How Home Equity And Loan
No matter what type of mortgage you have, your homes equity plays a big role in your ability to refinance. Lenders will look at your homes equity and loan-to-value ratio to determine if youre eligible for mortgage refinancing. Heres how each of these work:
- Equity is the amount your home is currently worth, minus what you currently owe on your existing mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, your homes equity is $100,000.
- LTV ratio is how much you owe on the mortgage divided by the current value of the home. For example, if your home is worth $300,000 and you owe $200,000, you would divide $200,000 by $300,000 to get an LTV of 66.67%.
Typically, you only need 5% equity for a conventional refinance. But keep in mind that if your LTV is less than 20%, youll pay higher fees, have a higher interest rate, and have to pay for mortgage insurance.
If you have an FHA loan, theres an FHA streamline program that lets you refinance even if you have negative equity. However, mortgage insurance is required.
Will I Qualify For A Mortgage
To know if you will qualify for a mortgage based on your current income, try our Mortgage Required Income Calculator. You will need to supply information about the cost of the Mortgage, down-payment, interest rates, and other liabilities, after which the calculator responds with the required minimum income to qualify for the loan.
Refinancing To Tap Equity Or Consolidate Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt.
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.
Another justification is that the interest on mortgages is tax-deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision nor is spending a dollar on interest to get a 30-cent tax deduction. Also note that since the Tax Cut and Jobs Act went into effect, the size of the loan on which you can deduct interest has dropped from $1 million to $750,000 if you bought your house after Dec. 15, 2017.
Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring automatic financial prudence. Take this step only if you are convinced you can resist the temptation to spend once the refinancing relieves you from debt.
It takes years to recoup the 3% to 6% of principal that refinancing costs, so don’t do it unless you plan to stay in your current home for more than a few years.
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Have The Cash To Pay Closing Costs Or Roll Them Into Your New Loan
Closing costs generally range from 2% to 5% of the loan principal. On average, the closing costs on a mortgage refinance are about $5,000, according to Freddie Mac. While you dont have to have cash on hand to cover your closing costs, paying the costs upfront could help you save money on interest charges over time.
If you dont have enough cash saved to cover your closing costs, you might be able to take advantage of a no-closing-cost refinance.
There are two types of no-closing-cost refinancing:
How much could I save by paying my closing costs upfront?
That means you could have saved over $3,000 by paying your closing costs upfront.
What To Do If You Dont Qualify To Refinance Your Mortgage
Unfortunately, not everyone will qualify for mortgage refinancing. Here are a few reasons why your application could be denied:
- Your credit score is too low: If you have poor credit, focus on improving it. Be sure to make all of your monthly payments on time and pay down existing debt.
- You have a high DTI: If your DTI is too high, try to reduce your monthly obligations by paying down debt like credit card balances, personal loans, or car loans. If you have high minimum payments, a debt consolidation loan might help reduce your monthly payments and lower your DTI.
- You have a lien on your home: A mortgage itself is a voluntary lien. But if you have an involuntary lien , youll need to clear the lien before you can refinance. You can search for liens at the county recorders office or with a title company. Once youve resolved a lien , be sure to file a notarized Release of Lien form to clear your title.
- Youre underwater on your mortgage: Being underwater on your mortgage means you owe more than your home is worth. If this is the case, look into programs designed for people with declining home values. The Federal Housing Finance Agencys Home Affordable Refinance Program and Freddie Macs Enhanced Relief Refinance Mortgage program are two options if youre underwater on your mortgage and want to refinance your home.
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Refinance To Access Home Equity As Cash
As you pay off your mortgage, you’ll gradually build up equity in your home. Your home equity is calculated by taking the current value of your home, then subtracting from that your outstanding mortgage amount. Many lenders will allow you to borrow from them, using your home equity as security for the loan – this is what accessing your equity is all about.
If youâre considering a refinance to access your home equity, youâre not alone. According to the Canadian Association of Mortgage Professionals, last year 10% of Canadian mortgage holders accessed an average $49,000 of equity from their homes. The large majority of this equity was used for debt consolidation or home renovation.
If refinancing for equity, the first thing you want to determine is the maximum amount of equity you can access. In Canada, mortgage holders can access a maximum of 80% of their home’s value, less any outstanding mortgage balance. Unfortunately, accessing this equity comes at a cost â your lender will change you a penalty for breaking your mortgage early. Use Ratehub.caâs refinance calculator to determine your maximum equity and the corresponding penalty. If youâre refinancing in a falling interest rate environment, you may be able to take advantage of interest savings as a bonus.
How Much Does It Cost To Refinance
Refinancing your mortgage loan can save you considerable money, which does not mean there is no cost to refinancing. According to Freddie Mac, the average closing costs on a refinancing loan are about $ 5,000. Your lender, the size of your loan and where you live can determine how much you pay.
Those costs include several fees:
- Basic fees
- Underwriting fees
- Other charges
Depending on your current lender, you may need to pay a prepayment penalty on your existing mortgage when you refinance.
Mortgage points are another charge that your lender may charge. Each point is worth 1% of the mortgages total, so a point on a $ 200,000 mortgage can cost $ 2,000. Lenders usually allow you to buy points to lower your mortgages interest rate. This is known as rate buying.
Some lenders may offer refinancing of any cost, but that does not mean that it does not include costs. Instead, your lender will roll over the costs to your new mortgage loan instead of paying you upfront. Due to interest charges on these costs you may pay more in the aggregate.
Refinancing a mortgage does not have to be overwhelming. Following the necessary steps will help ensure a smoother process when refinancing your mortgage loan.
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When It Makes Sense To Consider Mortgage Refinancing
The best time to consider a mortgage refinance is when interest rates sink below the level they were when you closed on your original loan. As a rule of thumb, its worth considering a refinance if you can lower your interest rate by at least half a percentage point, and youre planning to stay in your home for at least a few years.
Another good opportunity is when your credit improves to the point where you qualify for a new loan that has a lower interest rate.
There are a variety of reasons to refinance that can make financial sense, including:
- To reduce your monthly mortgage payment by securing a lower interest rate
- When the costs of refinancing can be recouped in a reasonable time period
- To get a shorter term, such as a 15-year loan to replace a 30-year mortgage, so you can pay it off faster and pay a lot less in total interest
- To switch from an adjustable-rate mortgage to a fixed-rate loan a smart move if you think rates are going to go up in the future
- To extract cash from your homes equity in a cash-out refinance
- To eliminate mortgage insurance if youve built up 20 percent equity in your home
Sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators.
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Super: TD presents Asking for a FriendWhy Would You Refinance?
Welcome to Asking for a Friend. Lets see who could use some financial advice today.
Dear Asking for a Friend,My neighbour was talking about refinancing her home so she can borrow more money to build an extension, and it got me wondering…what exactly IS refinancing and why do people refinance?Sincerely,Next Door Nancy
I hear you, Nancy. First, what is refinancing?
Refinancing means renegotiating your existing mortgage loan agreement, usually to use any available equity in your home.
So what does that mean in real terms? Let’s say the value of your home is $500,000.
80% of home value 0.8 x $500,000 $400,000Outstanding balance of your mortgage $300,000How much you can borrow $100,000
Subject to the bank’s approval, you could borrow up to 80% of the value of your home less the outstanding balance of your mortgage.
That means if your home is worth $500,000 and you have an outstanding balance of $300,000 on your mortgage, you may be able to borrow an additional $100,000 .
So WHY do people refinance?
Super: To consolidate debts.
Super: Provide flexibility to pay for big ticket items.
Book an appointment and get financial advice for what you feel is most essential, through TD Ready Advice
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You Want To Pay Off Your Home Early
If you decide to shorten your repayment term , youll have a higher monthly payment but you also might be able to pay off your loan faster. With a shorter loan term, youll be paying much less in interest charges, which will bring the overall cost of your mortgage down.
Find Out: How to Pay Off Your Mortgage Early
Change Your Term Or Get A Different Mortgage
Sometimes your needs change and you may have to pay off your mortgage faster or switch your mortgage type. If you get a bonus at work and want to put it towards your mortgage, consider refinancing into a term with more prepayment privileges, such as an open mortgage. Or, if interest rates have dropped, and you plan to stay in your home for the long haul, you can refinance to a fixed-rate mortgageOpens a popup. to lock in the lower rates.
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The 7 Types Of Documents You Need For A Refinance
Get these documents together before you start the refinance process to streamline your loan.
With so many people filing for refinance these days, it can take a lot longer than you’d expect to have your refinance go through. You don’t have control over how backed up your lender is with applications. However, you can speed things up on your end by gathering all of the appropriate documents before starting the refinance process.
Think back to your original mortgage and all of the documents that you had to gather. For a refinance, the documentation for your refinance is pretty much the same. The overall purpose is to prove different aspects of your finances to your lender.
All lenders have slightly different requirements, but you can bet that they’ll probably ask for documents in the following seven categories:
1) Proof of income: Proving your income generally requires the following documents.
The last 30 days of pay stubs
Your current tax returns
Tax forms like W-2’s and 1099s
2) Insurance: You’ll probably need to produce documentation for two kinds of insurance:
Homeowners insurance, to verify that you have enough current coverage for your home.
Title insurance, to help your lender to check the taxes, the names on the title, and the legal description of the property.
3) Credit information: You’ll need a recent credit score and credit reports.
Your current mortgage
6) Appraisal: Your lender will probably also ask for a current appraisal of the house.
What Will Refinancing Cost
It is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees. These expenses are in addition to any prepayment penalties or other costs for paying off any mortgages you might have.Refinancing fees vary from state to state and lender to lender. Here are some typical fees and average cost ranges you are most likely to pay when refinancing. For more information on settlement or closing costs, see the Consumer’s Guide to Settlement Costs.
Tip: You can ask for a copy of your settlement cost papers one day in advance of your loan closing. This will give you a chance to review the documents and verify the terms.
Application fee. This charge covers the initial costs of processing your loan request and checking your credit report. If your loan is denied, you still may have to pay this fee. Cost range = $75 to $300Loan origination fee. The fee charged by the lender or broker to evaluate and prepare your mortgage loan. Cost range = 0% to 1.5% of the loan principalPoints. A point is equal to 1 percent of the amount of your mortgage loan. There are two kinds of points you might pay. The first is loan-discount points, a one-time charge paid to reduce the interest rate of your loan. Second, some lenders and brokers also charge points to earn money on the loan. The number of points you are charged can be negotiated with the lender. Cost range = 0% to 3% of the loan principal
Appraisal fee.Cost range = $300 to $700Inspection fee.Homeowner’s insurance.
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Know Your Homes Equity
The first qualification you will need to refinance is the equity in your home. At the end of the first quarter of 2020, home values were still on the rise in the U.S. according to the Federal Reserve Bank of St. Louis. However, as of the third quarter of 2020, the median sales price of homes sold in the U.S. was slightly down as a result of the economic recession caused by the global COVID-19 pandemic.
Furthermore, according to data reported by CoreLogic at the end of the third quarter of 2020, U.S. homeowners with mortgages saw their equity increase by a total of $1 trillion since the third quarter of 2019, an increase of 10.8%, year over year.
Still, some homes have not regained their value, and some homeowners have low equity. Refinancing with little or no equity is not always possible with conventional lenders. However, some government programs are available. The best way to find out if you qualify for a particular program is to visit a lender and discuss your individual needs. Homeowners with at least 20% equity will have an easier time qualifying for a new loan.
What Do I Do To Refinance
The first thing you must do when considering refinancing is to consider exactly how you will repay the loan. If the home equity line of credit is to be used for home renovations in order to increase the value of the house, you may consider this increased revenue upon the sale of the house to be the way in which you will repay the loan. On the other hand, if the credit is going to be used for something else, like a new car, education, or to pay down credit card debt, it is best to sit down and put to paper exactly how you will repay the loan.
Also, you will need to contact your mortgage company and discuss the options available to you, as well as discussing with other mortgage companies the options they would make available. It may be that there is not a current deal which can be met through refinancing that would benefit you at the moment. If that is the case, at least you now know exactly what you must do in order to let a refinancing opportunity best benefit you. When refinancing, it can also benefit you to hire an attorney to decipher the meaning of some of the more complicated paperwork.
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