btellensinkeynew

Ellen Sinkey

With interest rates increasing, but hovering near historic lows, many homeowners are wondering if they should refinance.

As of mid-March 2021, rates have increased from historic lows, but there is an opportunity to save money by refinancing.

Refinancing is the act of paying off one loan by getting another. Homeowners should consider refinancing if they are offered better loan terms or a lower interest rate.

Refinancing can make a huge difference in your monthly budget and ability to pay off your mortgage faster. In addition, if you haven’t considered refinancing to a shorter-term loan (e.g: 15-year fixed-rate mortgage), now is a great time to do so. A 15-year loan will allow you to pay more principal than interest immediately, something a longer term loan will take years to do.

That said, be aware of the costs of refinancing, as these can vary from lender to lender. A good “rule of thumb” is that you should aim to shave at least 1% off your current loan rate to offset the costs of refinancing. A mortgage lender will be able to run numbers for you to make sure you will recoup the costs of refinancing based on the amount of time you plan to own the home.

One lesser-known type of refinance is called a streamline refinance — and it’s easier than you might think.

Who is eligible?

You could be eligible if you have a loan through the Federal Housing Administration or the Department of Veteran’s Affairs. If you have a Rural Development Loan through the U.S. Department of Agriculture, you also might be eligible.

These government-backed mortgages were developed as an alternative to conventional home financing and can be easier to refinance down the road. With these programs, you have the ability to lower your interest rate, reduce your monthly payment or shorten your loan term without a home appraisal. Under certain circumstances, you also could convert from an adjustable-rate mortgage to a fixed-rate mortgage.

To be eligible, you must have made at least six payments on your government insured mortgage.

What if I’ve had late payments?

You must be current on your existing loan payments. Typically, you cannot have more than one 30-day late payment in the last year and you can have no late payments during the previous three months.

How does it work?

A streamline refinance lowers your interest rate and monthly payment by relying on information from your current home loan. If your mortgage is in good standing, you won’t need an appraisal, bank statements or a full credit report.

Also, unlike the first mortgage you opened, there is typically no income verification required. If you’ve been paying your mortgage reliably, it’s assumed that you’ll continue to do so when you have a lower monthly payment. The reduced amount of paperwork not only makes this refinance process quicker, but it also makes it cheaper.

It’s important to note that you do not need to stay with the original lender that you used when you purchased your home. In some cases, your mortgage might have been sold multiple times. You can refinance with any lender that provides government insured loan types, so feel free to shop multiple lenders.

Does it affect the length of the loan?

Yes, typically you are starting your mortgage term over; however, you can choose a reduced term if you don’t wish to start over at 30 years. You also are welcome to pay more each month to reduce the principal balance quicker.

Can I get cash out?

With a streamline refinance, you cannot take cash out of your existing equity. If accessing home equity is your goal, you might be interested in a home equity line of credit (aka HELOC) or a cash-out refinance. With a cash-out refinance, you can typically borrow up to 80% of the value of your home. After paying off your current mortgage, the rest is cash available for home-improvements, debt consolidation, etc.

What documents do I need?

This will vary from lender to lender, but here are the basic documents you’ll need:

• A copy of your most recent mortgage statement.

• Your loan’s mortgage note, showing your interest rate and loan type.

• Employer contact info to verify employment (income verification isn’t needed, but your lender will need to ensure you’re employed).

• Proof of homeowners insurance.

• Photo ID.

What if I want to refinance to another loan type?

If you took out a government-insured (FHA, VA or USDA) loan due to imperfect credit, but your credit score has improved, it might be a good time to refinance to a conventional loan.

This process isn’t always as “streamlined.” However, it could save you additional money. By refinancing out of one of the loan types above, you might be able to remove your mortgage insurance, in addition to improving your interest rate. A mortgage lender will be able to detail the options available to you and which is best for your specific situation.

Ellen Sinkey is a mortgage loan officer and branch manager of Movement Mortgage Dubuque/Tri-States in Dubuque.

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