To understand mortgage refinance, one must first understand debt refinance itself. Debt or loan refinance is simply replacing an existing debt with a new debt with better terms and interest rates.
Generally, refinancing is done with the idea of getting lower rates and more favorable terms however, borrowers or consumers should know that interest rates vary between each type of loan. For example, the interest on home and car advances is usually higher than purchase advances.
What is a Mortgage?
A mortgage or home advance is a credit taken out to purchase a piece of real estate such as land, house, factory, office, and so on. They are debt instruments that are secured by the properties being bought. Because of this, lenders consider it the safest type of loan to give out.
Home advances come with terms that are agreed upon by both the creditor and the borrower. However, due to factors like changes in financial status or better interest rates available in the market, a borrower over time may opt to refinance his loan. Consumers that engage in refinansiering av gjeld (which means debt refinancing in Norwegian) can potentially save a lot of money on their advances.
In refinancing a mortgage, a consumer may decide to make changes like:
- Decreasing monthly payment amounts
- Reducing the frequency of payments
- Extending the loan term, or;
- Negotiating the interest rates.
Types of Mortgages
Borrowers have unique financial status, which is why there are different types of housing loans aimed at meeting the unique needs of borrowers. Mortgage refinancing allows consumers the privilege of customizing existing loans since their financial status may change over time.
These are loans with fixed interest rates that are paid over the lifespan of the loan. The current market interest rates do not affect this type of mortgage, and this makes it a good choice for borrowers who want predictable monthly payments. They are usually long-term and can span as long as 30 years.
Consumers who take out this type of advance enjoy lower monthly payments but pay higher interests over time.
This type of advance offers borrower interests that change depending on the current market interest rates. Because the rates here are initially lower than that of the market rate, borrowers tend to choose this option. However, they risk paying significantly higher if the market rate rises in the future. Read this article to learn more about variable-rate mortgages.
Types of Mortgage Refinance
This is the most popular type of debt refinance because it allows consumers to make changes to existing loans based on their current financial status, or economic condition.
Rates and term refinance is commonly used by consumers who want to lower their interest rates, adjust the frequency of monthly payments, or either shorten or lengthen their loan term.
For example, a consumer who at the time of applying for a loan had a low credit score but now has a much higher one can refinance his debt to get better interest rates available to consumers with high credit scores.
Also, a borrower who can now afford to make higher monthly payments may opt to shorten the loan term, thereby paying a lower interest over time.
- Cash-out Refinancing
This type of refinancing also allows for a level of modification like the rate-and-term mortgage; however, the cash-out mortgage still differs.
In cash-out refinancing, a borrower takes a new credit that is bigger than the old one. The difference in the value of both loans is then paid out in cash to the borrower.
- Cash-in Refinancing
In this type of refinancing, a borrower deposits cash into his mortgage to either lower the monthly repayment amount or shorten the loan repayment period
- Reverse Mortgage
This is a type of refinancing that allows homeowners from the age of 62 upwards to take out loans that are equal in value to their home equity. These loans can be made by the lender as a one-time payment or in monthly installments, depending on the borrower’s choice. This type of refinancing is aimed at giving seniors access to cash flow they otherwise wouldn’t have.
In a reverse mortgage, no payment is made by the borrower until he or she dies, or moves out of the house which stands as collateral.
The lender then sells the house to pay the accumulated interest, loan principal, and other fees.
Types of Reverse Mortgages
- Monthly payments: Equal monthly payments are made to the borrower.
- One-time payment or lump sum: In this type of reverse mortgage, the loan amount is made at one. This is the only type of reverse mortgage with a fixed interest rate.
- Line of Credit: Here a line of credit is opened for the borrower. He only withdraws from it as needed. Here, interest is only paid on amounts withdrawn.
As earlier mentioned, this mortgage is only available to homeowners who are 62 years and above. However, such homeowners still need to meet certain requirements to qualify for the credit.
Homeowners must meet the following requirements:
- Be 62 years or older
- Go through an assessment to ensure they are healthy enough to make use of the loan
- Attend counseling with an approved property counselor from the Department of Housing and Urban Development
The Home used as collateral must also meet certain criteria like:
- It should be the homeowner’s principal residence
- It should not be a mobile home
- It should meet the Federal Housing Finance Authority (HFA) standards.
- No-Closing-Cost Refinance
Unlike in other types of refinancing, a borrower doesn’t have to pay the closing costs in this refinance option. Here, the closing cost is added to the principal.
This option is ideal for borrowers who intend to live in a house for not more than 5 years. By choosing the no-closing-cost option, they avoid paying this fee upfront.
With multiple refinancing options like these, borrowers can find and customize whichever one to meet their unique situations. They should make sure, however, to fully understand each option before making a decision. This is because certain fees like closing and transaction fees may be paid when refinancing mortgage debts.
Finally, a loan may contain a call provision that triggers a payment penalty if a borrower refinances it. To avoid complications like these, borrowers should employ services experts who specialize in housing finance.