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What is a mortgage refinance? Should I be considering it? – You could be missing out on savings!

 

What is a mortgage refinance?  Should I be considering it?

 

You see and you hear about the low interest rates and how now is the time to buy or restructure your mortgage loan, but is it for you? Skepticism surrounds the advertisements as salesman who only want your money and to start your loan all over again, removing all the hard work you’ve done to pay down the largest debt in your name. This causes the potential benefits of a mortgage refinance to go largely unnoticed. The truth is that a mortgage refinance is more capable of assisting you toward your goal of paying off your home quicker, rather than harming you when utilized correctly. Educating yourself on what exactly a mortgage refinance is and how it can benefit you as a borrower can create monthly and yearly savings!

 

What is a Refinance?

When you look at the big picture of what a refinance is, it is simply a request for a home loan by the home owner in order to buy their current home from themselves at a new rate and term. This begins their new mortgage payment, at a new interest rate, and loan term length of their choice. It is a tool for home owners to examine their current mortgage debt structure and determine whether it is the best it could be for them or not. You do not have to do this determination on your own, as there are mortgage professionals with more knowledge of the industry with more accurate information to help analyze your current position and potential benefit of a refinance.

Is a refinance good for me?

I wish that the answer to the question was cut and dry, but it isn’t. Every borrower’s financial picture is different than the others just as a borrower’s current mortgage loan amount, interest rate, and current term length remaining are different. The important questions to ask yourself and your trusted mortgage professional is:

  1. Will the refinance lower my monthly payment amount?
  2. Will the refinance lower the amount of interest I am paying?
  3. Will the refinance shorten the term of my home loan?
  4. Will the refinance remove the costly mortgage insurance every month?
  5. Is there equity in my home that I can use to improve my own/family’s financial picture?

Answering yes to just one of these questions is a great benefit, but combining two, three, or even four of these together makes for truly remarkable savings and improvements to the long-term picture. Often, it is overlooked that just because your monthly payment may not go down, a refinance right now can remove years off your current term and it wouldn’t cost you anything more per month. Of course every borrowers situation is different. Call your trusted mortgage profession and have a conversation about whether a refinance is right for you.

Refinancing your mortgage is not right for everyone

While the benefits of a mortgage refinance are great, it does not make sense in all cases to do so. As explained above, a refinance is a home loan to buy your house from yourself at a new rate and term. This means that similar closing cost fees paid to buy the home initially will again need to be paid to start this new refinanced loan. If that interest rate drop will not be that great, the equity in the home to remove the mortgage insurance isn’t quite there yet, and the monthly savings are minimal, taking a slightly lower rate and paying the cost to refinance may not be for you. Solely removing monthly mortgage insurance on a conventional loan (NOTE: Not FHA) may not need the cost of a refinance either. Contacting your lender and ordering an appraisal to see what your home is worth might be all that you need to remove the mortgage insurance instead of a refinance. However, if you’re also looking to reduce a rate as well as remove mortgage insurance, then a refinance should be your aim. Just as you would contact a mortgage professional to determine if a refinance is good for you, ask questions and determine whether it makes sense not to refinance as well.

A mortgage refinance could be a great tool to free up some monthly savings in these trying and uncertain times. At the time of this writing, I am originating loans from home as COVID-19 has made it that way for many occupations. If you find yourself in the same situation, take a break and connect with a mortgage professional about your mortgage saving options, mortgage term shortening, and interest rate reduction. Here at NEXA Mortgage, we say that “7 minutes could save you 7 years on your mortgage” and it could not be more accurate.

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Rejection is hard; 4 tips to increase your chances of mortgage pre-approval!

Homeownership is a milestone that most strive to accomplish at some point in their life. Just like anything you do for the first time, it can be intimidating. Where do I start? What do I need to begin the process? What if they tell me no?! While the tips in this article will not remove the fear completely, it will make you more confident when approaching a mortgage loan officer knowing that you’ve focused on these four areas ahead of time; Becoming the most qualified borrower you could be. These are four different tips to increase your chances of a mortgage loan pre-approval.

1. Maintain consistent income

Whether your income is coming from being self-employed or a W2 employee, maintaining a consistent income through at least two years of employment in the same line of work makes it easier to determine the amount you make monthly/annually. Sounds simple right? However, often times there are gaps of employment, significant decreases/increases in income from year to year, or cash accepted payments that make it difficult to verify that income to your file. If it cannot be verified, it cannot be utilized in determining your buying power. If you are self-employed and accepting payment through commonly used transaction apps or cash payments, make it a point to deposit/transfer all money collected from your business every Friday, or every other Friday. This will create a consistent distribution to your bank account, showing consistent income. If you’re working at a job that offers overtime to it’s employees, it can also be counted as long as you work those steady hours on a consistent basis.

2. Utilize free credit monitoring to keep an eye on your history

Monitoring your credit score seems to be a standard feature among most financial tools now a days. If you have a major credit card, they normally offer a fico score tracking system reported monthly. Websites like www.annualcreditreport.com allows for a free credit report once a year to make sure your history is accurate. Applications like Credit Karma give you weekly updates to any changes to your credit history for free. Monitoring your credit history and staying on top of credit fraud, errors, or monitoring credit card utilization rates staying below 30% will help propel your credit score higher. At the time of writing, FHA Mortgage Loans require that your minimum credit score to qualify be 580 and only require 3.5% of purchase price as a down payment. While it may be a joy to simply qualify, understand that the higher your credit score is, the lower interest rate you will qualify for. In turn, the lower interest rate equates to a lower monthly payment as well as a lower overall cost for the home over the length of the loan. With so many tools available to maintain a close eye on your credit history, it would be a disservice to yourself not to track it.

3. Control and lower your monthly liabilities

“You’re preapproved!” says the credit card mail advertisement. “Zero percent interest on new truck purchases through June’s truck month event!” you hear on television and think that now may be the time to upgrade that 2010 you have.  You walk into your bank and see how low of a rate your local credit union is offering on a personal loan and wonder…maybe now is the time to get the kitchen remodeled? If you’re reading this post and in the market for mortgage in the near future, fight the urge! While owning a car with zero or low interest and remodeling you kitchen may make sense, understand that installment loans (car payments, personal loans, etc.) and open lines of revolving credit (credit cards) affect both your buying power and ability to qualify when applying for a mortgage loan. When your income is calculated and verified, it is then matched up to the liabilities in your name to determine whether your debt compared to your income(DTI; Debt-to-Income Ratio) is within certain guidelines. Maintaining or actively working on decreasing your monthly liabilities will increase your chances of qualifying for a mortgage loan and being approved for a larger purchase price.

4. Don’t move your assets around frequently and keep them growing!

Qualified assets to be used for a down payment are a big road block to many potential borrowers on the path to home ownership. It is no secret that saving up a large enough pool of funds to use toward a down payment is difficult to do. When you hit your savings goal or commit to growing your savings to hit a goal, do so in one account per borrower and leave it there. This provides the loan officer an account in your name with savings that are seasoned and constantly growing. Seasoned funds, money that is stationary and verifiable through work paychecks or a receipt of a sale, are more likely to be eligible for use as a down payment toward your future purchase. If you are still in the process of saving the down payment, the bank statements requested when going through the pre-approval process will show the steady growth of the savings account over the previous months.

The process of buying a home can be a long and exhausting process. Make that process as smooth as you can for yourself and the real estate professionals involved and take advantage of the tips in this article. There is hardly a better feeling than the one you get when you set a goal, set a plan to reach that goal, and then crush it. Let that feeling come from overcoming the process and becoming a home owner. Happy house hunting!

 

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