Mortgage Refinancing: Figuring Out Your Options

As home values in many markets have rebounded from the crisis, the opportunity for homeowners to refinance is ever more present, especially considering how low the interest rates have been. One question consumers often ask is what their homes have to be appraised at in order to refinance their home. So let's take a look at how to figure that out.

First, it's important not to overlook the Making Home Affordable program. While you'll need to provide supporting financial documentation, there are no loan-to-value restrictions with this refinance. Because there are no loan-to-value restrictions, no value calculation is necessary. So how do you know if you qualify?

Under HARP 2, here are the requirements: If the loan is owned by Fannie Mae or Freddie Mac; the loan was delivered to either mortgage aggregator by June 1, 2009, or before; a consumer has not previously used the program; and the loan is not a FHA Loan. Within these guidelines, most homeowners are automatically eligible. First things first, homeowners can see which entity owns their loan by researching Fannie Mae's site or Freddie Mac's site.

2 Simple Ways to Run the Calculation: If you're not eligible for HARP 2, you'll be subject to standard loan-to-value guidelines for the purposes of securing a new mortgage loan. For this example, let's assume you have a conforming conventional loan -- which is a loan with a limit of $417,000 (or even as high as $625,500 in some markets).

On most homes, taking your principal balance and dividing it by .8 will give you the minimum value your house needs to be appraised at, assuming you're not interested in paying monthly private mortgage insurance (most consumers aren't, if they can avoid it). As such, the calculation does not factor in monies for closing costs. If you take approximately 1.25 percent of your loan amount and add that to your principal balance, then divide by 0.8, that can give you a better barometer of needed value -- if you plan to finance the fees. If you can cash-finance the closing costs, the 0.8 calculation remains viable.

Cash Financing Closing Costs: Using a principal balance of $301,234, take $301,234 ÷ 0.8 = $376,542 as the lowest value your house would have to appraise at in order to refinance without mortgage insurance, and paying cash for the closing costs.

Rolling Fees Into The Loan: Conversely, by taking the principle balance of $301,234 x 1.25% = $3765 (1.25 percent refinance closing costs amount is a bit high, but being conservative). $301,234 + $3765 equals a new loan amount of $305,000, rounding up. $305,000 ÷ .8 = $381,250 as the lowest value needed, rolling the fees into the loan.

Different Types of Occupancy: If the principle balance on the property is greater than $417,000, in most markets, the numbers can change based on the maximum loan limit in the county in which the property is located. For our purposes, these calculations are intended for traditional conventional financing on loans up to $417,000 (assuming you're not HARP 2 eligible).

Primary Home
• Worst-case calculation: Divide principal balance by 0.95. This is indicative of conventional 95 percent loan-to-value financing. In such a scenario, plan on having to pay mortgage insurance.
• Best-case calculation: Divide principal balance by 0.8. This is indicative of conventional 80% loan-to-value financing.

Second/Vacation Home
• Worst-case calculation: Divide principal balance by 0.9. This is indicative of conventional 90% loan-to-value financing. Expect to pay PMI.
• Best-case calculation: Divide principal balance by 0.8. This is indicative of conventional 80% loan-to-value financing.

Investment Home
• Best- and worst-case calculation: Divide principal balance by 0.8, which is indicative of conventional 80% loan-to-value financing (20% equity or more is required on investment properties, as mortgage insurance is unavailable for this kind of property).

Calculating these numbers at the start of the process can help you get a wider and more accurate range of options for refinancing, as it gives you the approximate loan-to-value to tell a loan officer when you're seeking rate and payment choices.

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How can I decide if refinance is right for me?

Your home may be the largest asset you have. Before deciding to refinance, be sure to consider the following so you can make an informed decision.

Determine your estimated costs

When you refinance, you may pay:

• An origination charge, which may include fees such as application or processing.
• Discount points to lower your interest rate further. (May be tax deductible. Consult your tax advisor regarding deductibility).
• A prepayment penalty if your current loan has a penalty for early payoff.
• Other settlement charges such as appraisal, credit report, title search, and title insurance fees.

If you’re an existing Wells Fargo Home Mortgage customer, you may be eligible for a streamlined refinance with no closing costs, application, or appraisal fees.1

Tip 

You may be eligible for a reduced reissue or refinance rate on your title insurance if the property’s current policy was issued recently. Ask your title or closing agent if you qualify.

Assess how much longer you’ll stay in the home
If you plan on owning the home for an extended period of time, and the interest rates are 1/2% to 5/8% lower than your current rate, refinancing may be the right choice for you.

Your break-even point occurs when your savings from your new loan equals the cost of getting the new loan. 

Determine your breake point

Your break-even point occurs when your 
savings from your new loan equals the 
cost of getting the new loan 

WHat are the benefits of refinance ?

When interest rates are low, you might consider refinancing your mortgage. Refinancing may allow you to replace your current loan with a new mortgage that has better terms. Here are some of the potential benefits of a refinance.

Increased cash flow

• Your loan’s monthly payment typically decreases with a lower interest rate.
• With a lower payment, you can use the extra funds for retirement savings, paying other debts, saving money for college, or other purposes.

Potential to switch to a different loan type

• If you have an adjustable-rate (ARM) or a balloon mortgage, reduced interest rates may make a fixed-rate mortgage more desirable, especially if you want the stability of an interest rate that does not change over time.
• If you have a long time left on your mortgage, lower interest rates may make it possible to switch to a shorter-term mortgage.
  • You can pay the principal balance down and build equity faster.
  • You may pay less interest over the life of the loan with a shorter term loan.
• If you have a jumbo loan you may be able to refinance to a "blended jumbo" (Mortgage + Home Equity Financing). 

Opportunity to access the equity in your home

• While you’re lowering your interest rate, you may want to consider using the equity in your home to pay for major purchases or to make home improvements. This type of loan is known as a cash-out refinance.
• See how much available equity you have for a cash-out refinance with a free refinance analysis.

Refinancing can be effective if you consider your refinancing goals and select the option that may be right for you. Consider the following.
If your goal is to:

Reduce monthly payments

• You can reduce your payment by refinancing when interest rates drop sufficiently below your existing rate.
• As another option, you can refinance to a longer term mortgage to lower your monthly payment, though you will raise your overall interest costs.
• With either option, you can pay discount points to further reduce your interest rate.

Repay your mortgage faster

• Refinance to a shorter term to raise monthly payments for faster repayment and reduce your overall interest payments.
• If interest rates are low enough, you may be able to get a shorter-term loan for faster repayment without a significant increase in your monthly payment.

Access home equity while lowering payments or repaying faster

• A cash-out mortgage refinance can affect your mortgage interest rate and provide funds for home improvement, debt consolidation, and other major expenses.

Plan for an adjustable-rate mortgage (ARM) interest rate change

• You can explore your options before your payment adjusts to see if refinancing may be right for you.

Access the available equity in your home without reapplying (if you qualify)

• You complete only one application, work with a single contact, and attend one simultaneous closing transaction for both products.
• You can choose from a variety of financing options.

Source: www.Wellsfargo.com