Refinancing your home is a great way to get extra cash for repairs and upgrades, which add to the value of your home. If you are not planning repairs or remodeling, you can use the funds for other things, like paying off other loans with higher interest rates and lowering the interest rates on your existing mortgage or even investing in real estate. Some mortgages will even allow you to use the funds to pay medical bills, and daily expenses.
There are several options for refinancing your home, especially if you have good credit. However, with so many options available, how do you determine which option is best for you.
Your Loan Options
The option you choose depends on several factors including what type of interest rate you would like, your age, the value of your home versus the amount remaining on your current mortgage, and whether or not you are a veteran.
Conventional loans are essentially available to anyone with good or excellent credit. They are the types of loans that most people think of when they talk about refinancing their homes.
There are several different types of conventional loans, with varying interest rates, and cash-out options. For example, you can do a straight refinance, where you essentially repackage the balance on your existing mortgage to get a lower interest rate. There’s also cash-out finance where you borrow against the equity that you have in the property. For example, if your home is worth $500,000 and the balance of y our existing mortgage is $250,000; you would have $250,000 in equity. You could refinance the property for $300,000 and get $50,000 as cash.
The advantage to conventional loans is that you don’t need to meet any special criteria to qualify, the bank looks solely at your finances, income, and credit history. Conventional loans are also readily available through most banks, credit unions, and independent mortgage companies.
The disadvantage to conventional loans is that, unless you get a fixed interest rate and fixed monthly payments, you could end up paying a lot more in interest as the loan ages, or you could end up having to make several large payments at the end of the loan – which could be a problem if you have any drastic changes to your income later in life, such as retirement.
VA Loans are designed specifically for active services members, veterans, and their surviving spouses. There are three types of VA loans, and they can all be used to refinance your home.
· The VA purchase loan allows you to do a cash-out refinance on your property;
· The Interest Rate Reduction Refinance loan allows you to repackage an existing VA loan to get a lower interest rate; and
· The Native American Direct Loan is specifically for Native Americans wishing to cash-out refinance a home on Federal Trust Land, or wishing to refinance an existing VA loan for a lower interest rate.
The VA also has a program called the Adapted Housing Grant for veterans who need funds to make their homes accessible.
VA loans are only available through several large banks and financial institutions, which you can find through services such as Lowvarates.com or Veteran.com. You must also meet certain eligibility requirements, and provide proof of eligibility, to apply.
The advantage to the VA loan is that it is guaranteed by the U.S. Government, which makes it easier for veterans, active service members, and their spouses to get home loans, than if they were applying for a conventional loan. VA loans often have lower interest rates as well.
The disadvantage to VA loans is that they have strict eligibility requirements, and there could also be restrictions on the types of properties you refinance. VA loans can also have some of the same risks as conventional loans, in terms of interest rates and payment terms.
The Reverse Mortgage
The reverse mortgage is designed specifically for people over age 62, who own their homes free and clear, and who wish to stay in their homes and need extra money.
The reverse mortgage is very different from conventional and VA loans in that instead of you paying the bank each month, the bank pays you for as long as you live in your home.
Reverse mortgages are only available through Federal, state or local government programs, such as HUD, and you can also find private lenders through the National Reverse Mortgage Lenders Association.
Reverse mortgages can be used for a single purpose, which is usually specified by the lender, such as paying medical bills or upgrading the home for accessibility. You can also get a reverse mortgage for multiple, non-specific purposes.
The advantages to reverse mortgages are that you don’t have to make a mortgage payment as long as you live in your home, and you will actually get money which you can use to supplement your retirement income.
The disadvantages to reverse mortgages are that you are required to live on-site, and you must also keep up with the maintenance, repairs, and taxes. If you fail to meet any of the requirements, the bank can take ownership of your home. Another issue is that the property automatically goes to the bank in the event that you die or enter a long-term care facility unless you can pay back the full amount of the loan.
3 thoughts on “Options for Refinancing Your Home”
A cash out refi to pay off higher interest debt is a great way to play some interest rate arbitrage.
Just make sure you don’t use this as an opportunity to build that debt back up on things like your credit cards after you pay them off.
“Conventional loans are essentially available to anyone with good or excellent credit.” I would have to augment that statement with “and a W2 or pay-stub”. Last year I left my 20 year career in IT to pursue a writing/blogging career. As of today I have a million plus portfolio and a FICO score of 824 yet banks won’t talk to me without that W2 or set of pay-stubs.
My house is underwater and I have looked into the government HARP program. They recently revised it to allow more homeowners to take advantage of it. I’m hoping everything works out and I am able to lower my interest rate.