Refinancing is the process of replacing your original mortgage with a new mortgage that has a more favorable interest rate and term. Many people choose to refinance when they have home equity (the difference between the amount owed to the mortgage company and the home's value). In other words, refinancing is paying off an existing loan with the proceeds from a new loan. Refinancing lenders typically require a percentage of the total loan amount, in the form of "points," as an upfront payment. One point equals 1 percent of the total loan amount. The more points, the better, because a larger payment upfront results in a lower interest rate.
Pros
Refinancing can reduce monthly payments and interest rates, and allow people to choose a different mortgage company or take cash out of their home preceding a large purchase. Homeowners can also cancel their private mortgage insurance (PMI) with a mortgage refinance loan, as the home's value increases and the balance on the home declines. Some people refinance to switch between an adjustable rate mortgage and a fixed one. For those with balloon programs such as ARMs, refinancing allows someone to switch to a new, fixed rate before the entire mortgage balance is due at the end of the term (usually five to seven years). One other reason for refinancing is to consolidate other debts into one loan.
Cons
However, there are risks involved. People may incur penalties that can amount to $1000+ for paying down their existing mortgage with home equity credit. Make sure you have an understanding of the fees involved before committing to refinancing. Fees can account for 3-6 percent of your outstanding principal and include the application fee, title insurance and title search, the lender's attorney review fees, homeowner's insurance, the appraisal fee, and points and fees incurred in loan origination. Your savings in interest must exceed refinancing fees in order for refinancing to be worthwhile.
Interested in refinancing? Experiment with the home refinance calculator. To learn more about refinancing a home, watch the short video below:
Your credit score is important—it’s what lenders use to determine your qualifications for a home loan. You can
request a free credit report here. Then
meet with a lender, who can help you come up with a game plan to strengthen it.
Keep in mind it can takes months, or even a year, for your credit score to rise
after you improve your finances. The illustration below breaks down how your credit score is determined:
If you have excellent or good credit
(a score of 700+ according to credit.com), you’re in good shape. But what if you’ve got poor or bad credit, at 649 and below? Conventional loans may not be able to help. Instead, talk to a
lender about the Federal Housing Administration’s loan program, which requires
a credit score minimum of only 580 (most lenders, however, require 620 or 640)
for a loan with a down payment of 3.5%. Lenders will also want to see documentation
of your income and assets to calculate your debt-to-income ratio, which, as a
rule of thumb, should not exceed 41% of your monthly gross income. The
FHA insures lenders against default and offers mortgage rates comparable to those
of conventional loans. However, FHA loans do have higher mortgage insurance
requirements than conventional loans, as mortgage insurance payments must be
made for the entire life of the loan unless you make a bigger down payment. Remember, a lender can always help you determine which type of loan is best for you.
Lenders consider a variety of factors when issuing mortgage loans, including job history, debt-to-income ratio, income & assets, and the amount your down payment will be. However, their primary concern is credit score. It's important to check your credit report for errors and areas of improvement.
Your credit score may influence the type of loan you seek. FHA-insured loans generally have lower credit score requirements than conventional loans. It's often easier for a person to qualify who 1) lost a home in a short sale or foreclosure to get a new mortgage faster, and 2) has damaged credit. However, with an FHA-insured loan, you must pay mortgage insurance on the loan--which is often for the life of the loan, and higher than private mortgage insurance if you make a down payment of less than 20 percent.
Conventional lenders look more exclusively at credit score when issuing loans. Private mortgage insurance is automatically cancelled when your loan-to-value ratio reaches 78 percent.
The simplest way to boost credit score is to pay all your bills on time. Take these additional steps to boost your credit score over time:
Pay off collections or judgments against you ASAP
Update your over-the-limit and post-due accounts
Reduce your credit card debt to no more than 25% of your credit line on each card
Don't open new lines of credit
Don't close your credit card accounts (you'll be using more of your overall credit limit if you do)
Use a credit card you haven't used for a long time, then pay the bill in full. This demonstrates your ability to responsibly handle credit.
When buying a home, one of the most important factors is price. How much you can spend on a home depends on how much cash you can put down on a down payment, and how much money you can borrow. Before you begin looking for a home, seek pre-approval, based on credit and income, from a lender. Additionally, determine what you, personally, are comfortable paying. Your lender will be much less familiar with your lifestyle and future plans, and therefore will not consider some pertinent factors when approving you for a loan. Are you saving up for a family? Do you travel often? These are just a couple of questions you should ask yourself when generating your housing budget. To estimate your ideal mortgage payment, you can assess your current comfort level with your rent payment and look at your monthly income and expenses.
As a homeowner, your housing payment includes:
Principal
Interest
Property taxes
Homeowners' insurance.
Additional expenses:
If you put less than 20 percent down on your home, you will have to pay mortgage insurance.
At least 1 percent of the home price should be set aside for maintenance and repairs.
Some homeowners need to pay homeowner association dues (HOAs) or condominium fees.
Lenders will look at your debt-to-income ratio when approving a loan. Most lenders won't approve loans with a ratio higher than 41-43%. You can use a mortgage calculator to help determine your debt-to-income ratio. Essentially, you'll want to divide your gross monthly income (all income documented by paystubs or tax returns) by your monthly debt payment (new housing payment and minimum monthly payment on outstanding debt, such as a credit card, a car loan, or child support). Aside from income and debts, lenders will also look at:
Assets
Downpayment
Credit score
Job history
Your mortgage payment depends on your loan term and interest rate. A shorter loan term generally has a lower interest rate; however, it also means higher monthly payments. Interest is also affected by credit score. A higher credit score means a lower interest rate. Ultimately, a good lender can evaluate your personal circumstances and make recommendations for a loan program based on your individual financial needs.
Considering buying a foreclosed home? Private auction companies offer an alternative to sheriff sales, which can be inefficient and time consuming. Privatized sales are increasing in Ohio, as lenders experiment with them and are impressed by the results.
How it works: After a judge rules in favor of a bank's foreclosure suit, the lender petitions the sheriff to auction the property. However, the lender can instead ask the judge to appoint a private auction company. This little known state law explains why privatized foreclosures are still rare. Benefits: Private auctions allow homes to be marketed in conventional ways, i.e., through advertising, open houses, and appearances on real-estate sites fed by the MLS. Potential buyers can see and inspect the inside of the home for themselves. By omitting the bank from the process, private auction sales speed up the process, which is more mainstream. It also allows a homebuyer's agent to earn a commission. Sheriff sales, on the other hand, neither market homes nor offer a commission. They attract few bidders, causing banks to buy back the properties to safeguard their investments.
The Numbers: Barry Baker, founder of Ohio Real Estate Auctions, shared that while 90% of properties auctioned at Ohio sheriff sales had to be bought back by banks, banks have bought back less than 5 percent of the 100+ foreclosed properties that his company has auctioned. Moreover, Baker's company sees many properties that have already, and unsuccessfully, gone through the sheriff-sale process.
Disadvantages: Buyers may have to pay more for a foreclosure auctioned by a private company. The Columbus Dispatch provided one example. A Geauga County property was originally auctioned by the government with bids starting as low as $73,300--with no takers. The property was then given to a company, which marketed it, attracted over 20 bidders, and sold for $170,500--more than twice the original bid in the sheriff sale. While the price for the home mostly increased due to competition resulting from marketing efforts, private auction companies can charge a fee for their services and for the commission to the buyer's agent. Ohio Real Estate Auctions charges a 10% buyers premium to cover such costs. Another debatable disadvantage deals with the fact that a government function is being replaced by a private one. Executive director of the Buckeye State Sheriff's Association Robert Cornwell fears that private auction companies are mainly profit driven, whereas the government works for the people. He is also concerned that sheriffs may be reluctant to give up one of their long-standing duties.
Overall, private auctions market a home conventionally and allow for a quicker, more efficient process that differs much less from non-forclosures than sheriff sales do. For more information on how to buy a foreclosed home, watch the brief video, below.
