When borrowers think about refinancing, it’s usually because news has come across that interest rates have dropped or that the Federal Reserve lowered the Fed Funds rate. When the Fed acts, it makes the news and typically sparks consumer queries. In reality, when the Fed does make such a move, mortgage lenders have already anticipated the action and set mortgage rates accordingly. Lenders are rarely surprised by the Fed’s rate moves.
One of the first things to recognize is that rates don’t always have to fall by a certain percentage before it makes sense to refinance. Too often, consumers who are thinking about refinancing make the decision on their own not to refinance because current market rates aren’t ‘1%’ or ‘2%’ below what they currently have. Instead, it’s about how much interest is saved each month in dollars and cents compared to the closing fees associated with getting any mortgage, purchase or refinance.
At the same time, consumers can discover that getting a lower rate isn’t always the main consideration. Sure, it’s important, but there can be instances where a balloon mortgage is coming due or someone wants to shorten the loan term to save on interest each month.
The most common type of refinance is referred to as a ‘rate and term’ refinance by the mortgage industry. A rate and term refinance changes the rate, the length of the loan or a combination of both. If someone currently has a 30 year rate of say, 4.50% and current market rates are closer to 3.00%, then a refinance might be a good move to get the lower rate.
Or, someone with a 30 year loan term might want to switch to a 15 year loan which saves a dramatic amount of interest over the life of the loan. Sometimes though the difference in monthly payment is too high for the shorter 15 year term that it puts the potential new payments out of reach. However, there are also 20 and 25 year terms which can provide a benefit of a better rate, shorter term and saving interest.
A cash-out refinance is a refinance that converts existing equity into cash at the closing table. A cash-out refinance should be a secondary option and not a primary reason to refinance. If a decision is made that a refinance does make sense, then pulling out some additional cash is certainly an option. The maximum amount of cash-out is typically limited to 75-80% of the current value of the property. These funds can be tapped into after paying off the existing mortgage as well as closing costs. I can give you an approximation over the phone after a quick conversation.
Streamline refinances are a feature of government backed mortgage loans. FHA, VA and USDA all carry some version of a streamline refinance. Why the term ‘streamline?’ It’s because there is much less documentation required with a qualifying streamline. No documentation of income, assets or employment is necessary. This literally means that for some streamline programs consumers could be temporarily unemployed and still be approved due to the lack of documentation needed to close the loan.
Streamlines do typically make sure the existing mortgage is current and there have been no late payments made within the past 6-12 months more than 30 days past the due date. As long as the new monthly payment is lower or getting out of an adjustable rate mortgage and into a fixed, a streamline can certainly be an option. Conventional loans, those approved using guidelines set by Fannie Mae and Freddie Mac do not have a streamline option.