, a mortgage refinance can give homeowners access to their home’s equity. Most of us probably have several ideas that spring to mind for where to channel freed-up funds, whether it’s debt consolidation, home improvement projects or something else entirely.
“Cash-out transactions can make a ton of sense for people saddled with high rates on second liens, credit card debt, or even the big elephant in the financial services room – student loan debt,” advises VanBuskirk.
“Right now, we have home values appreciating at around 5%,” says Lindsey Fediuk, senior pricing desk analyst at Quicken Loans. “Now people have the possibility to get cash out who haven’t been able to do that even at a higher rate,” she adds.
Black Knight Financial Services recently released research on the hottest markets for rising home values in its Mortgage Monitor Report. Currently, there are more than 39 million borrowers with tappable equity, or combined loan-to-value (CLTV) ratios of less than 80%. So those homeowners have more than 20% equity in their homes.
If you’re getting a conventional loan for a one-unit primary property, the required equity amount for a rate/term refinance is anywhere between 3% – 5%. Minimum equity for a cash-out refi on a conventional loan is 20%. It can be higher if you have more units and/or it’s a second home or investment property.
If you’re getting an FHA loan, the minimum down payment on a rate/term refinance is 3.5% for a 1 – 2-unit primary property. Equity for taking cash out must be at least 20%.
If you’re an eligible servicemember, reservist, veteran or qualifying surviving spouse, you can lower your rate and change your term or take cash out up to the full value of your home on a 1 – 4 unit primary property if you have a median FICO® Score of 680 or higher. If your credit score is a median of 620 or higher, you only need to leave 10% equity in your home to take cash out. With a VA loan, you can always do a rate/term refinance for up to the full value of your property.
USDA loans only offer rate/term refinance options, so you can’t take cash out, but you can refinance up to the full value of your property.
If you have little to no existing equity or owe more on your mortgage than your home is worth, you may still be able to lower your rate or change your term by doing a streamline refinance.
“Even with rising rates, there are still plenty of options for people to refinance and improve their financial situation,” says VanBuskirk.
Here is some other things you might consider when determining whether to refinance.
“People that have been in their mortgage for a few years can take advantage of a shorter term,” advises VanBuskirk. With a long mortgage term, it can sometimes feel like you’re a permanent renter rather than a homeowner. Refinancing with a YOURgage by Quicken Loans allows you to customize your mortgage term by choosing any number of years between 8 and 30 years – whatever fits your timeline.
For example, if you plan to retire earlier, you can shorten your mortgage term from 30 to, say, 22 years to better align with your career’s timetable. Or if you’ve just bought a home to grow your family, you can refinance your term to finish your payments before your children graduate.
“The day you retire can be the day you make your last mortgage payment,” says Fediuk. “Or when your kids go to college, that can be the day that you make your final mortgage payment. That way the house is paid off and that’s one less expense for you to worry about.” By shortening your term to a length that works for you, you can refinance your home loan without stepping backward in your mortgage.
And generally, the shorter the term, the lower your interest rate and the less money you pay over the course of your loan. Paying less interest allows you to put more toward paying off your principal balance. While the return won’t be as immediate as a cash-out refinance, shortening your mortgage term could also mean more money in your wallet in the long run.
Get Rid of Mortgage Insurance
While mortgage insurance probably helped you buy your home by lowering the amount you had to put down upfront, many homeowners aren’t the biggest fans of the additional cost on top of the other parts of their monthly mortgage payment. If that’s you and you’re ready to stop feeling frustrated with the extra cost, then consider getting rid of mortgage insurance altogether. “There might be a prime opportunity to take advantage of our PMI Advantage program and refinance out of mortgage insurance,” VanBuskirk advises.
“Rates are still historically low,” says Fediuk. “People are still going to refinance. People are still going to buy homes. We’re still going to be able to help people.” Take advantage of your home’s equity to achieve your financial goals in 2017.
Which of the refinance options mentioned above works best for you? Share with your fellow Zing Blog readers in the comments section below!
Got questions? Talk to a Home Loan Expert today to explore your refinance options for the new year!
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