What is a Refinance?
Learn what a refinance could do for you. Take advantage of your home’s value!
Learn what a refinance could do for you. Take advantage of your home’s value!
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.*
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!
By going into your refinance prepared, you can be sure to get the most out of your new loan!*
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.
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.
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.
Streamline refinancing requires less documentation and comes with less strict underwriting requirements. While eligibility varies, FHA streamline refinances have the following requirements:
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!
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.*
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 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.*