Could this be a great time to refinance? With rates starting as low as they are, it really may be. How soon can you take advantage and possibly get into a lower rate? Even if you can refi, does it make sense for you?
We’ll answer these questions and more.
When Can You Refinance?
You can put seasoning on a lot of things – tacos, hamburgers, a steak. Oh, and your mortgage can be seasoned, too. Did you know?
“Seasoning” in mortgage terms refers to how long you have to wait before you can refinance. It mostly applies to cash-out transactions, but it can also affect when you can have your equity recalculated based on a new appraisal.
If you’re looking to take cash out, you have to be on the title of the property for at least six months if you have an agency, jumbo or VA loan. If you have an FHA loan, the waiting period on a cash-out refi is one year.
On a rate/term refinance (taking no cash out of your equity), there’s no waiting period.
If you recently moved back into your former investment property, the FHA also requires you to prove you’ve lived there for at least a year. If you haven’t been back for at least a year, you can only do a rate/term refinance, and the maximum loan-to-value ratio (LTV) is 85%. In the case of a refinance, LTV is the ratio of the loan amount compared to the appraised value.
One thing to note is that if you inherited the property, there’s no waiting period necessary unless you had an FHA loan and rented the property out at any time since you inherited it.
Using a New Appraisal
If you’re looking to use a new appraisal to prove an increase in your equity that’s based on increased property value, there are special waiting periods involved depending on the type of loan you have.
If you have an FHA, a jumbo or a VA loan and you want a new appraisal to determine a value increase, you have to own the property a year before requesting the appraisal.
On agency loans from Fannie Mae or Freddie Mac, there is no specific timeframe you have to wait. The appraisal just has to be supported by changing market conditions and/or documented improvements made to the property.
Why Would You Refinance?
Now that you know whether you can refinance, it’s time to determine if you should. In making that determination, there are a couple of things you need to take into account: Why are you doing it – and is it worth the cost?
Here are the most common reasons people decide to refinance:
Lower Your Payment – A refi can be an opportunity to give your finances some breathing room. You can refinance your loan so that it has a lower monthly payment. And that extra cash can go toward your other financial goals, such as saving for a car, putting money into a retirement account or simply going on a dream vacation.
Lower Rate – The higher your interest rate, the larger your monthly payment. When rates drop below your current rate, it may be a great time for you to swoop in and get a lower one. It’s always good to keep track of interest rates so you know when you can save the most money!
Change in Loan Type – Sometimes we need a change of pace in life. If you’re interested in getting out of your fixed-rate loan, you may be the perfect candidate for an adjustable rate mortgage (ARM), which provides a lower interest rate than a fixed loan. After a period of time, though, this rate adjusts based on market conditions. Converting between adjustable and fixed can be a great way for you to save money.
Getting Rid of PMI – If you have an increase in property value based on a new appraisal, you might refinance in order to remove private mortgage insurance (PMI). Meanwhile, converting from an FHA loan to a conventional one once you reach 20% equity could help you ditch FHA mortgage insurance payments.
Cash-Out Refinance – If you want to convert the existing equity in your house into cash in order to make home improvements or boost a college fund, you can take out money with a cash-out refinance.
Consolidate Debt – If you have additional debt that has a high interest rate and you have enough equity in your home, you could consolidate that debt into your home loan and pay interest at a much lower rate.
Once you know why, you’ll know if it makes sense.
Things to Consider Before Refinancing
Before you’re ready to refinance, there are several things you need to think about, including the following:
- Current Equity – Home equity is the amount of your home’s value that you own. You’ll need 20% equity to remove your PMI through refinancing. If you’re interested in refinancing for a different reason, your situation will depend on specific loan programs. Reach out to a Home Loan Expert to discuss your options.
- Credit Score – Much like buying a home, you’ll need to consider your credit score when refinancing a mortgage. You’ll need a credit score of at least 620 (or 580 in the case of an FHA loan) in order to refi your home.
- Length of Time in the Home – Not only do you need to wait a certain amount of time before you can take cash out if you just took over the title, but you also need to consider how long you want to stay in your home and whether refinancing will make sense. For example, do you really need to pay more for 15 years of rate certainty if you only plan on staying in the home for five years? An adjustable rate mortgage (ARM) is a loan with a 30-year term with a low teaser rate that stays fixed for a period of time – typically five, seven or 10 years – before it adjusts up or down, depending on what the market is doing. If you only plan on being in the home for 10 years, you would be able to get a lower rate with an ARM then you could with a fixed-rate mortgage and be ready to move before it ever adjusts.
- Other Outstanding Debt – A mortgage lender will have to take a look at your debt-to-income (DTI) ratio. The less income you have going toward debt, the better your chances will be to qualify. You can also look at taking equity out of your home for debt consolidation.
When Does It Make Sense to Refinance?
When you set up a mortgage, there are various associated costs you have to think about. Among the costs you can expect to pay are origination fees. These vary from lender to lender and depend on the type of loan you get. Other costs include appraisal fees, mortgage discount points, prepaid tax and insurance payments (in order to set up an escrow account), etc.
Once you know what the costs are, it’s a matter of just doing the math. If you’re doing a rate-term refinance with the goal of lowering your payment, simply divide your cost to close the loan by the amount you’re going to save every month.
This will tell you the amount of time to stay in the house in order to break even on the deal. If you see yourself moving before you break even, it may not be a great option.
Before you break out the slide rule, though, we can help you with this math problem. With Rocket Mortgage®, you can compare a customized mortgage solution with your current mortgage loan in order to quickly and easily see if refinancing makes sense for you. You can also fill out this short form to speak with a Home Loan Expert.
If you want more information, view our refinancing options. If you still have questions, let us know in the comments below.
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