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Consider One of These Home Refinance Options in 2021

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On the heels of a year filled with mortgage interest rates that were historically low, rates are predicted to stay below 3% in 2021, according to Fannie Mae’s latest housing forecast. If you haven’t considered it yet, you may want to explore your home refinance options.

A home refinance is replacing your existing mortgage with a new one. Whether you’re looking to lower your rate, shorten your loan term, ditch mortgage insurance or tap home equity, you have several avenues to choose from.

Home refinance options for borrowers in 2021

Rate-and-term refinance

A traditional, or rate-and-term refinance loan, is typically used to lower your mortgage interest rate or change your repayment term. Perhaps you’re looking to switch from a 30-year to a 15-year mortgage, or vice versa.

You may also want to replace your adjustable-rate mortgage (ARM) with a fixed-rate mortgage. ARMs typically include lower interest rates for the first several years of the loan, after which the rate changes based on a specified schedule. With a 5/1 ARM for example, you’d pay a fixed rate for the first five years, after which the rate would adjust annually for the remainder of the loan term.

A fixed-rate mortgage can give you the stability that an ARM doesn’t — providing an interest rate that remains unchanged for the life of your loan. Regardless of what happens in the market, you’ll make the same principal and interest payment each month. If you’re risk-averse and uncertain whether your income will increase over time to keep up with ARM payment changes, a fixed-rate loan could be better for you.

Streamline refinance

If you have a government-backed mortgage, you may be eligible for a refinance program that doesn’t require income documentation or a home appraisal.

  • The FHA streamline refinance may be an option if you currently have a home loan backed by the Federal Housing Administration (FHA). You may want to lower your interest rate and monthly mortgage payments, switch to a shorter loan term or achieve another goal. Because of the streamlined documentation process, there’s no income verification or appraisal required, which can save you $300 to $400 on your closing costs.
  • The VA interest rate reduction refinance loan (IRRRL) is reserved for military borrowers with an existing mortgage backed by the U.S. Department of Veterans Affairs (VA). As with the FHA streamline program, there are no appraisal or income documentation requirements. You can also roll your closing costs and fees into the loan amount to reduce your upfront expenses.
  • The USDA streamlined assist refinance loan allows current homeowners with a mortgage insured by the U.S. Department of Agriculture (USDA) to refinance without the need for an appraisal — unless they’ve received a subsidy — or credit review.

Cash-out refinance

A cash-out refinance involves taking out a new mortgage for more than you owe on your current loan, and withdrawing the difference in cash. You may be able to secure a more favorable rate and repayment schedule. But you’re also borrowing cash against the equity of your house, and you can use that money to consolidate debt, make home improvements or however you see fit.

A key requirement is that you’ll need at least 20% equity to qualify for a conventional or FHA cash-out refinance. You’ll need just 10% equity for a VA cash-out refi. The USDA program doesn’t allow cash-out transactions.

High-LTV refinance

Fannie Mae and Freddie Mac, the two major agencies that buy and sell mortgages from lenders, offer a refinance option for mortgages with a high loan-to-value (LTV) ratio. An LTV ratio is the percentage of a home’s value being financed through a mortgage. The higher the ratio, the more money you’re borrowing for your home purchase or refinance.

For both agencies’ high-LTV refinance programs, the existing loan must have originated on or after Oct. 1, 2017, and the minimum LTV ratio required for single-family homes is 97.01%. Both programs are reserved for homeowners with conventional loans.

Why you might want a mortgage refi in 2021

If you bought your home when mortgage rates were higher than they are now, today’s low-interest-rate environment may motivate you to consider your home refinance options. You can potentially save money each month and over the life of your loan.

Here are some key reasons to consider a home refinance in 2021:

  • Your financial situation has improved. If you’ve increased your income and paid down a large chunk of debt, a drop in your debt-to-income (DTI) ratio and boost in your credit score could qualify you for a better mortgage rate.
  • You want a stable mortgage rate. If you have an ARM with a low initial rate that will expire soon, switching to a fixed-rate loan can provide stability in your monthly expenses, allowing you to budget more easily. This can also ease your mind if you’re worried that your mortgage payments will become unaffordable if rates eventually go up.
  • You’d like to get rid of your mortgage sooner. If you’re motivated to pay off your mortgage early and shrink your interest costs, you can refinance into a mortgage with a shorter term, such as 15 or 20 years. You’ll have a higher monthly payment amount but can save thousands of dollars in interest payments over time. Another perk: You’ll build home equity much faster than with a 30-year fixed loan.
  • You want to tap your equity. Home equity is the difference between your loan balance and your home’s value. Home prices rose 6.7% from September 2019 to September 2020, according to CoreLogic’s Home Price Index data, and higher property values translate to more equity. A cash-out refinance could provide you with cash for other financial goals.

Consult your mortgage lender or financial advisor before applying for a refinance. LendingTree’s mortgage refinance calculator can also help you estimate how much you stand to save.

Remember your break-even point

There’s a cost to refinance, which can range from 2% to 6% of your new loan amount. It’s critical for you to ensure you’ll stay in the house long enough to make those expenses worthwhile. The best way to make this determination is to calculate the break-even point on your refinance.

Divide your closing costs by your monthly payment savings; the resulting number is how many months it would take you to recoup those costs. If you’ll be in the house longer than the number of months it takes to break even, then the refinance probably makes sense.

How to refinance your mortgage

Interest rates are dropping, creating a great opportunity to save money on what is usually your largest monthly expense — your monthly mortgage payment.

Keep these steps in mind as you prepare for the mortgage refinance process:

1. Assess your financial health. Pull your credit reports and scores to see where you stand before you approach a lender. Dispute any credit reporting errors you find and work on paying down your debt to improve your DTI ratio. The better your credit score, the better your mortgage rate.

2. Nail down your refinance goal. Before you apply for a refi, be clear on your “why.” Whether you’d like to lower your rate, shave years off your loan or tap your equity, you need to know what you’re expecting to gain from refinancing.

3. Compare lender offers.Gather refinance offers from three to five mortgage lenders. You can also refinance with the same lender, but it’s wise to shop around and be sure you’re not leaving any savings on the table.

4. Prepare for closing day. Once you’ve selected a new lender, it’s time to lock your mortgage rate and work through the remaining steps to finalize your refinance. Respond promptly to any documentation requests from your lender, prepare for your home appraisal (if applicable) and schedule your closing.

 

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