As with any type of residential mortgage loan, it is important to spend time considering the relevant title insurance requirements, especially for a refinance. The first and most important thing to evaluate is about the objectives you wish to reach through the refinance transaction. Keep in mind that you will probably be paying the money borrowed back over the course of twenty or thirty years, incurring interest all the while.
Using the money to put an addition on your house will raise your property value, or using the money to start a business may help you make more money in the long run. If the refinance money is desired for something more short-term, is it really worth twenty years of payments and debt from a refinanced mortgage?
Interest Rates and Loan Amount
When refinancing your mortgage, it’s important to also think about interest rates. You do not want to refinance your mortgage if you’re going to be paying much higher interest rates than you already are paying.
The additional money spent on high interest rates often times makes the money you’re getting out of the deal not worth what you’re paying back for it. Keeping in mind that the interest rate(s) and the principle paid over the term of the refinanced mortgage is very important when considering refinancing. These calculations must be given due consideration before approaching a mortgage lender to handle your refinance.
It is also essential to know who you are working with. When refinancing with a residential lender, make sure that the company you choose has a good track record. There are many mortgage companies that collect money without doing what they are supposed to be doing for you in return. Check with the local Better Business Bureau and do an internet search on the company name before signing any papers. Make sure that it is a legitimate company with a shining record.
What to do with the Refinance Funds
When refinancing, it is a good idea to stop opening any new credit card accounts in the interim, and pay off all existing credit card debt at least 6 months prior to loan application. This will assist you in avoiding further debt.
When you are getting money from refinancing, it may be a good idea to take out enough money to cover your other debts and reduce your monthly payments to one combined payment. This is often referred to as debt consolidation refinance loan. This will help your budget, because in most cases refinancing comes with a lower interest rate than what most credit cards charge.
Cash Out Refinance Mortgage Details
The cash out refinance mortgage is quite different than a home equity loan. Second mortgages, also called home equity loans, have become popular over the past few decades as a way of obtaining funds for the purpose of developing current property owned, or of gaining capital to purchase additional properties.
Cash out refinancing is designed to give you funds in exchange for a higher mortgage loan amount, allowing you to use the funds in any way that you wish. This is ideal for such things as college tuition, paying off other debts such as credit cards or hospital bills, or for emergencies. In addition to gaining additional funds, the process usually allows you to get a better interest rate than the rate on your previous mortgage. This latter part depends on the prevailing mortgage interest rates at the time of your refinancing.
How Much Can Be Borrowed?
A cash-out refinance mortgage allows you to borrow additional money within the limits of your current property value. For instance, if your property is valued at $200,000 and you currently owe $150,000, no more than an additional $50,000 can be borrowed. You cannot borrow above your property value, and the property is essentially the collateral for the loan.
Lenders generally do not like to see these loans taken to their maximum amount however. The closer the amount you request brings you to your full property value, the more difficult it will be to complete the transaction. The allowable LTV (Loan-to-Value) based on the underwriting guidelines determines the actual loan amount you qualify for.
Unlike a home equity loan, cash out refinancing is combined with your current mortgage and you still have a single mortgage transaction. The mortgage in cash out refinancing replaces the existing first mortgage altogether.
Also interest rates are almost always lower with the new mortgage than with your first mortgage, which is almost never the case with second mortgages. Keep in mind that, unlike a home equity loan, you do need to pay closing costs with cash out refinancing, and they can add up to thousands of dollars at times. The impact of refinance closing costs such as title insurance, discount points, appraisal fee and other charges must be factored in your calculation in order to evaluate the suitability of a refinance.
What to Keep in Mind?
Some things to keep in mind when looking at cash out mortgages are interest rates and principals. If you can’t find an interest rate lower than what you currently have, you’re probably better off obtaining a home equity loan rather than a cash out refinance mortgage.
Also if you’re already well into your current mortgage, and refinancing would force you to increase your mortgage for a good many additional years, keep in mind the principal interest that is being added to your cash out refinance mortgage. The interest could well end up being more than it is worth for what you are borrowing.
When refinancing, ask the loan officer handling your refinance for any additional tips and suggestions to lower your transaction fees. Also, the professional mortgage closer from the title company will undoubtedly have recommendations for you that will save you money and time.