By Nicole Rueth - March 2, 2020
By Nicole Rueth, Producing Branch Manager for The Rueth Team - Fairway Independent Mortgage
If you’re a younger, first-time homebuyer who may not have been able to pay the full 20% towards their downpayment, you’re not alone - over 76% of Americans put down less than 20% in December 2019!
Did you know… with today’s appreciating market; you can quickly remove that pesky monthly private insurance (PMI)? If you put less than 20% down at the time of purchase; as you both pay down your mortgage and allow the market to lift your value; you can refinance your home to remove the PMI. An added benefit to refinancing is taking advantage of today’s low interest rates.
What is a Refinance?
A mortgage refinance is a fantastic option for a homeowner who needs cash, who wants to change their bank, would like to change the terms of their mortgage, or lower their interest rate. Simply, a refinance is the process to apply for a new home mortgage to take over your old mortgage, a process which tends to be much faster and less paperwork than the original “purchase” mortgage.
There are three types of refinances: cash-out, cash-in and rate-and-term. Of course, speak to your lender about whether either of these options might apply to your circumstances.
The cash-out refinance is an option where the new mortgage is for a larger amount than the existing loan amount. Homeowners who want to convert their home equity into cash go with this option, especially if you need cash to invest in home improvements or other personal financial needs. These loans typically have a higher interest rate and banks can limit the cash-out amount or require higher credit scores to qualify.
If you’re a veteran, active service member, retiree, or qualifying family members who have a guaranteed VA loan, there is special a cash-out option available to reduce your current interest rate or transfer an adjustable-rate mortgage to a more beneficial fixed-rate option. For more information, I go into more detail on how you can benefit from refinancing a VA loan.
The cash-in refinance is the opposite of a cash-out refinance, where a homeowner pays a large portion of cash towards their mortgage balance. The cash-in refinance can lower the LTV ratio which can lower interest rates or avoid PMI. The higher the percentage a loan is to the value of the home, the riskier you’re perceived by a lender and you’ll likely see a higher interest rate. By adding more of your own cash, or “skin in the game,” the less risk you are to a lender, and will likely be rewarded with a lower interest rate.
The cash-in refinance is extremely common with homeowners who are trying to get rid of their monthly PMI payments by reaching the 20% threshold of their mortgage balance. The PMI is about 0.5 to 1.0% of the total home value, which is typically a few hundred dollars extra per month.
For example, if you buy a $300,000 home but require a mortgage to cover 95% LTV of the value, a cash-in refinance will allow you to put more money towards the principal loan balance to reduce the percentage.
The rate-and-term refinance is the most popular form of a refinance, and is great for homeowners looking to take advantage of lower mortgage rates than what they’re currently paying. For instance, if you bought a home in the 1980s the average interest rate was around 10%, whereas today’s average interest rate is 4.25%. The rate-and-term refinance will allow you to change your loan terms from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage and is a fantastic option for a homeowner whose credit rating has increased since the original home loan.
All three options allow you to pay your closing costs out of pocket so that you do not increase your loan amount, or roll them into the loan so you do not have to bring additional money to the closing table. There are pros and cons to each.
There are two things you must be absolutely certain of before refinancing: a) Knowing how long it will take for the monthly savings to pay for the costs of the refinance (closing costs) and b) knowing how much your home is worth today. The quicker you reach the break-even point of a refinance, the better!
Of course, you need to have a pretty good estimate of how much your home has appreciated before you approach your lender. Bring in Homebot.
Homebot is a wonderful tool that estimates home value based on your customized home information from your loan officer (me!) or your real estate agent. You can receive tips and tricks to save money and build wealth, such as personalized calculations of how much making an extra payment can save you money in the long run and how many months the payment will bring you closer to paying off your mortgage.
Of course, as we’re discussing refinancing, Homebot even notifies you of great refinancing options with scenarios and real-time savings calculations. Homebot’s refinancing tools can estimate how long a home improvement will take to break-even with the refinance costs.
Now, imagine if you Airbnb the remodeled room for income… Homebot crunches monthly cashflow calculations with advanced market rental data and will automatically track the break-even date!
Refinancing can be a bit intimidating if you’ve never been through the process. Who in their right mind would want to willingly go through a mortgage process again? The truth is interest rates change over time as do your own financial circumstances as you age. Refinancing is the process of finding a new loan to optimize your own financial gain by lowering interest, avoiding PMI, changing loan terms, and more.
If you’re looking for more information on the Denver real estate market to determine whether it’s time for you to refinance, take a look at my monthly metro Denver Market Trends assessment - for free, of course! Keeping up with the global, national, and local economic trends can be complicated if you don’t know which data to look for. Lucky for you, I enjoy getting lost in data and am always happy to share with you what to expect down the road.
If you think you’re overpaying for your home or know someone who might be, call The Rueth Team. Customer service and keeping the process easy is why we’re Denver’s top mortgage lender. We’ll take a look at your financial circumstances and home to figure out your best options.