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Home Refinance

With historically low interest rates, you’re probably seeing a fair share of news items declaring what a great time it is to refinance your home. After all, refinancing can be a smart financial move if it results in lowering monthly payments, reducing loan duration, or building home equity more quickly. But the bigger question lingers: How soon can you (or should you) refinance after buying a house or condo?

Before contacting a loan officer or mortgage servicer about refinancing, take a read through the next few sections of this post to see if refinancing is right for you.

What does it mean to refinance? 

Simply put, refinancing is replacing your current home loan with a brand new one. Here’s why that might be an option, even if you have a decent rate already: 

  • You want to reduce monthly payments with a lower interest rate or a longer-term (or both)
  • You’d like to pay off your mortgage faster by shortening the terms 
  • You’ve re-evaluated having an adjustable-rate mortgage (ARM) and want to convert it to a fixed-rate mortgage
  • You’ve got financial hardships, home improvements, or a major purchase on the horizon and you want to tap into your home equity
  • Your credit rating has improved making you eligible for a better rate
  • You want to get rid of PMI (private mortgage insurance) that came with your original loan
  • You’ve since gotten married or divorced, and you want to add or subtract someone from the loan

 How soon can you refinance a home after purchase?

The answer may be “sooner than you think,” although it depends on the refinance program you’re looking for, the loan type, and if any penalties apply. It may seem foolish to refinance soon after you went through the process and paid closing costs on your original mortgage, but in some cases, it could save you big money over the life of the loan. 

Although you can technically refinance immediately, some lenders may require you to wait months before refinancing with the same company. If taking advantage of better terms is your main consideration, the path may be clearer. Here are some mortgage refinance rules and time frames to consider: 

  • A cash-out refinance, in which you are borrowing extra funds against your home equity, typically has a six month waiting period (and you probably don’t have that much equity invested in that short timeframe anyway).
  • If you went into mortgage forbearance or had your original loan restructured to allow you to skip or temporarily reduce monthly payments, you may be required to wait up to 24 months before refinancing.
  • If your original mortgage was funded with an FHA loan and you want to refinance it with an FHA Streamline Refinance, you’ll be asked to wait 210 days from the original closing date.
  • It’s typically easier to qualify for a straightforward rate and term refinance as they rarely have a waiting period.
  • Even if your current mortgage rate is only slightly higher than today’s rate, a small drop could save you thousands of dollars over the life of your loan. You’ll reap more long-term benefits if you refinance sooner rather than later when rates might not be this good. 
  • Some loan products have penalties for pre-payment if you refinance your loan within the first three to five years. 

 How long are you planning to stay in your home? 

Answering this question will help you determine if refinancing will even make sense financially. Why? Like your original mortgage, refinancing will require an appraisal, an inspection, and closing costs — somewhere in the range of 2% to 5% of the loan value. Will you be in the home long enough to recoup those fees? 

Let’s look at a hypothetical situation: Imagine your current mortgage is $1500 a month, but you’re thinking of refinancing. Closing costs and other fees are estimated to come to $4800, but your monthly payment is expected to drop by $200 a month. With an annual savings of $2400, you’d only start to see real savings after two years. 

Do you intend to stay in your home for at least that long? Refinancing might make sense. If you are not planning to stay put for more than a couple of years, your potential savings may not cover the cost of refinancing. Obviously, your math will differ.

Consider your credit report
Taking out a mortgage can impact your credit report, and if you haven’t had your home for very long, you’ve probably not made enough monthly payments to boost your score yet. Applying for a refinance loan shortly afterward pings your credit report once again and could affect your eligibility. This could make it challenging to get a new loan to replace the old one or negatively impact the rate you’re offered. 

Is the time right?
Refinancing is totally worth it if the time is right, and it can be an easy, straightforward process when you work with an experienced local loan officer

Rental property

Refinancing isn’t just for your primary residence. If you’re a real estate investor, now may be a good time to think about saving interest on your rental properties as well.

By and large, refinancing a rental property is similar to doing so with your primary residential mortgage, but there are some differences to be aware of.

Read on to see how refinancing a rental is different, and some advice for real estate investing.

Expect stricter requirements

Borrowers have a little more flexibility to qualify for their primary mortgages, but lenders tend to be less lenient with investors.

While you may be able to finance as much as 96.5 percent of your primary home value, you’ll probably need to have much higher equity in a rental property or a higher loan-to-value ratio.

Banks may also look more carefully at your income and other financials. It’s also important to be able to prove that your units are not vacant. 

“There isn’t a lot of difference between rental property and personal property. The main one is getting that lease,” said Tom Schneider, head of Roofstock Academy, an investor education program run by the real estate investing marketplace, Roofstock.

The rest of your portfolio matters, too. If you own multiple rental properties, you may not be able to get financing through a traditional bank.

However if you do have a larger portfolio, that doesn’t mean you won’t be able to refinance, you probably just won’t be able to do it at your local retail bank.

“It’s called asset-based lending,” said Jason Haye, western director of sales at Velocity Commercial Capital. “There’s usually not as strict credit requirements, because the property doesn’t have credit,” he added. “At the bank, not only are you going to have the same property requirements, but you’ll also have personal income requirements. We’ll look at the property alone.”

Having tenants is crucial to a rental refi. “It seems basic, but make sure you have a renter in there,” he said. “It’s supposed to be an income-based property, and if it’s vacant, it’s generating zero. It doesn’t matter where you go, that’s not good.”

Expect higher mortgage rates

Lenders generally consider rental properties riskier investments than primary residences, so your new rental mortgage rate will probably be higher than what you could get on your main home.

“They’re not as great as you might be able to get for your personal property, but there’s not a huge delta,” Schneider said. He added that as traditional lenders, the average rental mortgage rate is usually about 50 basis points higher than that for a primary mortgage.

If you have to go through a more specialized lender like Velocity, Haye said you should expect even higher rates.

“On the investment side, you can do 4s,” he said, compared to rates on primary 30-year fixed mortgages, which are hovering around 3 percent.

On loans for which Velocity requires less documentation, Haye said, rates could be even higher, like 6 or 7 percent. But those loans are less likely to experience the same delays as mortgages from traditional banks, which are experiencing serious backlogs.

“More expensive money is generally faster,” he said.

Shop around and prepare your documents

As with pretty much all financial products, it’s a good idea to shop around and talk to a few lenders before you move ahead with a refinance. It’s important to compare terms and determine which offer works best in your situation.

“The vetting process of selecting your lender is really important and the two key things in identifying a lender is what is their origination cost,” Schneider said. “Lenders who have a higher origination cost sometimes have a lower interest rate and vice-versa,” he added. “Be sure to measure that tradeoff.”

Finding a lender will take more effort. This is where a mortgage broker who specializes in such loans can help. Once you’ve selected a lender, it’s a good idea to get your documentation in order well in advance.

The amount of documentation you’re going to need can be a headache, Schneider said. “Having that in order ahead of time, especially if you have multiple properties,” can really help smooth the process along.

He added that it’s a good idea for real estate investors to keep organized files for all their properties, that way you’ll avoid having to scramble for documents when the bank needs them.

Bottom line

The refinancing wave isn’t just for primary properties. Investors could stand to save if they’re able to find the right deal, so shop around, get your documents ready, and go into the process with eyes open about what to expect.

House photo

There seems to be a common misconception out there from financial gurus that refinancing your home, under any circumstance, is a bad idea.  However, what these TV “talking heads” fail to realize is, that is just not practical.

Financial pundits will tell you refinancing your mortgage means you have to start all over again.  While that may be true, the “cost of money” is a very real thing! You are not digging a deeper hole, in fact, you are most likely lifting yourself out of one!

There are many factors to consider in a refinance of a mortgage.  Let’s consider a few questions:

  • Have you been making payments on a current credit card or credit cards only to see the balance stay the same or increase?
  • Have you recently or within the last 18 months did balance transfers from multiple credit cards to one?
  • Do you have a home equity line of credit or a home equity installment loan?
  • Do you have more than 2 years remaining on student loans?
  • Do you have multiple no payments finance deals getting ready to expire in 12 months?
  • Do you expect to move in the next 16 months?
  • Is this your “forever” home?

Now, did you answer yes to 3 of any of the above questions?  If so, then let’s talk about a refinance.  Before we do, let’s talk about the appreciation of your home.  Most homes in the United States appreciate in value year over year.  In fact, the nationwide average is 3% to 5% yearly.  This is a conservative estimate, especially in today’s real estate market.

If you have been in your home for 2 years now, let’s consider a scenario:

  1. The value of your home in August 2018 was $300,000.
  2. The value of your home (as an estimate) in March 2021 is approximately $340,750.
  3. You have built equity and that has nothing to do with your mortgage.  In essence, you are $40,000 to the plus!  You won’t be going backward.

Now let’s consider debt:

  1. $15,000 in credit card debt: average monthly payment is approximately $450.00 per month.
  2. $45,000 in student loan debt: the average monthly payment is $460.00.
  3. $275,000 mortgage payment for principal and interest and is approximately $1196.00 monthly.

Just these three above items total to $2100.00.  Plus, $910.00 per month may not be tax deductible.  However, for this post, let’s not complicate that calculation.

If you refinanced right now at today’s current rate, assuming good credit: $1,383.00  Your savings in real money is almost $850.00 per month! This is over $10,000 a year of real cash in your pocket.

Let us be clear, this is not an offer for a mortgage.  The calculations above are for illustration purposes only.  A mortgage professional will assist in helping you understand rates, terms, credit scenarios, and appraisals.  However, with that being said: are you starting over?

Imagine what your finances would like with an additional infusion of cash at a level of $600, $800 or $1000 dollars monthly!  It would be significant and would have an impact. You are not starting over.  In fact, in doing a refinance the proper way, you will be light years ahead in debt, savings, and the elimination of massive interest charges.  It’s time to meet with a mortgage pro!

Close up hand of man signing signature loan document to home ownership. Mortgage and real estate property investment

Mortgage rates are around record lows. However, rates are starting to move upward.  That news may have you asking yourself if it is time to refinance your current mortgage? Is it time for you to refinance your home loan? The decision is not a simple slam dunk. Here are three questions to ask yourself first:

1. How long do you intend to be in your home?

Refinancing your mortgage costs money.  If you are planning to move in the next three years, the savings may be minimal. You may not live in your home long enough to cover the costs of getting the new loan. Instead, focus on getting in the best shape financially through paying bills on time, keeping other debt low and saving for the transition.  If you are going to be there for over 3 years, the cost makes sense both in the short and long term.  However, a financial plan to look at your overall financial picture should be in order.  Focus less on the cost to refinance, focus more on the improvement you could be making in eliminating credit card debt and other high rate bills!

2. Where does your mortgage stand now?   

Beyond your current Interest rate, consider your principal balance, payment amount and the time left on your loan. If your principal balance is low, you may not gain from a lower interest rate because most of your monthly payment is going to paying down the principal, not toward interest.

In the scenario above however, in taking advantage of a refinance you could pay off your home exponentially faster!  Lower rate, and converting your 30 year term to a 10 may make both short and loan term sense.

Flipside:

If your interest rate is significantly higher than what you’d get through refinancing — say 4% or 5 % — then a lower rate may save you money.

3. Do you have the money, time and credit history to refinance?

Closing costs are an integral part of the mortgage process. They are due when you finalize or “close” your loan. These fees include the mortgage application fee, appraisal, attorney’s fee, title insurance and other charges. Closing fees vary by state, loan type and mortgage lender, but the average cost of refinancing is around $5,000 (varies on lenders program).  Run the numbers to see.

Refinancing is time-consuming. At the very least, you need to share up to three years of taxes, a current pay stub and a net worth statement. A mortgage provider may request even more paperwork. 

You need a good credit score. This may not be the year for you to refinance, even with low rates. The past year has wreaked havoc on many people’s finances. If your debt is high versus your income or you have been late with payments due to the pandemic, you may not qualify for the great rates. Get your financial house in order and then apply for a new mortgage. 

These 3 questions should be leading to look at your entire financial picture.  When we look at our picture, it should lead us to set real, tangible goals.  You should ultimately be asking, what does my financial picture look like at the end of the mortgage?  That is a question that needs to be answered today!

house

Being an Airbnb host or VRBO host is no longer abnormal. In fact, it is the new normal for many property owners.  When you are a host with such a service, there are some hidden benefits beyond their platform that you might have never known about.

Now, the income from your short-term rental can be used if you’re looking to qualify for a refinance of your second home and/or rental properties. We also go over the ways a couple of the major home rental platforms work.

Using Short-Term Rental Income To Refinance

Short-term rental income has posed a challenge in the past when it came to using it for mortgage qualification because you don’t have a lease agreement. That’s changed with services like Airbnb, HomeAway®, and VRBO™ because they keep a record of each time your property is rented out. Now, all major conventional mortgage investors accept this short-term rental income.  Their recording keeping has helped more property owners get the favorable financing they deserve!

As a good entrepreneur, the more you can document, the better.  Recordkeeping is not only paramount for taxes, but it is also for financing as well!  In order to qualify for short-term rental income, records like the payout history and income or host report are necessary. You will need records for at least the last year, but having 2 years’ worth of records is helpful.

If you’re using short-term rental income to qualify, up to the last 2 years worth of tax returns will be helpful in terms of documentation. The returns should include Schedule C or E, depending on how the income is reported.  There is always a balance between reporting income and deductions.  Be sure you are able to leverage the income you make.  Not every write-off is a good write-off. Having the ability to refinance and solid financial records are worth more than just maximizing a deduction.

The major conventional mortgage investors Fannie Mae and Freddie Mac have different requirements, but below are some things you should expect.

You may need a certain number of months worth of mortgage payments so you can show that you’ll be able to cover your mortgage payment in the event of a short-term loss of income or another event that adversely impacts your finances (COVID-19). If you click on the link to the left, you will see a report that Forbes did on the effect of COVID-19 and Airbnb properties.  Why is this important? If Forbes knows it, banks know it.  Your business will be held to a different standard.  Documentation, financial reserves are your friends.

The requirements vary, but 2 months with the principal payment, interest, property taxes, homeowners insurance, and homeowners association dues (if applicable) is a good starting point.

You can refinance primary properties with up to four units as well as second homes. Depending on the investor in the mortgage, you may need to have a certain amount of existing equity, but one of our Home Loan Experts will help you find the right option for you.

Saving money, home loan, mortgage, a property investment for fut

Most people don’t realize what an important financial step refinancing is. Circumstances change, and mortgages should too. If you’re wondering whether or not you’re a good candidate, here are some of the top reasons why refinancing could be right for you:

  • Your mortgage interest rate is higher than the current market interest rate.
  • You have other debt you need to reduce; such as credit cards & student loans.
  • You’re planning to stay in your home for several years.
  • You want to make home improvements.
  • You want to pay off your mortgage sooner — going from 30 to 15 in your term.
  • You have college tuition to pay.
  • You have an adjustable-rate mortgage and you want to lock in a fixed rate.
  • Your credit score has improved.

Whether you’re looking to get a better interest rate or take equity out of your home for renovations, we’ve put together a step-by-step guide on why you should refinance and how to do it.

Why Refinance?  Let’s Run through the Top Reasons!

Your life changes and your mortgage should change with it. Whether you’re moving, staying put, have a lot of expenses, or experience a change in finances, making sure your home loan is keeping up with you is of the utmost importance. Your mortgage should always be your financial tool. It should always accomplish more than a roof over your head. 

Here are the most common reasons homeowners choose to refinance:

Your Mortgage Interest Rate Is Higher than the Current Market Interest Rate

Even a small reduction in your interest rate could save you a lot of money in the long run. A refinance can help you ensure you’re getting the lowest interest rate possible. The result? More money in your pocket, for you and your family.

You’re Planning to Stay in Your Home (This Matters)

There’s no better time than right now to evaluate the type of home loan you have. When you know you’re living in your current home for several years, refinancing is a great step toward setting long-term goals.

You Want to Pay Off Your Mortgage Sooner

When rates fall, you could refinance to a lower rate and a shorter term, helping you pay off your mortgage sooner.  You should never just default to a 30-year term.  You have options as aggressive as your finances and your goals.  What does your life look like at the end of your mortgage?

You Have an Adjustable Rate Mortgage and You Want to Lock In a Fixed Rate

If your payments are already fluctuating, it is time for a fixed-rate mortgage.  It will keep your payments steady. Your rate will stay constant in a rising-rate environment. Believe it or not, rates will rise!  It may be time to lock in for long term stability.

You Have Other Debt You Need to Reduce (Most Common!)

Do you have credit card debt, student loans, or any other high-interest debt? Non-Tax Deductible Debt? A cash-out refinance could help you reduce or eliminate your debt. Debt consolidation is one of the most popular reasons people refinance. 

It is all about the cost of money. When mortgage money is this low, you have to take advantage of today’s rates or cost of money.  Why pay a high interest rate, no tax deductibility, and lower your credit score?  Plus, you are paying more monthly.

You Want to Make Home Improvements

Would your home benefit from a new kitchen, new windows or an addition? A cash-out refinance is one of the most affordable ways you can fund home improvements.  Equity is power and the ability to create additional equity is driving long term value regardless of market conditions.  Especially if you are planning to stay long term.

You Have College Tuition to Pay

Refinancing with a cash-out option can help you or your loved ones reach their educational goals as well. Whether you’re returning to school or you’re paying for your child’s college tuition, refinancing could help make it happen. Student loans can be debilitating for your child, there is a better alternative.  Second biggest expense in your lifetime!

Your Credit Score Has Improved

If you’ve worked hard to improve your financial situation by paying off credit accounts that were weighing down your score, it’s time to call your Home Loan Expert. You could qualify for a much lower interest rate if your score has substantially improved.  Credit score matters. If you paid the price to get into the home, it is now time to take advantage of “A” credit interest rates.  Why continue to overpay on your single biggest bill!

Refinance Your Mortgage

Mortgage rates are around record lows. Is it time for you to refinance your home loan? The decision is not a simple slam dunk. Here are three questions to ask yourself first:

1. How long do you intend to be in your home?

Refinancing your mortgage costs money.  If you are planning to move in the next three years, the savings may be minimal. You may not live in your home long enough to cover the costs of getting the new loan. Instead, focus on getting in the best shape financially through paying bills on time, keeping other debt low and saving for the transition.  If you are going to be there for over 3 years, the cost makes sense both in the short & long term.

2. Where does your mortgage stand now?   

Beyond your current interest rate, consider your principal balance, payment amount and the time left on your loan. If your principal balance is low, you may not gain from a lower interest rate because most of your monthly payment is going to paying down the principal, not toward interest.

In the scenario above however, in taking advantage of a refinance you could pay off your home exponentially faster!  Lower rate, and converting your 30 year term to a 10 may make both short and loan term sense.

Flipside:

If your interest rate is significantly higher than what you’d get through refinancing — say 4% or 5 % — then a lower rate may save you money.

3. Do you have the money, time and credit history to refinance?

Closing costs are an integral part of the mortgage process. They are due when you finalize or “close” your loan. These fees include mortgage application fee, appraisal, attorney’s fee, title insurance and other charges. Closing fees vary by state, loan type and mortgage lender, but the average cost of refinancing is around $5,000(varies on lenders program.)  Run the numbers to see.

Refinancing is time-consuming. At the very least, you need to share up to three years of taxes, a current pay stub and a net worth statement. A mortgage provider may request even more paperwork. 

You need a good credit score. This may not be the year for you to refinance, even with low rates. The past year has wreaked havoc on many people’s finances. If your debt is high versus your income or you have been late with payments due to the pandemic, you may not qualify for great rates. Get your financial house in order and then apply for a new mortgage. 

These 3 questions should be leading to look at your entire financial picture.  When we look at our picture, it should lead us to set real, tangible goals.  You should ultimately be asking, what does my financial picture look like at the end of the mortgage?  That is a question that needs to be answered today!

Refinance Your Mortgage

Home prices are up — way up.

According to the Federal Housing Finance Agency, home values have increased by about $100,000 since 2012, contingent on location.

This makes it a great time for real estate investors to “cash out” the equity in their rental properties. The cash can be used to:  

  • Buy another rental property
  • Make home improvements
  • Pay off other real estate loans
  • Reduce personal debt
  • Stash away emergency cash 

With mortgage rates at record lows, it could be time for rental property owners to put their equity to work.

How to get a cash-out refinance on an investment property

Because investment properties are “non-owner-occupied,” there are special rules about refinancing and taking cash out. 

For instance, your credit score needs to be quite good, usually at least 680 (speak with an advisor to talk about qualifying criteria).

And your cash-out refinance must leave you with at least 25% equity in the rental property and decent cash reserves in your bank account.

In addition, you can only use a conventional loan to complete a cash-out refinance on a rental property.

That means you won’t be able to refinance using any government-backed loans like FHA, VA, or USDA. 

Instead, you’ll need a loan backed by Fannie Mae or Freddie Mac — the two major agencies that set rules for most U.S. mortgages. 

Luckily, conventional refinance rules are fairly lenient, making it possible for many landlords with investment equity to cash out on their rental properties. 

When to use a cash-out refinance on your investment property

Cashing out equity is one of the best ways to profit from your investment property. 

Unused equity in the home may look good on paper, and for many investors, that’s fine. They have cash flow and don’t want to increase their loan balance and payment.

But a cash-out refinance rental property loan can put a good portion of the home’s value to work.

For instance, you might use the cashed out equity to make improvements on a rental property. 

Home improvements can yield a double-return. They increase the home’s value while justifying higher rent. And, tenants feel great about staying in the property long-term.

Perhaps the best use — and highest return — for cash-out funds is to expand a real estate portfolio.

For example, say you have a property worth $250,000 with a loan of $150,000. 

You can get a cash-out loan up to 75% of the current value, netting about $37,000. This money could be used to put 20% down on another rental home worth around $200,000. 

In this way, a cash out investment property loan can help build your real estate portfolio and your earning power through new rental opportunities. 

Cash-out refinance waiting periods

Many home investors buy a run-down property with plans to fix it up. You may plan to fix-and-flip using a cash-out refinance to fund home improvements. 

While this is allowed, waiting periods apply.

You must wait at least six months between the home sale closing and the date you can close on a cash-out refinance. 

The exceptions to this rule are as follows:

  • The property was inherited
  • The home was legally awarded via divorce or other separation order
  • The cash-out refinance qualifies for the delayed financing exception

In addition, homes that have been on the market in the last six months have a lower allowable LTV for cash out refinancing, which maxes out at 70%. 

Rentals properties and the art of the cash out, is not a one-size-fits-all transaction!  It requires a financial expert to guide you through the process to ensure you get the max capabilities for your money!

Refinance

There are many reasons to refinance your mortgage, some obvious and some a bit more obscure and/or different.

I figured I’d compile a list of the many reasons I can think of to refinance.

Some of the situations are complete opposites of one another and will depend on your unique financial goals and/or risk appetite.

However most will be appealing at times when interest rates are low, as they are now.

1. To get a lower interest rate

This one is the no-brainer that everyone will agree on. If you want a lower interest rate then refinancing is the way to go, assuming mortgage rates are lower now than when you took out your original mortgage.

The classic rate and term refinance allows homeowners to reduce their interest rate so they can enjoy a lower monthly payment.

The potential downside to this is resetting the clock on your mortgage, though you can also go with a shorter term at the same time to avoid that, and save HUGE money over the term.

2. Because your borrower profile has improved

Another reason to refinance has to do with your unique borrower profile.

Say you improved your FICO scores over the past year and cleaned up some other negative stuff. Or perhaps your home value increased enough to push your LTV into a lower tier.

If your borrowing profile has improved significantly since you first took out your mortgage, you might be entitled to a much lower interest rate than what you previously qualified for.

This could be a good time to inquire about a refinance to save some money each month.

3. To change loan products (FHA to conventional)

It could also be that you started out with a loan product you weren’t too fond of because it was the only way to qualify.

But now that you’re a better borrower with more home equity you’ve got more options to choose from.

Instead of paying mortgage insurance for life on an FHA loan, you can refinance your mortgage into a conventional loan instead, thereby removing the lifetime MI and potentially snagging a lower interest rate at the same time.

4. To reduce the loan term

Then we’ve got the folks who want to aggressively pay down their mortgages, or at least not pay them down at a snail’s pace.

If this is you, there is a huge benefit to refinancing from a 30-year fixed into a shorter term loan such as the 15-year fixed.

These shorter term mortgages also come with lower interest rates so you can pay your mortgage off a lot faster without potentially breaking the bank, depending on the rate you had and where rates are today.

5. To increase the loan term

The exact opposite group might refinance to extend their loan term, which will cost them a lot more in interest but save them in monthly payment.

Not everyone wants to pay down their mortgage in three years and for some it’s very difficult to make large monthly payments.

Perhaps a change in circumstance means a 30-year term is more sustainable moving forward.

6. To switch to a fixed-rate mortgage

We’ll put this in the common reasons to refinance. Just about everyone will suggest that you refinance out of an ARM and into a fixed mortgage if you think rates are rising.

The same is true if your hybrid ARM that was fixed for X amount of years is about to hit its first rate adjustment.

To avoid the costly rate reset you can move to a FRM before that happens. And with rates so low today, you might even get a lower fixed rate than what you had on your ARM.

7. To go adjustable instead

Of course, things also move the other way. It’s entirely possible to switch from a boring old 30-year fixed mortgage to an ARM if you want some payment relief, or simply feel you’re overpaying.

It’s also possible to refinance out of one ARM and into another ARM to not only obtain a new (hopefully lower) rate but also restart your fixed-rate period on the new ARM.

Plenty of wealthy individuals move from ARM to ARM to take advantage of cheap short-term rates while they put their money to work elsewhere.

8. To go fully-amortized

Another common scenario might be a borrower with an interest-only mortgage who is facing a recast. The IO period typically only lasts 10 years before the mortgage must be paid back in full.

To avoid a steep monthly payment increase, a homeowner might opt to refinance out of the IO product and into something fully-amortizing. Or perhaps even another IO product to extend that benefit.

9. To go interest-only

Conversely, a borrower sitting on a lot of home equity might decide it’s time to make interest-only payments to improve monthly cash flow.

This can also free up cash for other expenditures or investments the homeowner may be looking at.

After all, you don’t always want all your eggs in one basket if you’ve already got a ton of them in your house.

10. To get cash

Speaking of cash flow, you might refinance simply to get cash out of your home.

The age-old cash out refinance is a great way to free up your home equity and put it to work.

Perhaps you want to make some home improvements, or buy a second home or an investment property. Maybe you want to diversify and move your cash out of your home and into the stock market instead.

11. To buy someone out

In certain situations, you may need/want to add or remove someone from title and/or the mortgage. If this is the case, a refinance can be an appropriate vehicle to do.

Maybe there was a divorce and you’re buying someone out. Or maybe you’re ready to fly solo and remove mom and dad as co-signers.

Again, this could be a good time to snag a lower interest rate and/or make a loan product change too.

12. To protect your investment

You might also refinance to tap some of the equity you’ve gained over the years. Home values are known to seesaw over time and it could be a good opportunity now to get some of that cash for the future.

It doesn’t hurt to put aside some dry powder, especially when interest rates are low. And if you can do so while home values are high and your property is owner-occupied, that cash can be put to work elsewhere. Diversify.

13. To drop PMI

I spoke about switching loan products to drop mortgage insurance, but you can also dump private mortgage insurance by refinancing if you’ve got a low enough LTV.

If your home increased in value and/or you paid it down enough to ditch the PMI, a refinance might save you a lot of money via both a lower interest rate and from the absence of said PMI. It’s a one-two punch!

14. To apply a lump sum to lower your LTV

Similarly, you might have come across some money recently and as such have the ability to take a big chunk out of your mortgage balance.

If you’re one of those people who likes to pay down the mortgage as quickly as possible, applying a lump sum to lower the balance (and the LTV) will lead to a lower monthly payment, assuming you refinance (or recast).

A lower interest rate and/or shorter loan term could apply here as well to really speed up the loan payoff.

15. To consolidate multiple mortgages

Here’s a classic reason to refinance. You’ve got multiple mortgages (hopefully just two) and want to consolidate them into a single loan.

A refinance is often a great way to accomplish this, especially if you wind up with a lower interest rate to boot.

Many second mortgages have sky-high interest rates or are adjustable (hello HELOC), so this can be a conservative money-saving move.

16. To consolidate other debt

Another typical reason to refinance is to consolidate other non-mortgage debt, such as credit cards and other higher-APR debt.

Mortgages tend to have the lowest interest rates around, and they allow you to pay the debt very slowly, which makes it easier to manage.

Just be careful not to go on a spending spree because you still haven’t paid off the old debt, you’ve merely transferred it.

Best place to start?  Use a calculator so you can see for yourself the power of a refinance.  Go here and see the money you can save and financial goal you can achieve: <CLICK HERE>

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Ask 100 people and you will most likely get 95 different answers. A mortgage, specifically a refinance, is not a “one size fits all” solution. Here are 7 steps that will help you:

Step 1: Decide what you want to get out of the refinance?  Sound easy? If you have a financial plan it may very well be. However, you should have a clear definition. It cannot be broad. It is not just a lower rate. It is not just a lower payment.  It is not a new term. What are you achieving? This is the key to your refinance success.

Step 2: Assess where you are financially.  Often we assess our financial state from the 1st through the 15th and the 16th through the 30th.  In short, when we get paid.  Where we are financially is what we have leftover when the bills have been paid.  Your assessment of your financial situation needs to include:

  • What is my credit score?
  • What is my debt to income ratio? Total income versus total outstanding debt payments.
  • What is my LTV loan to value? How much has my home appreciated or gone up in value?  How can I use that to my advantage in achieving my goals?

Step 3: Shop the best terms. Now you will hear the “talking heads” on TV say “find the best rate.” Shop the best rate. The rate can be an illusion. You are looking at the entire package.  How will that help you achieve your stated goals?

Step 4: Apply to one single source for your refinance. Applying to multiple lenders and those hard credit pulls can drive your credit score. Have conversations with a few, choose one.  Choose the one that is in alignment with your financial plan.

Step 5: Prepare all of the documentation.  All the tax returns, pay stubs, assets, credit explanation letters, savings, etc.  This will help the lender and ultimately help you in moving the process along.

Step 6: Next up the appraisal.  This is an exciting time.  Most homeowners have under-valued the worth of their home. You may be surprised by the market.  Do not allow yourself to think any improvements made will have a huge increase in value.  Unless you did total kitchen or bathroom remodels, you may be surprised at what drives up the value of your home.

Step 7: Close. Close and stick to the plan, no matter what. If you did a debt consolidation, ensure you stop using those cards and resist the temptation of acquiring new debt. It is a financial plan for a reason.

Don’t overcomplicate the process. Do not be overwhelmed. Those initial conversations without credit being pulled will tell you a great deal about the function and flow of a company or individual. It is how you connect together to ensure you achieve those goals that matter.