Use Equity in your home & Cash Out
There are a few main types of mortgage loans widely used in the US to purchase a home. Government insured loans such as an FHA loan for 1st time home buyers are backed by the government and provide lenders some security against default. These loans require the borrower to meet certain guidelines and pay PMI insurance on top of the loan amount but require a lower down payment.
Conventional loans on the other hand do not provide the lender any security against default so interest rates, down payments, and fees can be higher. Most conventional loans are competitive from major lenders but ultimately it depends on the individual borrower, their financial standing, and ability to repay the loan.
If securing a loan to finance a borrower's existing home a refinance loan is the way to go. A refinance loan replaces an existing loan on a home with a new loan that has new terms. Many times borrowers are looking for a lower rate which can lower their monthly payment but borrowers should beware that a lower rate is not always best in the long run.
While refinancing can lower once rate it effectively resets the life of the loan extending the period of which borrowers pay the lender interest. If not managed property borrowers can find themselves paying interest on their home forever making little dent in the actual principal balance.
A home equity loan or "second mortgage" is a loan against the equity a borrower has in their home. Equity is the difference between the market value of a home and the balance remaining on loan. Lenders allow borrowers to take out an additional loan or second mortgage against this equity.
Home equity loans come in various forms. A home equity loan as well as a home equity line of credit. With a home equity loan the borrower secures a loan for a specific amount against their equity with a set term and rate whereas a home equity line of credit provides borrowers a line of credit to draw against like a credit card. Each has their pros and cons and should be researched well before one decides what option is best.
A reverse mortgage is a loan against a property that is typically owned outright without a loan. Typically targeting older homeowners with 100% or a large amount of equity a reverse mortgage provides the borrower income.
A mortgage refinance involves getting a new mortgage to replace an old one. When you refinance the mortgage on your home, you are essentially trading the old loan and terms for a new one. The mortgage refinancing process is similar to a new home loan application. However, instead of using the money to buy a new house, you would use it to pay off the existing mortgage.How does a Mortgage Refinance work?
When you set out to get a home loan, the first step is to look around and compare the offers that are available to you. Similarly, the first and most crucial step while looking for a mortgage refinance is to shop around and compare loan terms, interest rates, and tenures that various lenders are offering. Once you know what is on offer, you can compare it with your existing mortgage to find the most feasible option for you. There are many reasons why you might consider refinancing your mortgage:
- Loan Term: Depending on your current loan term, you may want to increase or decrease the tenure while refinancing. Increasing the loan term would typically result in lowered monthly installments. On the other hand, reducing the tenure from 30 years to 15 years would qualify you for a lower interest rate with most lenders. You also stand to save on interest payments over the life of the mortgage.
- Interest Rate: One of the most popular reasons to opt for a mortgage refinance is to lower the interest rate you have been paying. As a rule of thumb, if you can reduce your interest rate by at least 1-2%, refinancing makes sense for you. Refinancing is also a good idea if the mortgage rates have fallen since you applied for your original loan or if your credit rating has improved enough to make you eligible for lower rates.
- Rate Type: Mortgage loans offer two rate types – fixed and adjustable. You can make the switch from adjustable to fixed-rate to steer clear of market fluctuation-related impact.
- Home Equity: With mortgage refinancing, you can dip into home equity and cash out enough funds to pay for upcoming purchases or consolidate your debt.
While comparing home lenders, keep in mind that there could be closing costs and prepayment penalties associated with your original loan. So, shop around for mortgage refinancing loans and compare the competitive terms to make an informed choice for your future.
Once you have decided that a mortgage refinance loan is the right option, you must choose your new mortgage lender. Unfortunately, many people make the shortsighted error of opting for their local bank without considering other options. Local banks and credit unions may offer a great deal but savvy shoppers will check options online as well.
Shopping around for a mortgage refinance loan is a necessary process if you want to get the best financial deal to meet your needs. Here’s a quick reference to help you compare mortgage refinance lenders:
While choosing a mortgage refinance lender, your primary focus is to get the best deal for yourself. Any intermediary you add to the process should have the same goal as you. However, loan officers and mortgage brokers may not offer you the whole variety of options because a part of their earnings come from transactions you make with the financial institutions they represent. Enlist the power of the Internet to compare mortgage refinance lenders at the click of a few buttons.Cast a wider net:
When it comes to refinancing, most people stick to banks and credit unions. While these are great options, they are by no means the only ones. Consider adding savings and loan companies, specialized lenders, and consumer finance institutions to your list. Such a broad list affords you the luxury to say no if a lender does not meet your needs.Compare interest rates and costs:
There are many different parameters to look at while comparing mortgage refinance lenders. However, the interest rate, costs, and services are three pivotal differentiators. First, compare the type of loan, loan tenure, interest rate, prepayment penalty, closing costs, and monthly payment amount to help you narrow down your choices. Next, use the legally mandated Good Faith Estimate (GFE) provided by the lender to compare filing fees, legal fees, and processing costs.
Remember that some costs cannot be negotiated, such as the appraisal fee, flood determination and monitoring fees, and credit report fee. Your goal is to secure a good deal by reducing the costs that can be reduced, including expenses that originate from the lender, such as discount points, application fees, and the underwriting fee.
Compare multiple mortgage refinance lender offerings, but do not stop at the first offer you like. Instead, leverage the proposal with other lenders who make it to your shortlist.
Researching, comparing, and negotiating with mortgage refinance lenders could help you save thousands of dollars in the long run.
According to the Federal Home Loan Mortgage Corporation, better known as Freddie Mac, mortgage refinancing breached its highest annual rates since 2003. With more than $2.6 trillion mortgage debt being refinanced in 2020, this is an excellent time to shop around for competitive refinancing deals and see how much you could save by refinancing your home too. However, before you make this decision, it is essential to learn how much refinancing will likely cost you and whether this is a good time for you to refinance at all.
A mortgage refinancing allows you to replace your existing mortgage with a loan that offers you better terms and conditions. It is vital to ensure that refinancing helps you save enough and that the closing costs get balanced out as you compare home lenders.
Refinancing makes sense when you can lower your current mortgage interest rate. A general rule of thumb is to refinance when the new interest rate is at least 2% lower. However, in the present scenario, experts suggest that even a 0.5-1% reduction in interest rates could help reduce your long-term payback substantially. Typically, borrowers with excellent credit scores get better rates.When you want to amend the term of your mortgage
Before choosing to refinance your home, consider your chief objectives behind making this financial move. For example, if you are hoping to pay off the loan as soon as possible or want to put away any extra money towards paying off the house, refinancing to switch to a shorter-term mortgage might be the best choice for you.
Conversely, you may want to reduce your existing monthly payments. Refinancing your home with a longer-term mortgage and a competitive interest rate will help you achieve this goal.
Suppose you want to use the equity built in your home to pay off other high-interest debts, do some remodeling, or pay for more significant expenses. In that case, a cash-out mortgage refinance offers a great way to leverage the equity and meet your needs.When you can change your mortgage type
If your original loan had a floating rate of interest based on your credit eligibility, locking in a fixed rate is a valid reason to refinance your home.
While refinancing could be tempting for many reasons, remember to compare home lenders to get the best rates.
With many home loan programs to pick from, choosing the right one may seem challenging. The truth is that there is no 'best home loan' that would fit everyone's needs. Every home loan option is designed to appeal to a specific type of buyer. So, your goal should be to find one that matches your particular requirements. Here are a few of the typical loan types that you can select from:Conventional home loan
The obvious choice for many buyers today is the conventional or conforming loan which features down payments as low as 3% for qualified borrowers, flexible terms from 10 to 30 years, higher loan amounts, and choice between fixed and adjustable rates. However, these loans require a 620+ credit score for fixed-rate mortgages and 640+ for adjustable rates. In addition, the mortgage insurance has to be paid in a conventional mortgage until home equity of 20% is reached.Federal Housing Administration (FHA) home loan
Backed by the Federal Housing Administration, FHA loans are designed for people from low-income groups or with a low credit score. These loans typically require a minimum down payment of 3.5% of the home value and 15- or 30-years’ loan terms. Under FHA loans, the minimum credit scores have a direct impact on the down payment rates. So, a credit score of 500 would require a 10% down payment, while a 580 score would make you eligible to pay a 3.5% down payment. Mortgage insurance payments are to be made upfront and annually for the rest of the loan tenure.VA home loan
Backed by the US Department of Veteran Affairs, VA loans are designed for veterans with eligible US military service history. Such loans feature very low mortgage rates, 0 down payment facility, no mortgage insurance payments, and lenient credit score requirements.
Other than these three main types of home loans, you may be eligible to apply for a USDA mortgage loan, jumbo or non-conforming loan, or FHA 203k mortgage rehabilitation loan. Before you apply, consider which loan would be the right fit for your needs based on your credit score, financial status, and paying capacity.
Jumbo and traditional loans are two types of mortgage financing options that can be used to buy homes. Like every other type of loan, these also require the home buyer to meet specific eligibility criteria such as minimum down payment, minimum credit scores, and income groups.
Another similarity between jumbo and conventional/traditional loans is that neither is backed by any GSE (government-sponsored enterprise) such as the Federal Housing Administration (FHA), Freddie Mac and Fannie Mae, or the Veterans Affairs (VA) Department. However, while both loan types serve the same purpose, they are intrinsically different.
Jumbo mortgages are super-sized loans designed to purchase high-ticket properties in the luxury market or expensive homes in highly competitive real estate arenas. Unlike typical mortgages, jumbo loans cater to highly-priced homes, often running into millions.
These non-conforming loans do not abide by the restrictions placed by the Federal Housing Finance Agency (FHFA) and are not backed by GSEs.
- An excellent credit score (more than 680) is a prerequisite to qualify for jumbo loans.
- The income threshold of the buyer has to be on the higher side with a low debt-to-income ratio.
- Jumbo loans require higher down payments of 10-30% and typically have a higher interest rate than conventional loans.
Offered by private lending institutions such as mortgage companies, banks, and credit unions, a conventional loan could either be conforming or non-conforming. In 2021, a conforming conventional loan has a national maximum limit of $548,250 (single-unit). Competitive real estate markets also have a maximum loan limit set by Freddie Mac and Fannie Mae. These loan limits are adjusted on an annual basis.
- Typically, a credit score of 620+ is required for a conforming conventional loan.
- A minimum down payment of 3% of home value is required from qualifying home buyers.
- Conventional loans require you to pay mortgage insurance until 20% equity is reached.
Comparing loan offerings from a variety of home loan providers gives you the luxury to say no. Consider the debt-to-income ratio, income threshold, down payment, interest rates, and flexible terms to determine which loan will be the right choice for you.
While buying or refinancing a home, there are myriad fees and expenses that need to be factored in. But unfortunately, most people get so caught in looking for the right home, saving for the down payment and applying for a home loan that the reality of closing costs escapes them.
Understanding these costs and making room in your budget in advance will ensure that the last leg of your home-buying journey runs smoothly.
Although there are a few closing costs, such as the broker’s commission that the seller typically pays, most of the closing expenses fall in the buyer’s lot. Normally, closing costs equal approximately 2-5% of the total loan amount.
Under the marquee of closing costs, the buyer needs to factor in a few basic categories of expenses – third-party fees, pre-paid fees, escrow fees, and lenders fees.
Lenders fees cover the cost of everything the lender uses to process, approve or disapprove, and fund your home loan. Typically, these include an underwriting fee, application fee, recording fee and any origination expenses.
The one to watch out for is the loan origination fee, which can be a substantial expense. The lender charges an origination fee for evaluating and creating your mortgage loan. Typically, you would be required to pay approximately 0.5% of the total borrowing expense under this heading. In addition, notary expenses, lender’s attorney charges, and document preparation expenses fall under origination costs.
Keep in mind that federal law mandates that lenders disclose all the financing costs, including lenders fees, to the home buyer before any financial transaction occurs. A GFE or Good Faith Estimate enlists all possible mortgage loan expenses and has to be handed over to the buyer within three days of loan application completion.
Buying a home is a significant expense. So, while it is right to be excited about the process, you also need to do as much homework beforehand to ensure that the home loan application does not cause you to stumble. The loan application process is straightforward, but borrowers often find the jargon challenging to understand. Here’s a quick look at the home loan application process to help you understand it better:Getting a mortgage pre-approval
The most pivotal first step you take in the loan application process is to get pre-approved for a loan. Not only does this assure the lender that you mean business, but it will also give you a better idea of what you can afford. Once you choose a lender based on the terms, you must provide the lender documentation pertaining to old and new debt, proof of income, credit history, credit score, employment history, assets and liabilities list, and debt-to-income ratio.Loan application process
After getting pre-approval, you can look for the right home and make an offer. If the offer is accepted, you have to begin the actual loan application process. Since much of the documentation would have already been shared with the lender while applying for pre-approval, there is little new documentation to give the lender at this stage.
Typically, the loan application process requires you to provide records and documentation pertaining to your education, employment, income, debt, expenses, and outgoings such as rent, previous mortgage, and any instalments. At this stage, you will also have to give the lender the fully executed Purchase Agreement and proof of deposit.
After your loan application is completed, the lender is required to give you a Good Faith Estimate (GFE) within three days. For complete transparency, this GFE will include all the expenses, closing costs and fees, as well as the terms of your loan.
If you decide to go ahead with the home loan, the home is appraised, and the mortgage underwriting process kicks in. At the end of the loan process is the closing day when you will receive the Closing Disclosure that confirms the initial estimated costs in the GFE.
Getting a home loan is a step-by-step process that starts with looking for a home and getting pre-approval, and ends on closing day. However, the process of home-owning does not end there. After the loan application process is over, the repayment process begins.
Like a mortgage lender plays a primary role in the loan application process, a mortgage servicer plays a pivotal role in the repayment process. Regulated by the federal government, a mortgage servicer is an entity handling the payment processing. Mortgage servicers are also tasked with sending monthly transaction statements to the borrower.
The same financial institution can play the role of lender and servicer. Once you apply and get a home loan, you owe the lender the loan amount to be paid in instalments with interest as per the home loan agreement you entered into. When you pay a monthly instalment, parts of the payment are put toward paying down the mortgage and loan principal while the other portion is diverted to pay off the loan interest accrued.
A mortgage lender can choose to hire a third-party mortgage service company to ensure proper payment processing after the loan is sanctioned. A mortgage servicer is an integral part of the loan repayment process.
The servicer’s role starts with ensuring that the loan amount is cleared for the borrower and the borrower only uses the loan for the intended purpose. Loan processing also includes sending monthly statements to the borrower, tracking loan payments, and sending reminder notices in case of missed payments.
If loan payments have not been made for some time and the potential of future payment is bleak, the loan is considered a default. At this stage, the mortgage servicer would push for a loan term renegotiation and eventually foreclosure if an agreement cannot be reached.
Few purchases are made in the digital age without checking online forums for a top 10 list, complaints, and reviews. The world of home loans is no exception to this rule. In fact, data released by American experience management company Qualtrics suggests that online reviews influence the purchasing decisions of over 93% of consumers. When getting a home loan, it is essential to look at online reviews to ascertain a lender's reputation, service quality, and overall reliability.
It is recommended that you look at online reviews when shopping for a loan, but what exactly should you be looking for? Here is a quick list to help you choose the right lender for your home loan needs.
- Compare before you confirm – When shopping for a loan, it makes sense to compare multiple lenders and check their reviews and testimonials. Even if you think you have found a suitable lender, having a reference point to understand what else is available is a good idea.
- Check the review date – With a business, you always risk having a few bad reviews. So, while looking at negative reviews, make a note of when it was published. An older review can be offset by multiple newer reviews that give you real-time information
- See the company's efforts – Online reviews can be helpful; however, it is essential not to get lost in the reviewer's emotions. If the review is unfavourable, see how the lender addressed the issue and whether it was resolved to the customer's satisfaction.
- Find patterns – When you read online reviews, look for keywords and patterns that emerge. For example, you can bank on the lender's online reputation if multiple reviews speak well about the lender or if a specific quality is well-documented.
Buying a home is a big decision. Therefore, it is essential to ensure that you have covered all corners. Online reviews enable you to make an informed choice after comparing the loan offerings and lenders reputations.