Refinancing Q&A Pt. 2
There’s no question that owning your own home is a facet of the American dream. It’s a tremendous asset, and each year of ownership the equity and value of the home can grow. To follow up on our previous article, let’s take a deeper dive on the benefits as well as the various avenues of refinancing and taking advantage of that growing equity.
With the strong housing market and increasing equity, a conventional refinance has become the loan of choice for homeowners. In addition to lower rates, it includes more options and perks like refinancing a second home or investment property, taking cash out, and eliminating private mortgage insurance (PMI), to name a few.
Because conventional mortgages are controlled by the federal agencies of Fannie Mae and Freddie Mac, there are certain guidelines that must be conformed to and varying circumstances will dictate the loan rates. For example, refinancing a rental property will receive a slightly higher rate than a primary residence. Borrowers with a high credit score of 700 will pay a lower rate than those in the 600s.
As of now, the conventional limit for a loan in most of the country is $484,350. This can be higher for multi-unit homes and in certain pricey areas of the country like San Diego and Honolulu. This refers just to loan limits – not actual home prices.
Additional perks of conventional refinancing:
• As little as 5% equity may be needed to qualify.
• Refinancing from an FHA loan to conventional can eliminate mortgage insurance and reduce monthly payment.
• Refinancing with 20% equity means requirement for conventional private mortgage insurance (PMI) is negated.
• Rolling your 30-year mortgage into a 15-year loan means paying the home off in half the time, but be sure to budget for a possible larger monthly payment, depending on equity at time of refi.
While homeowners often look to refinance out of an FHA (Federal Housing Administration) mortgage for the benefits mentioned above, the government-backed option can be a great solution for some. Borrowers with less equity built up in the home, damaged credit, or more debt than traditional lenders accept can more easily qualify going this route.
As previously discussed here, there are several FHA options to consider depending on your objectives. These include a cash-out refi, refinancing for repairs and improvements which can only be used for those purposes, and a Streamline mortgage. Streamline refinancing is done on an existing FHA mortgage and reduces the number of hoops a borrower has to jump through.
There are also loan limits for FHA refinancing, as with conventional. This year borrowers have a maximum loan of $314,827 for single-family homes in most of the country, and up to $726,525 in the high dollar cities.
Homeowners who purchased through the Veterans Administration (VA), can benefit even further with a VA refinance. Like the FHA option, the borrower can streamline with an Interest Reduction Refinancing Loan (IRRRL) and bypass much of the documentation and limitations other loans entail. For instance:
• No pay stubs or bank statements required
• No loan-to-value limitation (100% refinancing) and no appraisal required
• Closing costs can be rolled into new loan, meaning zero out of pocket
Ultimately, a VA Streamline must improve a veteran’s financial situation either with lower monthly payments or by reducing the term of the loan. There is no cash back with an IRRRL except for energy-efficient improvements, however a VA cash-out refinance is possible with the typical paperwork and qualifying requirements.
There are clearly a lot of options for homeowners looking to refinance in this current market. Before you get overwhelmed by the pros and cons, let EnTrust Funding (ETF) help you determine the benefits of each path and your specific goals. Give us a call today.