What is a Refinance?

What does refinancing a mortgage mean?

To put it briefly, refinancing a mortgage is the process of paying off your current mortgage with funds from a new mortgage. Obtaining a new mortgage this way also allows the borrower to modify the loan term and interest rate, and in some cases, even cash out the equity on the home. Because every situation is different, we recommend speaking to a mortgage consultant to get a free, no obligation On Q Home Loans quote.*

Why Should I Refinance?

A refinance can come with some great benefits, especially if your original loan was not ideal. One way to think of a refinance is a mortgage upgrade!

• Reduce your interest rate and mortgage payments.

  • A lower rate could lower both the monthly principal and interest on a mortgage payment, meaning you pay less per month and less interest over the life of your loan!

• Use the equity in your home to borrow money.

  • Cash-Out Refinances may allow a borrower with sufficient equity in their property to refinance their mortgage for more than is currently owed and pocket the difference. The best part is you can use this money for whatever you want!

• Adjust the term of the mortgage.

  • Changing the length of your loan term can benefit you in the short-term or long-term. Extending the length will likely lower your payment while taking a shorter term will mean less interest and a sooner payoff.

• Convert an Adjustable Rate Mortgage (ARM Mortgage) to a Fixed Rate Mortgage.

  • One of the best reasons to refinance is to switch from an ARM to a Fixed Mortgage. Interest rates for an ARM mortgage are unpredictable and can make a difference when interest rates increase. Switching to a Fixed Rate Mortgage that has a steady interest rate and a stable principal & interest monthly payment may be more appealing to some borrowers.

• Remove Private Mortgage Insurance (PMI).

  • If you have enough equity in your home, it may be possible to terminate private mortgage insurance from your original loan. Contact a mortgage consultant to find out if that may be an option for you*

Things to Consider Before Refinancing

• Which loan products interest you?
• Are you current on your mortgage payments? (Delinquent payments within six months may disqualify you from some refinance programs.)
• What is your refinancing goal? (Lower rate, shorter term, etc.)
• What are the current interest rates?

By going into your refinance prepared, you can be sure to get the most out of your new loan!*

Compare Your Refinance Options

Whether you’re hoping for a better rate or would like to take advantage of the many benefits of refinancing, it’s a good idea to know your options.

10 or 15 Year Fixed Refinance

While it is possible to refinance into an ARM, a typical borrower will seek a 15 or 30-year fixed conventional loan. Not only will you have a stable interest rate permanently, but conventional loans also offer maximum flexibility and customization. 15 and 30 are not the only loan terms available; some borrowers may be eligible for 20, 10, or even 7-year mortgages!

While a shorter term is generally more desirable due to the quicker payoff and less interest paid over the life, the trade-off is a much higher monthly payment. On the other hand, extending your term can lower your payment if your financial situation has changed, but you still want to keep your home.

USDA and VA Loans

You can even refinance into a government-backed loan program like a VA or USDA loan. While USDA refinances offer many of the same benefits as conventional loans, VA refinances are noteworthy. Through a VA Interest Rate Reduction Refinance Loan (IRRRL), a borrower may be able to streamline their refinance, provided their current loan is a VA loan and the borrower states they occupy or have occupied the home as a primary residence. While VA loans are limited to service members and their families, there are other streamlined refinance options.

FHA Streamline

Streamline refinancing requires less documentation and comes with less strict underwriting requirements. While eligibility varies, FHA streamline refinances have the following requirements:

• Your current loan must be an FHA loan.
• The loan must be current.
• The refinance must have a net benefit.

FHA loans tend to be more accessible, and as such, come with a mortgage insurance requirement. Fortunately, a future refinance to a conventional loan is possible!

Conventional Loans

As previously mentioned, a conventional loan offers maximum flexibility when it comes to loan options. Conventional loans with at least 80% loan-to-value do not require mortgage insurance. If your value has increased substantially, you might benefit from refinancing to a conventional loan from a government loan to avoid mortgage insurance.*

Refinance Costs

Many of the programs discussed will allow you to “roll” your closing costs into your loan. That means you may be able to refinance with almost no money out of pocket! Of course, this largely depends on your situation, so we recommend speaking with a mortgage consultant to get a custom quote.

Even if you do not include your closing costs in your refinance, the process may still have some financial benefits aside from the refinance itself. Interest starts accruing on the day that you close, but your first payment will not be due for another 30 days. That means that if you close near the end of the month, you may be able to skip a mortgage payment! Further, if you had an escrow account on your original mortgage, any overages will be returned to you, adding to the payday.

Another way to determine if your refinance is worth the cost is to calculate the money you will save over the loan’s life and determine when the savings will equal the refinance cost. If you find that you break even within a few years, it may be beneficial to refinance.*

When to Apply?

When to refinance can be a tough question. While it’s easy to say that a refinance lets you reset your mortgage to more favorable terms, you must also consider the cost and the climate. Interest rates will have a significant impact on your choice regardless of whether you are refinancing solely for a rate decrease. In 2020, interest rates hit historic lows, leading to a wave of refinances. Ask an On Q Home Loans mortgage consultant about the current refinance rates to determine if now is the time.

If you still aren’t sure, check out our article on how to refinance to get more information about the process, and be sure to get in touch with us if you have any questions! We have the answers! Mortgages Simplified is our commitment to you, and On Q Home Loans will be there every step of the way.*