Refinancing – Everything you Need to Know

Refinancing your mortgage is a great way to save money or get money from your home’s equity. At Total Lending Concepts, we’ll help you decide if refinancing makes sense and which program is the best fit. Whether you own a primary residence, investment property, or second home, there are refinancing programs for everyone.

Read the guide below to learn all about refinancing to decide if it’s right for you.

What Does Refinancing Mean?

When you refinance, you pay off your original mortgage with a new mortgage. There are many reasons to refinance, including:

  • Lowering your interest rate
  • Getting a better term, such as refinancing from an ARM to a fixed rate
  • Shortening your loan term (30 year to 15 year)
  • Tapping into your home’s equity (the difference between your home value and your loan amount)

The reason you’re refinancing will determine which refinance program suits you. Like your purchase mortgage, you’ll need to qualify for the loan, which we discuss below.

Your Refinancing Options

Just like when you bought your home, there are many loan programs available. Your credit score, loan-to-value ratio, and current loan program determine which refinancing option you choose. 

Here are the most common choices.

Conventional, FHA, VA, or USDA Rate/Term Refinance

Choose a rate/term refinance when you want to take advantage of lower rates or you improved your qualifying factors and qualify for a lower rate now.

With the rate/term refinance you can only refinance the outstanding principal balance – you can’t take cash out of your home’s equity. It’s commonly used when interest rates drop or for borrowers who want to decrease their loan term from a 30-year to a 15-year or any other shorter term.

Conventional, FHA, VA, or USDA Cash-Out Refinance

If you have equity in your home and need it, a cash-out refinance will help. Most cash-out refinance options allow you to borrow up to 80% of the home’s current value, except for the VA loan which may allow more.

Borrowers use home equity to pay off high-interest credit card debt, renovate their home, or pay other large expenses. You don’t need to prove your reason for using the proceeds unless you have a high debt-to-income ratio and are using the funds to pay off your debt. 

Streamline Refinance – FHA, VA, or USDA

If you have a government-backed loan, you may use their streamline refinance program. All three government agencies offer this option.

The streamline program doesn’t require extensive qualifying requirements and they don’t check things like your income, assets, or credit score. Many borrowers use this option when they’re upside down on their home (owe more than the home is worth) but want to take advantage of lower rates or a better term.

How to Qualify for a Refinance

Qualifying for a refinance works much like when you bought your home. You must prove you meet the loan’s requirements which may include:

  • Credit score requirements
  • Debt-to-income ratio maximum requirements
  • Equity requirements
  • Stable income and employment
  • No recent public records (bankruptcy or foreclosure)

Credit Score Requirements

All loan programs have different credit score requirements, but here are the basic guidelines:

  • Conventional loans – 620-640+
  • FHA loans – 620+
  • VA loans – 620+
  • USDA loans – 640+

Debt-to-Income Ratio Requirements

Like credit score requirements, each program has different DTI requirements:

  • Conventional loans – Max 36% DTI
  • FHA loans – Max 43% DTI
  • VA loans – Max 43 – 50% DTI
  • USDA loans – Max 41% DTI

Equity Requirements

Each loan program requires a different amount of equity, except for the cash-out refinance. Most programs allow you to borrow up to 80% of the home’s equity.

Here are the other equity requirements.

  • Conventional loans – 95% LTV max
  • FHA loans – 97.5% LTV max
  • VA loans – 100% LTV max
  • USDA loans – 100% LTV max

Income and Credit History Requirements

Lenders also look at your income/employment and credit history.

For income and employment, lenders look for stability and reliability. A two-year stable employment history with stable or increasing income helps your case. If you changed jobs, but stayed in the same industry and/or took a higher paying opportunity that may help too.

On your credit history, lenders look for no recent bankruptcies, foreclosures, judgments, or collections. 

The Benefits of Refinancing

Refinancing has different benefits for every borrower. Your financial circumstances, current rates, and your intentions determine the benefits you reap, but here are the most common:

  • Save money – Borrowers refinance to lower their payment. If you can get a lower rate or get rid of PMI because you owe less than 80% of the home’s value, your monthly payment will decrease. If you score a lower interest rate, you’ll save money over the life of the loan too.
  • Decrease your term – If your income increased or you lowered your other expenses, you may have room for a higher payment on a shorter-term loan. The shorter the term, the lower the interest rate and the less the loan costs you over its term.
  • Consolidate debts – If you have a lot of high-interest credit card debt, you can consolidate it into your mortgage. This leaves you with one monthly payment, typically a lower interest rate, and savings on your monthly obligations.
  • Reinvest in your home – Renovating your home may increase its value and taking the money from your home’s equity, but reinvesting it back into your home puts your money to good use, growing your investment.

Are you thinking about refinancing? Whether you have a conventional loan or a government-backed loan, we have options to help you save money, tap into your home’s equity, and get the most affordable solution for your home.

Contact Total Lending Concepts today to see how we can help you.