Today's unstable economy has led people to look for money saving alternatives. One of the biggest expenses is a home. Homeowners look to refinancing to ease monthly expenses.
There are two reasons why people refinance their homes. One is that they want to reduce debt, pay a lower rate of interest and lower their monthly mortgage payment. The other is to get equity from their home in a cash-out refinance which they can use elsewhere.
Becoming divorced or widowed will not change whether or not the bank will refinance your loan, unless your income level drops significantly. "The banks look at ratios of payment to income," says Stanford Mortgage's Loan Consultant Jeff Silver. The key is to be between 38-45% expense to income ratio. For example, if someone makes $2,000 a month, they should not have more than about $800 in debt including the mortgage payment.
The general rule of when to refinance is when the current interest rate is two or more points below the rate you pay now. However, you must also take into account that you will be paying closing costs and appraisal fees. The key is to calculate how much time it will take for you to break even. If it's less than a year, you are set to refinance.
The other condition of when you should refinance is when the value of your property is at a 80-20 ratio. This means that your loan amount should be 80% of the overall value of your property. This will save you from paying $75-150 extra in property mortgage insurance on top of your principal balance.
If homeowners want to refinance, they should prepare themselves financially to ensure a smooth transaction. The key is to pay off any debt that may hinder your ability to refinance. Pay off the credit cards or the remaining balance on your car or student loans.
Homeowners should also review their credit report and dispute any transactions that are incorrect. Sometimes something as simple as an error in the credit reporting can make the banks nervous.
Your mortgage payment history is the make or break of your refinance. If you can show that you have paid your mortgage payments on time without being late, you have won half the battle with the banks. However, if you are consistently late on your payments, you will have difficulties with the refinance process.
There are no real programs from the government that helps homeowners to refinance their homes. "Very little assistance trickles down to homeowners from the government," said Silver. Banks are not going to lower qualifications to approve loans for refinance.
There is one program that can help homeowners called Silent Second where the government provides equity to the buyer in the form of a second loan. A homeowner who can afford only a $70,000 loan will get an additional $30,000 to be repaid after the original 30-year loan is paid off. Then the homeowner will have another 30 years to pay off the government loan. "This is a popular loan for places like Roseville, Citrus Heights, Rocklin and other municipalities," said Silver.
FHA loans are the best for refinancing. They are assumable loans, so if the prior owner had a 4.5% interest rate with an FHA loan, as the new homeowner, you can also get that same rate. In refinancing, you would not have to prove your income status again for a FHA loan but rather just show that you have a job. Also you do not need to get an appraisal.
So if you are a homeowner looking to refinance - be sure to be in the best financial position you can be in. Shop around for the best rate and look at popular programs that give you advantages to pay off your loan.
