In the field of refinancing your home loans, you will notice that every person adheres to different refinancing types in the USA. These types can vary in many ways depending upon the type of home mortgage they have chosen, the market value of their house, the amount of money they owe, and their reasons behind refinancing. The first step towards refinancing is making oneself aware of it. The second step is to check for the types of refinancing options available in the USA.
So, we have narrowed down a list of a number of refinancing types making the process easier for you to proceed with. Before that, we have listed out the significance of/need for refinancing one’s mortgage, in the following segment. So, let’s begin!
Benefits of Refinancing Your Mortgage
Based on what type of loan you are qualified for, the refinancing will offer you one or more benefits, which may include:
- a lower rate of interest (APR)
- a lower monthly payment
- a shorter term of payoff
- the power of cashing out your proprietorship for other uses
The ultimate advantage of refinancing is that it helps out the cash-strapped borrowers in finding space within their budget, every month. This could be beneficial to you in times of need, especially if your monthly income has reduced (due to recession or job loss or decreased work hours, etc.), or if your cost of living has significantly increased (for having a baby, etc.).
But, during the refinancing, you can utilize it as a chance to use some part of the cash from your home value to meet some other important expenditure:
“Essentially 50% of the folks are pulling cash out, and they are looking at either reinvesting that money in other properties or sending their children to college or something like that,” stated English.
While many homeowners look for refinancing so that they can change the duration of their current mortgage to a term of 15 years from 30 years. Based on the rate of interest you are eligible for, this might but slightly change your monthly budget, thereby helping you to pay back the loan a little faster.
During refinancing, you might get to bounce a loan payment while a fresh loan is issued and its paperwork is in the process.
“You have 30 days before the actual amortization begins. So there are times where you can have as many as 60 days before the payment is due,” says English. Though this is not the real reason while people go for refinancing, it is a smart benefit and can prove to be an opportunity for you to develop an emergency fund (in case you do not have one in hand already), by utilizing the money which would generally move toward your loan payment to finance the account.
Different Types of Refinancing Options in the USA
Adjustable-Rate Mortgage (ARM) Refinance
This is the most common type of refinancing option. It is generally also known as the rate and term refinance as this can be used to modify the rate of interest, the term of your loan, or sometimes both. For example, if the rate of interest rate is low, you can issue another loan in the form of an adjustable-rate mortgage, like a 5/1 ARM, into a fixed-rate loan of 30-year term so as to lock in a lower interest rate for a fixed time period. Refinancing a loan from a period of 30 years to 15 years could secure a lower interest rate and make you pay off your loan sooner.
While to adhere to a traditional refinancing option, it won’t any less than a number of weeks, at least, and might involve much paperwork. If you have opted for the FHA (Federal Housing Administration) loan, then the streamline type of refinancing can simplify the entire process. Plus, it will require minimal underwriting and documentation.
Here is what you need to be eligible for a streamline refinance:
- Your current loan should be FHA-insured
- You should be regular and up to date with your payments
- The refinance should facilitate a “tangible benefit,” for example; a lower rate of interest
- You should not take out a cash amount of more than $500 from your home equity.
Home Affordable Refinance Program (HARP)
Traditional refinancing is not available in case the current value of your home is less than than the amount you deserve. This is the reason why the government has established the HARP (Home Affordable Refinance Program) in 2009. It lets you refinance your home for about 125% of its current worth.
To qualify for a HARP refinance, you should meet the following criteria:
- Your home should be your permanent address, or secondary home, or investment property with no more but 4 units
- Your existing home loan should be supported by Freddie Mac or Fannie Mae
- Your payoffs should be up to date, with no delayed payment but one in the previous year
During the lifetime of the borrower, he or she should only need to pay the property tax, while keeping the home in good condition. The sum of interest acquired on the reverse mortgage is added up to the loan. If desired, the borrower might pay off the interest in order to decrease the loan balance during the borrower’s lifetime so as to raise the heir’s inheritance value.
The loan never comes till the time the last borrower residing in that house moves out or expires.
In such situations, the home is offered for sale and the lender of the reverse mortgage pockets the proceeds amounting to the loan balance, with any remaining amount going to the heirs of the homeowner.
In order to be qualified for the reverse mortgage, you must meet the below criteria:
- You should be at least 62 years of age
- You should have sufficient home equity. The homeowners should at least have 50% of the home equity but the required value of the equity differs by the moneylender.
- You should attend a counseling session from the Housing and Urban Department.
- You should carefully check out the financial assessment in order to ensure that you stand in the top position to be successful with your refinancing strategy.
Apart from these requisites, your home is also needed to be eligible for the loan as it ensures loan security. Here are some of the basic criteria to be met:
- Your home should be your permanent residence
- Your home should be in better condition and must comply with the FHA standards
- The home should not be a manufactured or mobile home
- If your residence is a condominium, it should be present on the HUD (Housing and Urban Development Department)/FHA-issued condo list. If not, then also you might be qualified for a proprietary reverse mortgage.
HELOC (Home Equity Line Of Credit) is another refinancing option that can help you convert your home equity into cash. This is similar to the cash-out refinancing option. The only difference is that in HELOC refinance, you do not draw out a fixed sum of cash, rather your bank provides a line of credit to you to draw and pay off as required; it functions much like a credit card. You can withdraw cash from your HELOC via a bank-issued card, or other special checks. A HELOC is a variable-rate mortgage, in particular, that is suitable for a fixed amount of time, (say) 15 years.
The above list of refinancing types and options is not at all exhaustive as you have got a plethora of other options still to explore/ develop, specifically in order to meet your monetary requirements. If you are looking to learn more about the other possibilities that you can try in refinancing your loan, go for an online consultation. There are a number of reputed refinance specialists available to guide and assist you with a compatible solution. Hope it helps!