Should I Refinance My Mortgage? One Question, Many Answers

Refinance Rates not Only Consideration

Refinancing a mortgage amounts to replacing an existing home loan with a better one. The primary purpose of most refinance transactions is obtaining lower mortgage rates and payments. However, homeowners who ask,"Should I refinance my mortgage?" should understand that refinancing can meet other objectives as well. Consumers should reviews their financial needs and personal goals before selecting refinance terms.

How Much Does Refinancing Cost?

It's important that homeowners include the cost of refinancing when comparing refinance terms to their current mortgage. In most cases, there are lender fees, title insurance costs, a home appraisal, recording charges, and an escrow agent or attorney's fees. Costs vary according to the program selected, the property type and use, and the borrower's profile -- better credit and lower loan-to-value ratios translate to lower fees, and the reverse is also true.

Most fees and costs are paid at closing, wrapped into the new loans, or absorbed by the lenders (for which they charge a higher interest rate). The total cost of the loan (fees plus interest) is disclosed on the Good Faith Estimate and in the annual percentage rate (APR) on a Truth-in-Lending (TIL) disclosure.

Mortgage Insurance

FHA loans require two kinds of mortgage insurance premiums -- an upfront mortgage insurance premium, which is paid at closing or wrapped into the loan, and an annual mortgage insurance premium that's divided by 12 and added to the monthly payment. VA loans generally have a funding fee added to their costs, which goes to the government.

Borrowers with conventional (non-government) financing usually pay for private mortgage insurance only if the refinance exceeds 80 percent of the property value.

When comparing refinance costs, borrowers should ask lenders to provide Good Faith Estimates (GFEs) or worksheets listing the loan's costs and interest rate. Different refinance programs are designed to meet certain needs. Here are a few.

Plain Vanilla Refinance

This basic transaction is called a "rate and term" refinance. If the costs of the refinance are added to the new loan's balance, it's called a "limited cash out" refinance. Usually the existing mortgage is replaced by a loan with a lower interest rate. Sometimes, however, it may be replaced for other reasons -- to exchange an adjustable rate mortgage (ARM) for a fixed loan, to terminate mortgage insurance coverage if the property value has increased, or to drop a co-borrower from the home's title and mortgage (as part of a divorce, for example). In that case, "Should I refinance my mortgage?" has different implications.

Mortgage rates remain near historic lows. Homeowners whose mortgage rates are higher than those available on the current market can use LendingTree's LoanExplorer tool to view current rates for their borrower profile. Then, they can run those numbers through the Refinance Breakeven Calculator to determine their potential savings.

Cash-Out Refinancing

Cash out refinancing replaces the existing mortgage with a better loan (if the homeowner can't find a loan with better terms, a second mortgage or personal loan is a better choice to get cash) and also delivers a lump sum of cash at closing. This money can be used for any purpose, from debt consolidation to home improvement. Qualifying for a cash-out refinance can be more difficult than qualifying for a rate-and-term refinance because it's considered riskier to the lender.

Mortgage lenders typically allow cash-out refinancing up to 85 percent of the property value (if a mortgage insurer approves) and FHA refinance programs also allow cash-out refinancing to 85 percent of the proeprty value. VA lenders, on the other hand, let their borrowers take cash out up to 100 percent of the property value.

Time Is Money: Shorter Loan Terms

Refinancing to a shorter loan term can save thousands of dollars over the life of the loan. Not only do 15-year mortgages carry lower interest rates than 30-year loans, but the loan is repaid in half the time, saving tens or even hundreds of thousand in interest charges. Mortgage payments are higher, however. Mortgage calculators can illustrate the trade-offs of these refinances.

Streamline Refinance

Streamline refinancing refers to refinance loans that replace loans from the same program. The VA's Interest Rate Reduction Refinance Loan (IRRRL) program lets homeowners refinance an existing VA loan to a new VA loan with fewer costs and qualification requirements. VA refinance loans also have terms that allow borrowers to pay little or no cash out-of-pocket.

FHA offers two streamline programs -- a limited cash out program (it allows borrowers to add the closing costs to the new loan balance), which requires an appraisal, and a rate-and-term plan that requires no appraisal. No income documentation is needed, and there are no minimum credit scores.

Homeowners with loans backed by Fannie Mae or Freddie Mac also have a streamline program -- at least until the end of 2016. It's the Home Affordable Refinance Program (HARP) and it was created to allow borrowers with little or no equity -- or even negative equity -- to refinanance to loans with lower mortgage rates.

Homeowners considering a refinance should check out current rates and programs and avail themselves of helpful tools like LendingTree's Current Mortgage Rates and Refinance Breakeven Calculator.

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