Home Refinance Loans
WHAT IS RATE AND TERM REFINANCE?
Rate and Term Refinancing refers to the process in which the current mortgage loan is replaced with the new one by paying off the existing mortgage loan, replacing it with one with a lower rate, shorter term, or both. It is simply replacing an existing mortgage loan with another mortgage loan with different terms of repayment. Why should a homeowner refinance their current mortgage? Simply, to take advantage of the opportunity, like a lower interest rate, reduced monthly payment, or to save up cash in some cases. The primary goal of rate and term home refinance loans is to take advantage of the current mortgage rate, being at its historic lows. By replacing the current mortgage loan with a lower rate, a homeowner lowers their monthly payment.
BASIC ADVANTAGE OF REFINANCING
Refinancing to a lower interest rate, but keeping the current term the same, results in a lower monthly payment. Whereas, replacing the current term with the shorter term leads to the shorter overall duration of the loan. It may result in a slightly higher payment per month, but the homeowner builds equity faster. This is often referred to as the “equity builder refi”.
TYPES OF REFINANCING
Refinancing also has several types, which includes: conventional refinancing, FHA, and VA, respectively. Existing conventional loans can be refinanced to another conventional mortgage loan, or from a conventional to an FHA mortgage loan. FHA loans can also be refinanced to a conventional loan.
Another type of refinancing is the FHA refinancing program. If a homeowner currently holds an FHA mortgage loan, they can avail of the FHA Streamline Refinance Program. There are four (4) types of FHA streamline home refinance loans programs: (1) Full Credit, Full Appraisal, (2) Full Credit, No Appraisal, (3) No Credit, Full Appraisal, and (4) No Credit, No Appraisal. VA Refinancing, on the other hand, is only available to veterans and their eligible spouse.
- Fixed Rate Mortgage – As the name implies, the rate is fixed throughout the life of the loan. A homeowner can have peace of mind knowing that the monthly payment stays constant for the entire term chosen.
- Adjustable Rate Mortgage – ARM monthly payments are based on the index plus margin, also known as a Fully Indexed Rate. Borrowers opt to get an ARM if they believe they will not stay in the home or keep the home longer than the initial adjustment period. More often than not, homeowners that initially got their original mortgage loan on an ARM, refinances and converts their ARM loan to a Fixed Rate Mortgage.
REQUIREMENTS OF CONVENTIONAL REFINANCING (HOME REFINANCE LOANS)
In order to be able to perform home refinance loans to a conventional mortgage, one needs to meet certain requirements. First is the debt-to-income ratio requirement. A borrower’s monthly household expense in relation to their gross monthly income, should not exceed 45%, often referred to as the “45% back-end DTI ratio”. Credit plays a very important role in a borrower’s ability to refinance to a conventional mortgage. Generally, a borrower’s middle FICO score must be at least 620. Closing costs can be rolled into the new loan, provided, the total loan-to-value (LTV) doesn’t exceed 95% of the appraised value of the property. Asset requirement for a conventional loan is typically six (6) months of reserves. Simply put, whatever the monthly mortgage payment is, a borrower must have six months of that amount in liquid assets, such as, checking or savings account, IRA, etc..
If a borrower is lacking in any of the 3 aspects, they should have a compensating factor to make up for the other that’s lacking. If the asset is not available, they must have adequate income. Their debt-to-income ratio must be low enough to compensate for the lack of asset. A high debt-to-income ratio can be compensated by a high credit score. A marginal credit score, at a minimum of 620 middle FICO, must be compensated by good income and sufficient asset.
The Home Refinance Loans Specialists at AMCAP Mortgage Ltd. can help answer any questions you might have regarding a rate and term refi. Call us now at (832) 356-5605 to speak with one of our Home Loan Specialists.