According to data from the National Bureau of Economic Research (NBER), a fifth of US homeowners qualify for mortgage refinancing. However, most of the people who qualify for refinancing have failed to do so for various reasons and as a result, forgone savings worth $5.4 billion. With that in mind, here is everything you need to know about mortgage refinance.
Refinancing is Easy
According to the NBER, many homeowners shun refinancing because they believe it is a complex process. The truth is refinancing is easy regardless of what you may have heard. To make this process a breeze, gather recent paystubs or any document that could prove you have a regular income, tax returns documents and bank statements. In essence, you should prepare for refinancing as you would to buy a house. While this process involves more scrutiny now than before the housing crisis, stricter checks and balances are necessary to prevent financial impropriety, not inconvenience homeowners.
Take Advantage of HARP
If you have Freddie Mac or Fannie Mae mortgage, you may qualify for federal refinancing. This may come as a surprise considering the Home Affordable Refinance Program (HARP) should have ended on Dec 31, 2013. However, the US Treasury Department extended HARP to run until Dec 31, 2015. To qualify for HARP refinancing, your mortgage should be worth at least 80% or more of your home’s value. Additionally, Freddie Mac or Fannie Mae should be the guarantors or owners of your mortgage and more importantly, you should have missed only one mortgage payment or none in the last 12 months. The beauty of HARP is it protects property owners from foreclosure (you can continue living in your home), comes with very low monthly payments, and lowers the total mortgage amount one owes.
Refinancing Options
Homeowners have two main refinancing options: rate-and-term and cash-out refinancing. The first option is rate-and-term refinancing, which involves taking out a new loan to pay off an existing mortgage refinance. Luckily, the same property bought with your current mortgage will serve as collateral for the new loan. This option is ideal for homeowners interested in building equity faster or taking advantage of low interest rates. On the other hand, cash-out refinancing would allow you to take out a new mortgage worth more than the amount you owe your current mortgage financier. After paying off existing mortgage debt, you can pocket the difference.
Be Wary of “no-cost” Refinancing
According to the Federal Reserve Board, lenders define “no-cost” refinancing differently. Despite that, you can avoid shouldering expenses such as closing costs if your lender agrees to pick up the tab. The downside to this arrangement is higher interest rates that some lenders charge mortgagers who wish to refinance their mortgages. Another way to avoid paying refinancing fees directly is by instructing your lender to include them in your principal. With this in mind, find out from your lender what “no-cost refinancing” really means before appending your signature to any document.
Conclusion
By refinancing, US homeowners repaying mortgages could save about $11,500 each, according to the NBER. Of course, some property owners could even save more. Still, a good number of property owners mistakenly believe refinancing is a complex process. Additionally, some property owners are unaware that they qualify for HARP refinancing or fall for the so-called “no-cost” refinancing trick. For these reasons, evaluate your options carefully before entering into any agreement.
