Though mortgage rates have rebounded some from the lows seen in 2016, they remain very attractive. Many homeowners are refinancing before rates go higher.
Yes, you can save money by doing a simple refinance in which you swap a lower rate for your existing higher rate. But that’s just one way — and one reason — to refinance. There are at least four other reasons.
Here are some of your options.
1. Rate and term refinance
Nowadays, this is the most common form of refinancing. When you get a rate and term refinance, you replace your mortgage with a loan sporting a lower interest rate, and for roughly the same term. The term is the payoff period: A 30-year mortgage has a 30-year term.
2. Cash-out refinance
These were popular during the housing boom and contributed to the bust. When you get a cash-out refi, you borrow more money than the outstanding mortgage balance and you receive the difference in cash.
For example, you might have borrowed $225,000 a few years ago, you’ve been making payments faithfully and now you owe $200,000. Meanwhile, your home’s value has swelled. It can be appraised at $300,000. In this case, you can refinance for more than $200,000. In fact, you can borrow up to $240,000 without having to pay for mortgage insurance.
During the boom, a guy on my street got several cash-out refinances. At least one was a subprime loan. He ended up owing much more than he originally paid for the house. Eventually, he couldn’t afford the payments, forfeited the house and moved out of state.
There are responsible ways to use a cash-out refi. You can use the money to pay off high-interest debt. Or you could use it for a home improvement: a swimming pool, solar panels or whatever.
3. Shorten the term
You got a 30-year mortgage three or five years ago, and you want to refinance. You don’t have to start over with a 30-year repayment period. You can ask to pay it off in a shorter time than that — 27 years, 25 years, 20 years or 15 years. Your choice.
If your preferred payoff period is more than 20 years, you’ll probably have to get a 30-year mortgage and ask the lender to amortize it over your preferred, shorter period. Most lenders offer 15-year mortgages, which generally have lower interest rates than 30-year loans. A few lenders offer 20-year mortgages with slightly lower rates.
4. Cash-in refinance
Yes, in addition to the cash-out refinance, there’s such a thing as the cash-in refi. This happens when you have some money lying around and you spend it to pay off part of the old mortgage. Then the new, refinanced loan is for less than the old loan.
Cash-in refis used to be more popular. But in today’s low-interest environment, any spare cash would best be used to invest in something with a higher return than your mortgage interest rate.
Divorces can force a variety of the cash-in refi, in which one former spouse pays off a portion of the outstanding loan balance and the remaining spouse refinances the loan in her or his own name.
5. Refinance to get rid of mortgage insurance
You made a down payment of less than 20 percent, and you’ve been saddled with mortgage-insurance payments as a result. But in the years since you got the mortgage, you paid down some of the debt and, more important, the value of your house went up a lot. If the outstanding loan amount is less than 80 percent of the home’s appraised value, you might be able to refinance into a loan without mortgage insurance.
This can be an especially valuable tactic if you have a mortgage insured by the Federal Housing Administration — also known as an FHA loan. With modern FHA loans, you can’t cancel the mortgage insurance — even when your loan-to-value ratio falls below 80 percent. The way to get rid of FHA mortgage-insurance payments is to refinance (or to sell the house).
Some refinancing help from HARP
HARP, or the Home Affordable Refinance Program, allows homeowners who have little or no equity in their homes to refinance their mortgages and get lower interest rates. You can even refinance if your mortgage is upside down.
The program — which was launched by Fannie Mae and Freddie Mac in 2009, after the 2008 housing crisis — was due to expire in September, but it has been extended through December 2018, adding 15 months to this popular initiative.
HARP offers a streamlined refinancing process that requires less documentation than traditional refinance programs.
You may be eligible to refinance your mortgage through HARP if you meet the following criteria:
• You’re up to date on your mortgage payments, have not been 30 or more days late in the past six months and have not been late more than once in the past 12 months.
• The home is your primary residence, a one-unit second home or a one- to four-unit investment property.
• Your loan is owned by Freddie Mac or Fannie Mae.
• Your loan-to-value ratio is 80 percent or greater.
• You had the mortgage before May 31, 2009.
Like with refinancing any mortgage, you’ll have to pay closing costs (which can be rolled into your loan). While a lower mortgage payment reduces your monthly expenses, you’ll want to calculate whether the savings in your monthly payment outweigh your costs.
When you apply for your loan, the lender will give you a “good faith estimate” and a “truth in lending statement.” This outlines your costs for the life of the loan. Compare these documents to your current loan terms to determine if you’ll come out ahead with your new refinancing package.
If your existing mortgage includes mortgage insurance, you’ll be required to have the same amount of mortgage insurance with your new loan.
If you think a HARP refinancing might save you money, contact your lender and ask if it participates in HARP.
If your lender doesn’t, contact a HARP lender approved by Fannie Mae or Freddie Mac on their websites or on the Federal Housing Finance Authority website.