When you are looking to refinance your mortgage, you would like to see all possible options to lower your cash to close.
If you are paying your property taxes and homeowner’s insurance through an escrow account you should consider the option of netting the escrow when you are refinancing your mortgage.
In this post, we will understand what is netting escrows in detail.
Escrow netting is only available on request for individuals who are looking to refinance their current mortgage.
It allows the borrower to credit the balance in the escrow account towards the outstanding mortgage balance at the time of requesting a payoff.
Escrow is money set aside at the beginning of a mortgage (and as part of the monthly payment) to ensure that property taxes or property insurance are always paid on time.
This escrow account helps you to set money aside for paying property taxes and homeowner’s insurance before they are due so that you don’t have to pay it in a lump sum.
When you are refinancing if you request to net your escrow, the lender will send you the payoff after deducting the escrow balance from your existing mortgage balance.
When you refinance, escrow netting will allow you to apply the credit of the balance amount toward repaying your existing mortgage.
In other words, netting escrows help reduce the principal amount for the mortgage that you are going to refinance. Let’s give an example.
John refinances his mortgage with an outstanding balance of $200,000. He has $2,000 in his old escrow account.
He requests for netting his escrow. With the request the lender nets his escrow balance with the current payoff and his new refinance principal amount would be $198,000.
In another example, Jane refinances her mortgage with a balance of $200,000. She decides not to net the escrow.
Her balance in the escrow account is $2,000. In this case, the new refinance principal amount is $200,000 and she would receive a check from the lender for $2,000.
In John’s case, since the new principal amount is lowered by $2,000, this means that the monthly payments that he would be paying would be less than what Jane would be paying considering that both of them get the same interest rate and loan term.
It is important to keep in mind that the netting escrows option is not available for all types of refinances.
FHA does allow the borrowers to net their escrows while refinancing their current FHA loan, however not all the lenders would provide this option.
It is better to check with your lender before you refinance to check if they provide this option.
Anyways, you would have to pay escrow when you refinance; however, escrow netting could help you to lower your monthly payments.
Ensure that you speak to the appropriate department and/or management. Be patient with what you ask for. Typically, the lender will ask you to submit a written application.
Submit the request to the payoff department via the website, email, or fax. Then wait for the correct number of days and call back to follow up!
The request letter must include the following: It should mention that you are requesting to net your escrow balance with your payoff. Ensure that the request includes your name, address, and correct loan number.
After mentioning all the above things, sign the request letter with the date.
Not all lenders accept e-signs. Most of the lenders would require a wet signature for this kind of request.
Even if the e-signs are accepted by some lenders, it may take time to process the request.
When you refinance your current mortgage, you have two options. You can pay the new escrow amount at the closing and receive a check for the escrow balance after the closing, or you can request to net the escrow and apply a credit to the current mortgage balance.
Either way, a new escrow account needs to be set up as part of your monthly mortgage payment once you refinance.
Hence, Escrow netting can lower the principal balance of your new mortgage. Finally, a lower principal helps borrowers save money over the life of the loan.
The downside of netting escrow is that returning the original escrow balance will not result in a refund.
You won’t have access to the escrow funds. Instead, the money is sent to help you with your next mortgage principal.
Netting escrows could be one of the best options to save money on your mortgage refinance in the long run.
However, this option may not be available to every lender. Ensure that you speak to your lender before refinancing to check if this option is available with them.
If you do not request to net your escrow, by default the lender would refund the amount to you after the closing.
Once the borrower takes a mortgage on your property, the borrower is expected to repay the loan through monthly scheduled installments.
If the borrower is unable to repay the mortgage payments the lender has the right to foreclose the property and sell it to recover their loss.
This is how the mortgage process generally works. However, there is an option where the borrower does not have to wait for the lender to foreclose the property in case of missed payments.
In this post, we will understand what voluntary foreclosure is in detail.
Voluntary foreclosure means a foreclosure that is initiated by the borrower. Borrowers are ready to go into foreclosure because they can’t repay the mortgage payments or they want to avoid future mortgage payments.
Just like involuntary foreclosure the ownership of the property is transferred to the lender from the borrower.
An involuntary foreclosure occurs when the borrower struggles to pay or avoids payment altogether.
In non-voluntary foreclosure, the borrower has to evict the property after notice is provided by the lender.
In the case of nonvoluntary foreclosure the borrower has to lease the property on the lender’s terms, hence, a friendly foreclosure is often the best option for borrowers.
They can evict the property on their terms and pay off the loan more quickly.
This type of foreclosure is bad for the borrower and can make it difficult for years to rent or buy a home and get approved for a loan, but they are not financially damaging as a non-voluntary foreclosure.
Hence, this option could make more sense if the borrowers are sure that they are unable to make further payments on their mortgage.
Many borrowers choose to open new credit lines or take new credit cards and plan for this type of foreclosure before their credit scores drop.
Most lenders allow borrowers to request a friendly foreclosure as it can make the process of undertaking the property and collecting debts faster and more efficient compared to a non-voluntary foreclosure.
A borrower might enter into this type of foreclosure due to unexpected unemployment, the perception that the borrower has too many overhead expenses to cover the mortgage payments, dramatic changes in the housing market, and fluctuating interest rates in the case of ARMS.
One of the most widely used voluntary foreclosures is a deed in lieu of foreclosure. Regulations, guidelines, and fees for this type of foreclosure are based on lenders and the state.
This type of foreclosure is used as a final option for borrowers but may provide the quickest way to obtain relief from the debt.
The friendly foreclosure process can be faster than a nonvoluntary foreclosure. Moreover, this foreclosure is initiated by the borrower, which allows the borrower to determine if he can pay at any time.
It is better to leave your own home than to be forced to leave it by non-voluntary foreclosure.
In this type of foreclosure, the borrower can plan where they plan to move. It relieves you from the stress of your next home.
Voluntary foreclosures have less impact on your credit than involuntary foreclosures.
A borrower can lower the credit impact and shorten its length by using a deed in lieu of foreclosure.
Deed in lieu of foreclosure will only impact 4 years compared to 7 years in case of non-voluntary foreclosure.
Compared to a non-voluntary foreclosure, a voluntary foreclosure can be a win-win for both lender and borrower.
This process is faster and less stressful for both parties.
Though the impact on credit is less in this type of foreclosure, it is still a negative one.
Your credit score will decrease and you would be facing the consequences in the future while acquiring credit.
The borrower may still be subject to a deficiency judgment after choosing to foreclose the property voluntarily.
The borrower may face issues qualifying for credit in the future due to the negative impact on credit.
Some employers may deny your job application due to bad credit ratings.
There are various other ways to avoid this type of foreclosure. You can speak to your lender and come up with a payment plan option or forbearance plan.
Most lenders avoid any type of foreclosure as it is a costly and time-consuming option for them as well.
Even after considering all the options, if you foresee that you are still unable to make the payments in the future, voluntary foreclosure could be the best option.
When you acquire a loan, you need to repay through installments to the bank or the lender until the loan is paid off.
However, an individual could have some hardship or financial difficulty due to which he or she is unable to make monthly payments for the debt.
Many individuals faced such financial challenges during the COVID-19 pandemic and were unable to make their monthly payments.
In such cases, the government, agencies, and businesses can provide a moratorium on such loans.
This applies to both individuals and businesses. In this post, we will discuss what a moratorium means and what are its pros and cons.
By definition, a moratorium means the suspension of activity for a limited time due to an acceptable reason through legal means.
This could be applicable in any industry like insurance, loans, projects, etc. Loan moratoriums are usually provided if the borrowing individual or business is facing challenges to repay the debt due to justifiable reasons.
The standard loan procedure states that the borrower has to repay the loan in installments once the debt is granted.
The loan moratorium period allows the borrowers to delay the payment till the time the reason for the moratorium is resolved.
This gives a breathing space to the borrowers so that they can source the finances to repay the debt after the period is lifted.
While this applies to all types of loans, including mortgages, personal loans, student loans, and credit card payments, students are more likely to take advantage of moratoriums.
It could take several years or months for a student to complete the education program and start working, hence these delayed payment provisions are most beneficial for student loans.
In addition to student loans, mortgages usually have these provisions as they are large amount loans and borrowers may need time to get source their finances before the process begins.
A loan moratorium helps the borrower plan a stress-free repayment strategy. It will also help them pool funds from various sources and start regular payments instead of rushing into payments without proper funds in hand.
The delayed period can be used to plan monthly income and expenditure and help borrowers save for future loan installments and other overhead expenses.
One of the main advantages of this type of provision is that there is no negative effect on your credit score.
Meaning, that during this period if the borrower does not make the payment on the loan it would not impact his or her credit score. Hence, this period has no impact on the borrower’s borrowing capacity.
During the COVID-19 Pandemic, we have seen how one global event can have catastrophic consequences on a country’s economy.
Countless individuals have had their savings swept away due to the loss of employment.
Hence, a shortage of cash or access to liquid assets was a great challenge for many families.
A loan moratorium can be useful in such a situation as it will help you deal with a severe financial crisis.
This will especially help those on low wages, and those working in the small businesses facing severe disruption to their incomes during the pandemic.
A temporary suspension of loan payments can help individuals who are trying to assess their financial condition and have a better strategy for the future.
One of the biggest disadvantages of this provision is that loan repayment is not waived; instead, it is only delayed.
This means, you still have to pay the interest to your bank or the lender for the payments that were deferred.
Moratoriums may also lead to increased interest charges and can potentially increase your payments in the future once the period is lifted.
Initially, the delayed period could give you some space. However, the accumulated interest rate might be a huge burden once the period is lifted.
This could potentially impact your cash flow and monthly budget if you are not prepared.
More the length of your deferred period, the more time you would take to pay off the loan.
For example, if you avail of a moratorium on a loan that was to be repaid in two years, the repayment period will now be stretched to three or four years.
This could delay your d strategy to become debt-free in the future and impact financial stability.
This type of provision may bring a great deal of financial aid to an individual during a financial crisis; however, the intention of delayed loan payments is to plan your repayment so that you do not have any financial burden when the period is lifted.
Make sure you speak to your trusted financial adviser before entering into such type of provision to make an informed decision.
Title insurance is one of the important pieces in a real estate transaction. When you buy or sell a property, it is required to have title insurance for both buyer and the lender.
This helps to protect the buyer and the lender in case of title-related issues in the future.
Just like mortgages and home loans have to follow guidelines and code of conduct; the title companies and title agents need to follow some guidelines.
These guidelines are taken care of by American Land Title Association. In this post, we will learn what is ALTA in detail.
The American Land Title Association is a business-oriented entity that stands as the patron of the title insurance industry. This entity pays a major concentration on the real estate abstract of the title.
The real estate abstract of title is an officially recorded document that shows the accurate ownership history for the real estate property.
It will also state if the property in question has any liens, outstanding taxes, or structural violations. Founded in 1907, this entity works to protect consumer rights and improve the performance of the title insurance industry.
ALTA members also adhere to established consumer-friendly rules and regulations of business conduct and legal practices.
American Land Title Association members include abstracts, title insurance companies, and legal representatives.
Almost all abstractors, title agents, and title insurance companies, that compile public records of the ownership of a particular piece of land, are members of ALTA.
A lender’s title policy and an owner’s title policy are the two basic types of title insurance policies.
The lender’s title insurance policy is used to protect the mortgage lender and the owner’s title insurance policy is used to protect the owner from any ownership-related issues.
A title search is completed before the real estate transaction closes. Every time the property is sold or refinanced, a new title search is required.
This is required so that the lender and the buyer know about any outstanding liens and title defects on the property.
American Land Title Association members include surveyors, land developers, attorneys, builders, lenders, and real estate agents.
It is an eleven-member Board of Directors that has thirty-three committee members.
The board members are responsible for drafting policies for the association, managing the financial health, supervising the work of committees, and ensuring the general welfare of the American Land Title Association.
American Land Title Association is a large and crucial association. This association also maintains a connection with members of Congress, the Federal Home Mortgage Corporation (Freddie Mac), and the Federal National Mortgage Association (Fannie Mae).
The fact is every company, entity, or agency that has an association with real estate has a relationship with American Land Title Association.
This association also strives to increase the state of the record in land titles as well as current relevant education in this industry. From time to time, this association collaborates with other organizations on pending state land legislative positions.
This association also produces title insurance forms that are freely used by title insurers across the country and works to increase a greater understanding of its industry among the users and others associated with title services.
The roles of the members in this association include searching, reviewing, and ensuring land titles to protect homebuyers and real estate lenders.
There is education training provided by the Land Title Institute (LTI), which is a subsidiary of this association to develop the land title service in the industry.
Thanks to American Land Title Association, the current land title industry is keeping up to the standards.
The job of the association members is to ensure that the land title services are improved for the buyers and the lenders who invest in real estate.
It provides all the necessary resources and keeps the regulatory
updates so that you are aware of what is happening in the industry both
nationally and at the state level.
In the financial market corporations, entities, and investors often require funds for their operations.
The funds are acquired through a bond or a loan. To acquire the funds the corporations, entities, and investors need to pay interest to the lending parties. As we all know that the interest rates always fluctuate.
In the event, that the rates are expected to rise in the future; the borrowing parties have an option to do an interest rate swap.
In this post, we will understand what is an interest rate swap, and how it works with examples.
Interest rate swap is a term in which two companies exchange their interest rates on their bonds or loans to avoid the potential risk of spending more on the interest rate in the event the interest rate rises.
In the interest rate swap, the notional amount is taken into consideration for the interest rate swap.
It is only the interest amount that is exchanged in an interest rate swap. Usually, the companies or investors do this to exchange their fixed rate for a variable rate or vice versa.
If a company or an entity has a variable rate interest rate, this interest rate is indexed based on London Interbank Offered Rate (LIBOR).
Lenders will charge their share of interest on top of the LIBOR for a specified period mentioned in the lending contract.
A fixed-rate is a rate charged by the lender irrespective of the LIBOR index for a specific period in the lending contract.
Let’s say company A borrowed $2 million from lender 1 at a floating interest rate of LIBOR + 1%.
Let’s assume that the LIBOR rate is 5%. So company A is paying an interest rate of 5%+1% is 6% on $2 million for the first period which comes to $120,000.
In the second period, the LIBOR goes up to 6%, the lender will then Company A will end up paying 7% which comes to $140,000.
There is another company; Company B that borrowed $2 million from lender 2 at a fixed rate of 8%. Company two will be paying a fixed interest payment of $160,000 during period one as well as period two.
Company A and Company B decide to swap interest rates with each other. In the contract, Company A decides to pay a 7% fixed rate on the notional amount, and Company B agreed to pay LIBOR +0.5% to Company A.
In this event, Company A will be paying a fixed rate of interest on the notional amount of $2 million to Company B, and Company B will be paying a variable rate of interest on the notional amount to Company A.
After the interest rate swaps, in the first period, Company A would be paying 8% to Company B on a notional amount of $2 million which comes up to $160,000. Company A would receive an interest amount from Company B on a LIBOR+0.5% which is 5.5% which comes to $110,000.
Company A will be paying the lender 1 the interest amount on LIBOR+1% which would be 6% which comes to an amount of $120,000. In the fire period, Company A will be paying a net amount of $170,000 in interest.
In the second period, Company A will be paying the same 8% which is $160,000. However, this time since the LIBOR rate has increased, Company A will receive 6.5% of the interest from Company B which comes to $130,000.
Also, Company A will be paying 7% to the lender 1 which comes to $140,000. In the second period, the lender B will pay a net amount of $170,000 in interest. This means now Company A is paying a fixed amount of interest in each period.
Now let’s see how much Company B is paying for the first and the second period. In the First Period, Company B is paying 5.5% to Company A ($110,000).
Company B is receiving 7% from Company A ($140,000), and paying 8% to Lender 2 ($160,000). In the first period, Company B will pay a net amount of $130,000 in interest.
In the second period, Company B will pay 6.5% to Company A ($130,000). Company B will receive 7% from Company A ($140,000) and will pay 8% to Lender 2 ($160,000).
In the second period, Company B will pay a net amount of $170,000 in interest. This shows that Company B will have variable interest payments in each period.
The interest rate swap is a great way for many companies to increase cash flow and lower the risk of rising interest rates.
These swaps happen only over the counter (OTC) unlike any other swaps. Though it is a benefit there is still some risk involved for any one of the parties defaulting on the payment. This would lead to a very challenging situation for both parties.
If you are looking to buy a home, mostly you would require finance to buy that home.
There are multiple options that an individual can choose from to get a mortgage like conventional mortgages, VA loans, USDA loans, and FHA loans.
However, there is one other option in the market called a convertible ARM. In this post, we will learn what does convertible arm means and how it works.
A Convertible ARM or a Convertible Mortgage is a loan that allows the borrower to change the loan from being adjustable rate to a fixed rate after a specific time.
The convertible mortgage is based on specific parameter requirements and not all lenders will be able to provide such options.
The borrower would be initially paying a lower interest rate compared to the market while in the adjustable phase of the loan.
Your interest rates will be variable in the initial period of the loan just like any other variable rate mortgage.
Once the lender converts the loan into a fixed-rate mortgage, the interest rate is usually adjusted to a higher rate compared to the market index at the time of conversion.
In case, the index rate is lower than what it was during the adjustable-rate phase, the borrower might be able to get a lower interest rate during the fixed rate.
The new interest rate will be based on the lowest interest rate within a week from the day when you finally decide to convert.
The loan is converted by the lender after a specific period, usually, between 1-5 years.
When converting an adjustable-rate to a fixed-rate mortgage, the lender might not charge a closing cost that is usually charged when you refinance or finance a loan for the first time.
However, there are some fees associated with the convertible arm. The charge of the convertible arm may vary from lender to lender.
Just like any other mortgage, a convertible loan knowing about the pros and cons of a convertible mortgage can help you make an informed decision.
The best advantage of a convertible ARM is that you would be getting the lowest interest rate on the mortgage compared to any other loan based on the current mortgage rate index.
Let’s say that the current mortgage interest rate is 4%. If you know for a fact that the interest rates are going to dip in the coming few years, instead of waiting for the low fixed rate to come you might want to get a convertible mortgage and you can buy a house for less than 4%.
After a few years let’s say after 4-5 years, once the rates are lower like 2.5%, you can convert the mortgage to a fixed rate and get a lower interest rate than what you might have got in the beginning (4%).
The ARM rates when you initially get it are lower than the market index, for example, instead of 4% you might be able to get 3.5% or 3.25%.
The convertible ARM would also help you save huge closing costs of refinancing in the future as the charges for a convertible mortgage are lower than the cost of refinancing.
The ARMs were introduced in a market where interest rates were very high showed a potential dip in the future.
Hence, many people were able to take advantage of it. However, the mortgage market is extremely unpredictable.
If you lock into a convertible ARM loan anticipating that the interest rates will drop after a few years, and the interest rates increase, you would end up converting the interest rate which is a lot higher than what you might have paid if you would have got a fixed-rate mortgage to begin with.
Getting a convertible ARM loan is very risky. Even many experts are not able to predict the mortgage market to its full potential.
You do get benefits initially when you lock into one, however, to extend the benefit of the convertible mortgage, you need to be very sure about the mortgage market and only then think of getting one.
Your home is much of a bigger risk in case you end up in a situation where you might end up paying high monthly payments.
If you are a person who is ready to take the risk and are sure about the market movement, the convertible Arm could be the best option.
This is a very common question asked by many people who already have a mortgage on their properties. It could be a confusing situation when it comes to refinancing your house.
When mortgage interest rates are going up and especially when they are going down, a lot of people have begun to wonder, When is the best time to refinance a home loan in Texas?
At some point, every homeowner wonders when does it make sense to refinance a home loan. There are a few factors that you may want to consider before you decide to refinance your home mortgage.
We all are aware of how refinancing works which we discussed in one of our previous blogs “What Does It Mean To Refinance”.
We also mentioned some common reasons why an individual would refinance a home loan. Today we will see ‘When Is The Best Time To Refinance A Home Loan In Texas’.
Most homeowners think that it is a good decision to refinance a home loan when you are getting a lower interest rate.
Yes, usually they are right. But the thumb rule says if the interest rate you are getting on your new refinance should be at least 0.75% to 1% lower than the previous mortgage interest rate.
For example, if your previous interest rate is at 5% it would make sense to refinance a home loan if you are getting an interest rate of at least 4.25% or lower.
A second most important factor to keep in mind to refinance a home loan in Texas is how much time would it take for you to recoup the closing costs which are charged by the lender to get the refinance done, and if you are planning to stay in the house long enough.
If you are planning to move before you recoup the closing costs we would suggest not to refinance at this time. Make sure you know all the fees included in the closing costs.
It is always suggested to pay the closing costs upfront because if you include that in your loan amount you might end up paying interest on the closing cost as well.
The third important factor to consider would be when you decide to pull money from your equity. We have already established how important your home equity is in “Understanding Home Equity”.
When you decide to pull money out from your home equity is always suggested to invest in an asset that would give you more return for the amount of money you took out.
One more thing you might want to consider especially when interest rates are really low is to lower your loan tenure.
When the interest rates are low and you are at a 30 years mortgage and if you have paid off a few years, it would be a good decision to refinance if the payments of a 20 years mortgage are either the same or lower than your current 30 year one.
Considering all the above factors, ensure when you can save money n your existing mortgage that is the time when you might want to start thinking about refinancing a home loan in Texas.
Have a conversation with your trusted loan officer whenever you think that the time is right for you.
Eventually, it all has to make sense and should be worth all the efforts that you are willing to put going through the refinance.
If you are wondering whether does refinancing hurt your credit? Then according to credit bureaus, the financial companies that produce the well-known credit scores, your FICO credit score is affected in many ways by Mortgage refinancing.
But all impacts would be small and temporary in comparison to possible changes caused by the way you handle your mortgage payments for the duration of the note.
If you are constantly refinancing or applying for new credit related to your mortgage then refinancing does hurt your credit score.
Credit rating companies do not fancy having your credit score pulled too many times over a short period, and from too many different potential creditors.
In fact, if you are unable to honor a credit contract or having too many inquiries on your credit report then FICO might penalize you.
And, every time you refinance, the credit score gets pulled, and it often has a negative impact on your credit score if you are having too many credit score requests within a short period of time.
Likewise, interest rate shopping for a refinance on your current mortgage will lead to multiple credit inquiries in a short period.
In 2009 for certain kinds of debt, like mortgages or student loans FICO and other credit scoring systems changed the way multiple inquiries are treated on your credit score.
FICO recommends submitting all of your applications within a 30- to 45-day period if you are going to shop around.
With this newest scoring model, even if you do not take up a new loan, FICO treats all of your inquiries during that period as just one “credit pull,” as a result the impact on your score gets minimized.
But there are some lenders who choose to use older FICO scoring models, so some people still prefer to limit their inquiries to the duration of a fortnight.
When you refinance an existing loan, then the older mortgage accounts are paid off so you could be missing out on some credit benefits by replacing a long-standing payment history on one debt.
Compared to new or irregular debts the older, established, and consistent debts are considered more valuable.
Newer debts even if you are making payments for the same asset but do not have steady payment history are not good for your credit score.
Cash-out refinances can further impact your credit score in two ways. The first being replacing the old debt with a new loan.
The second being taking up a larger loan balance could increase your credit utilization ratio. The credit utilization ratio adds up to 30% of your FICO credit score.
The larger your credit file the impact on your overall debt levels would be smaller, leading to the less potential impact of a mortgage refinance.
The vice president of mortgage lending at Guaranteed Rate Mortgage, Jennifer Beeston, suggests an alternative for the problem of multiple inquiries for a refinance.
She suggests It is best if you know your credit score, and to give your scores to the lender when you shop around.
This way each lender would not have to run your credit. Once you have zeroed down on the lender that you would like to work with, then they can run your credit and complete your refinance.
Thus having a single lender run your credit and refinance your home will not affect your credit score adversely.
Mortgage refinancing does hurt your credit score very badly, hence it’s advisable to take certain precautions.
Not refinancing or applying for credit too often will help.
Similarly when you shop mortgage rates concentrating the credit inquiries to either a 30 to 45-day or 14-day window and working strategically with lenders by avoiding having too many credits pulls will help.
Also, if you are not paying an old mortgage on time could be harmful to your score, also if you choose a cash-out to refinance it is not a smart decision.
Following these basic steps will keep your FICO score healthy, which, is most helpful for mortgage refinancing.
For credit-related to your mortgage avoid refinancing too often or applying too frequently, because refinancing hurts your credit score.
Limit your inquiries to a 14 days window when you are rate shopping.
It is always better to have an older debt that has a steady payment history than a newer debt.
It is advisable to avoid cash-out refinances if you can so you can maintain your credit score.
The process of revising and replacing the terms of an ongoing credit agreement that is related to a loan or mortgage is called refinancing or refi.
When a business or an individual decides to refinance a credit obligation, it is for the purpose of making favorable changes to their interest rate, payment schedule, and/or other terms outlined in their contract.
When they get approved, the borrower gets a new contract in place of the original agreement.
When the interest-rate environment changes the borrowers often choose to refinance, so they can save on debt payments from a new agreement.
Refinance is opted by consumers to seek certain debt obligations in order to obtain more favorable borrowing terms, which is more likely in response to shifting economic conditions.
Either for lowering one’s fixed interest rate or to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM) or vice versa refinancing is done.
Borrowers may also refinance because of an improvement in their credit profile, or because of changes made to their long-term financial plans, or to pay off their existing debts by consolidating the debts into one low-priced loan.
The interest-rate environment is the most common motivation for refinancing. As interest rates are cyclical when the rates drop many consumers choose to refinance.
National monetary policy, the economic cycle, and market competition are some important factors causing interest rates to increase or decrease for consumers and businesses.
And these factors influence interest rates for all types of credit products, including non-revolving loans and revolving credit cards.
Debtors with variable-interest-rate products land up paying more in interest during the rising-rate environment and in a falling-rate environment, the reverse is true.
If they want to refinance, a borrower must approach their existing lender or a new lender and request a completely new loan application.
Refinancing happens when an individual’s or a business’s credit terms and financial situation are re-evaluated.
The common consumer loans that are considered for refinancing consist of mortgage loans, car loans, and student loans.
Mortgage loans on commercial properties are also sought for refinancing by businesses.
The business investors evaluate their corporate balance sheets for business loans issued by creditors so they can benefit from lower market rates or an improved credit profile.
There are several refinancing options. Depending on the needs of the borrower the type of loan is decided by the borrower. Some of these refinancing options are:
Being the most common type of refinancing, this refinancing takes place when the original loan is paid and replaced with a new loan agreement that consists of lower interest payments.
These refinance are common when the underlying asset that collateralizes the loan has gone up in value.
The transaction involves taking out the value or equity in the asset in exchange for a loan with a higher amount and higher interest rate.
Meaning, when the value of an asset increases on paper, then instead of selling it you can gain access to that value with a loan.
Though there is an increase in the total loan amount with this option but the borrower has to access cash immediately while he still maintains the ownership of the asset.
This type of refinancing allows the borrower to pay down some portion of the loan for a lower loan to value (LTV) ratio or smaller loan payments.
Consolidation of a loan may be an effective way to refinance in some cases.
When an investor obtains a single loan at a rate that is lower than their current average interest rate across several credit products then a consolidation refinancing can be used.
In this type of refinancing the consumer or business are required to apply for a new loan at a lower rate and then pay off existing debt with the new loan, by leaving their total outstanding principal with substantially lower interest rate payments.
When a company reorganizes its financial obligations by replacing or restructuring existing debts then the process is called corporate refinancing.
This refinancing is usually done to improve a company’s financial position and help the company which is in distress with debt restructuring.
With corporate refinancing, the older issues of corporate bonds are called in and new bonds at lower interest rates are issued.
When the terms like the interest rates, payment schedules, or other terms, of an existing loan, are revised a refinance happens.
When interest rates fall that is when borrowers tend to refinance. Refinancing requires the re-evaluation of a person or business’s credit and repayment status.
The consumer loan that is often considered for refinancing is mortgage loans, car loans, and student loans.
Although the home prices continue rising even during the pandemic, the mortgage rates have hit a record low by falling lower than 3% for the first time in 50 years.
This might be the perfect opportunity to refinance for a lot of homeowners, but for homeowners with bad credit scores, it is a different story.
According to industry experts, a lot of lenders have increased their standards and are essentially closing out the homeowners with a low credit score.
These higher standards may lead to a situation, similar to the one that followed the last big recession in 2010-2013, where only homeowners with near-perfect credit scores get approved for refinances.
The reason why lenders are reluctant to extend credit to homeowners with low credit scores is the recession caused by the pandemic and high level of unemployment.
Qualifying for a refinance and a low interest rate depends on a number of factors and the type of loan you apply for. Borrowers can refinance with bad credit scores too, using loan programs with relaxed credit score requirements or programs that are backed by the federal government.
However, to qualify for these programs a borrower must meet certain requirements.
For instance, there is a usual requirement of ‘net tangible benefit’ like acquiring an interest rate that is at least 0.5% lower.
Here are a few tips you can follow if you want to refinance with a bad credit score.
Since you already have a mortgage, you probably have a relationship with your current lender.
It may be wise to talk to your current lender explaining to him your situation completely and finding out what your options might be.
Ask your lender if they offer any types of programs for borrowers who want to refinance with bad credit scores.
If you are not happy with the options your current lender has provided, you can approach other lenders and shop around.
Every lender has different offers, and you may find that a particular lender’s offer suits you better than others.
The FHA has multiple refinance program options for borrowers that want to refinance with bad credit scores. However, one major requirement for these refinance programs is that your mortgage must be an FHA loan. These include:
If you already have an existing mortgage that is backed by the Department of Veterans Affairs, or VA, you may refinance using the Interest Rate Reduction Refinance Loan (IRRRL), which generally does not require an appraisal or a credit check.
There is also no annual cost to guarantee the loan. You can go through a private bank, mortgage company, or a credit union to get a VA loan and refinance up to 100% of the value of your property.
This is a mortgage loan that is not sold through the secondary market and can be obtained only by a lender.
The standards for requirements for these loans usually differ from typical loan requirements as banks and mortgage brokers set their own standards.
Although these mortgage loans have looser requirements, lenders will still want to take a good look at your credit history and finances.
The good news related to a bad credit score is that it is not permanent. You can focus on building and improving your credit score if in case you cannot refinance now.
Having a good credit score is a very important factor in your financial health and you can improve your credit score quite easily and quickly with a few small actions, like making bill payments on time or lowering your credit utilization.
If, since your last mortgage application, your credit score has not improved at all, you need to stop and think about why this might have happened and what you should do to rectify this.
Borrowers that want to refinance with bad credit score, may find it difficult to do so, however, it is not impossible.
There are a number of options available for homeowners with bad credit scores to choose from.
Although it is important that you take time and analyze what you can do to improve your credit score, a good credit score simply means better refinance offers and lower interest rates.
If you were thinking about refinancing your mortgage, make sure you read this post because there is a new mortgage refinancing fee coming up that you do not want to pay.
Refinancing could be a great way to save money on your mortgage if you do it the right way and if you don’t get slammed with the fees.
In August 2020, the Federal Housing Finance Agency (FHFA) announced that they are going to impose a new half a percent fee on lenders on all mortgage refinances that happen through Fannie Mae and Freddie Mac after September 1st.
This news was not taken well by many executives saying that this was a money grab and some of them said that it was a tax because it is going to make refinancing more expensive for homeowners who just want to save some money.
Surprisingly, the FHFA heard this and they backed off. Instead of tacking on this fee from 1st September 2020, they decided to tack this fee from 1st December 2020.
In simple terms that means that if you refinance your home after 1st December 2020, your lender might have to pay an additional half a percent fee, which means refinancing your home might become more expensive for you.
For most people refinancing is still going to be a smart move even if you have to pay this additional fee, but if you don’t have to pay an additional couple of grands why do it?
If you are planning on refinancing right now you have two options:
Since the interest rates are at their lowest, most of the homeowners are refinancing to lower their interest rates.
This will help the borrowers to not only reduce the interest rate but also change the tenure of the loan according to their monthly expenses.
You can also make additional payments over your new mortgage payments which can help you to pay off the mortgage in comparatively less time.
If you are looking to borrow additional cash on top of your mortgage balance, you can choose to do a cash-out refinance and use the additional money from your equity for your benefit.
The benefit of getting a cash-out right now is that you will get the advantage of the low-interest rate along with cash in hand which you can use for any purpose.
Make sure that you get a cash-out only if you can afford to repay. Because failing to make payments can result in property foreclosure.
The investment could be one of the options to use the cash so that you can get returns on the amount that you have borrowed.
The simplest thing that you can do to save money, save time, and shop around to find great deals is by using a mortgage comparison tool.
We at Compare Closing LLC help you to do a fair comparison with our mortgage comparison tool.
At Compare closing you can compare deals from different lenders and help you make an informed decision.
If you have multiple quotes from lenders all you need to do is use our mortgage comparison calculator to check which lender is giving the best of the deals on your refinance or purchase.
After your comparison, if we see that there is a better deal with one of our preferred lenders, you can request a free quote in no time.
Is this the right time to refinance? Of course, it is. With FHFA charging .5% on every refinance starting December 1st, 2020, and the rates being historically low, this is an opportunity that you should not miss.
Some lenders may tack the entire fee to you, some lenders may eat up this cost, and some may tack a portion of this fee.
However, why to pay this fee if you can refinance now and save that additional cost.
Make sure that you do your comparison before you refinance your mortgage with any mortgage lender or mortgage broker.
Since there are fees and closing costs involved in a refinance transaction, you need to make sure that you compare the mortgage quotes in the right way and let the lenders compete for your business.
Remember, when lenders compete, you win.
Refinancing in Texas is a process where a borrower replaces his old mortgage with a new one for a specific reason.
Now when you do that basically, it means paying off the old mortgage and creating a new one.
But to do that there has to be a prominent intention and a valid reason. An individual may opt for refinancing if he/she is looking to lower the interest rate, change the tenure, take cash out, or change the mortgage company.
There are pros and cons to refinancing, which we will discuss as well. First, let’s understand the reasons for refinancing in Texas.
There could be lots of reasons why an individual may opt for a refinance In Texas. Keeping in mind your credit history would be a major deciding factor in whether or not it is best for going for a refinance.
The primary factor before going for a refinance is to lower your interest rate. The interest rates are fluctuating on a daily basis.
If your current mortgage is on a higher interest rate and if the market rate considerably is lower than your current interest rate, refinancing can save you lots of money provided you have a good credit history.
If the market rates are going up, a good option would be to wait for them to lower down or get other options.
Your loan officer would be the best person to guide you with the best options available for you depending on the market and your current situations for refinancing in Texas.
Many people refinance to change the tenure. For example, if you purchased a home on a 30 years note and now you are ten years into the loan, and if you want to change the tenure to 15 years note, refinancing would be a smart move for you.
In this case, you may not only save on five years of monthly payments but also may get a lower interest rate, as the interest rate on 15 years mortgage is more economical in comparison to 30 years.
Again refinancing in Texas is subject to market conditions on interest rates and your credit history.
Yes, you read it right. There are individuals whose only reason to refinance could be to change from Adjustable Rate Mortgage (ARM) to a conventional one.
And it could be a wise decision as well. The interest rate on an ARM loan is usually fixed for a few years, and after maturity, it is adjusted according to the market conditions.
So if you have an ARM loan, it would be best to refinance before it reaches maturity. Once it reaches maturity ARM loans can offset your interest rate above the market conditions, doing so, increasing your monthly payments.
Hence, refinancing in Texas to change from an adjustable-rate to a fixed rate could be worth the money.
Getting a cash-out is one of the major reasons why an individual might go for refinancing. Going for a cash-out refinance could be a little tricky.
Because it adds up to your loan balance hence, increasing the monthly payments.
Usually, the interest rate on cash-out refinance is higher than a conventional rate and term.
That’s why it is advisable to go for this type only if you are in dire straits. To qualify for a cash-out of refinancing, you must have enough equity in your home to pull the desired amount of cash.
In addition to that, an individual also needs to have a good credit history. The maximum cash-out an individual can pull out is up to 80% of the property value.
Now this 80% will also include your previous loan balance and the closing costs.
Below is the table with an example to understand better. Cash-out refinancing in Texas has different guidelines compared to other states in the country.
We all have gone through financial discrepancies with our banks/lenders at some point in time.
Not enough to change the bank/lender. But some of you may have had these at a level where the only option was to change your current mortgage with a different lender or bank.
In this case, a borrower can select a bank or lender, approach them, and get a refinance done through the new bank or lender.
Knowing the reasons for refinancing in Texas is only the beginning of the refinance process. Once you have a valid reason for refinancing, you can get in touch with your trusted loan officer to know your refinancing options that are unique to your situation.
By having all the knowledge available to make a well-informed decision, you can have peace of mind and comfort once you are aware of the reason for refinancing in Texas.