Mortgage Q&A: âWhy are refinance rates higher?â If youâve been comparing mortgage rates lately in an effort to save some money on your home loan, you may have noticed that refinance rates are higher than purchase loan rates. This seems to be the case for a lot of big banks out there, including Chase, Citi, [&hellip
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You need to come up with some cash, fast. Maybe you have a leaky roof that desperately needs fixing or you need help paying for your kid’s first semester of college. But where do you turn?
If you’re a homeowner, you have options that involve tapping into your home equityâthe difference between what your home is worth and how much you owe on your mortgage.
There are three main ways to tap into home equity, but sorting through those options can be confusing. To help, we’ve boiled down what you need to know about some of the most common home financing optionsâcash-out refinance, home equity loan, and home equity line of creditâand how to determine which one is right for you.
How it works:Â A cash-out refinance replaces your existing mortgage with a new loan that’s larger than what you currently oweâand puts the difference in your pocket. With a cash-out refinance, you’re able to receive some of your home’s equity as a lump sum of cash during the process.
“This only works if you have equity in your home, either through appreciation or paying down your mortgage,” says David Chapman, a real estate agent and professor in Oklahoma.
Pros:Â If you need cold, hard cash in your hands, a cash-out refinance can help you get it. You can use this money for whatever you wantâupgrades to your house, even a vacation. Another positive? If interest rates are lower than when you first got your loan, you’ll get to lock in lower interest rates than you’re paying now.
“Now is the time to look at a cash-out refinance due to the low interest rate environment,” says Michael Foguth, founder of Foguth Financial Group.
Cons:Â You’ll have to pay closing costs when you refinance, though some lenders will let you roll them into your mortgage. The costs can range from 2% to 5% of your loan amount. And, depending on the circumstances, if interest rates have gone up, you could end up with a higher interest rate than your existing mortgage.
Also, you’ll be starting over with a new loan and, unless you refinance into a different type of mortgage altogether, you’ll ultimately be extending the time it takes to pay off your home loan. Even if you get a better interest rate with your new loan, your monthly payment might be higher.
When to get a cash-out refi: A cash-out refinance makes the most sense if you’re able to get a lower interest rate on your new loan. (Experts typically say that at least a 1% drop makes refinancing worth it.)
This option also works well for home renovations, since (ideally) you’ll be increasing your home’s value even more with the updates. In essence, you’re using your home’s existing equity to help pay for even more equity growth.
While you could use your cash-out refinance to pay for anything, financial experts typically advise that you spend the money wisely, on something that you see as a good investment, rather than on something frivolous.
How it works: Unlike a cash-out refi, which replaces your original loan, a home equity loan is a second additional mortgage that lets you tap into your home’s equity. You’ll get a lump sum to spend as you see fit, then you’ll repay the loan in monthly installments, just as you do with your first mortgage. The home equity loan is secured by your house, which means that if you stop making payments, your lender could foreclose on the home.
Pros:Â With a home equity loan, you get a huge chunk of cash all at once. A home equity loan lets you keep your existing mortgage, so you don’t have to start over from year one. Your interest rate is typically fixed, not adjustable, so you know exactly what your monthly payment will be over the life of the loan. And, another plus is your interest may be tax-deductible.
Cons: Compared with a cash-out refinance, a home equity loan will likely have a higher interest rate. Home equity loans also come with fees and closing costs (though your lender may opt to waive them). Another downside? You’re now on the hook for two mortgages.
When to get a home equity loan: A home equity loan makes more sense than a cash-out refi if you’re happy with your current home loan, but you still want to tap into your home equity, says Andrina Valdes, chief operating officer of Cornerstone Home Lending. It can also be handy for home renovations that add value, though of course you’re free to use it however you want.
“A home equity loan could be used in cases where you may already have a low mortgage interest rate and wouldnât necessarily benefit from a refinance,” says Valdes.
How it works:Â A home equity line of credit, aka HELOC, is similar to a home equity loanâit’s a second mortgage that lets you pull out your home equity as cash. With a HELOC, however, instead of a lump sum amount, it works more like a credit card. You can borrow as much as you need whenever you need it (up to a limit), and you make payments only on what you actually use, not the total credit available.
Since it’s a second mortgage, your HELOC will be treated totally separately from your existing mortgage, just like a home equity loan.
“With a HELOC, the homeowner will need to make two payments each monthâtheir mortgage payment and the HELOC payment,” says Glenn Brunker, mortgage executive at Ally Home.
Pros: You borrow only what you need, so you may be less tempted to spend this money than a lump-sum home equity loan. You pay interest only once you start borrowing, but you can keep the line of credit open for many years, which means your HELOC can act as a safeguard for emergencies.
HELOCs typically have lower interest rates than home equity loans, and they typically have little or no closing costs. (Again, your lender might offer to waive these fees.) HELOCs are often easier to get because they’re subject to fewer lending rules and regulations than home equity loans.
Cons:Â HELOCs usually have adjustable interest rates, which means you can’t necessarily predict how much your monthly payment will be. Most HELOCs typically require the borrower to pay interest only during what’s known as the draw period, with principal payments kicking in later during the repayment period. If you don’t plan properly or you lose your job, you might be caught off guard by these higher payments down the road. As is the case with other second mortgages, your bank can foreclose on your house if you stop making payments.
“Once a HELOC transitions into the repayment period, the borrower is required to make both principal and interest payments,” says David Dye, CEO of GoldView Realty in Torrance, CA. “Many borrowers forget about this transition and are often startled by the sudden increase in minimum payments.”
When to get a HELOC: A HELOC makes the most sense if you want the flexibility and peace of mind of knowing you can easily access money in the future, says Mindy Jensen, a real estate agent in Colorado.
“A HELOC is great to have just in case,” says Jensen. “You have access to it, but are not committed to taking it or paying for money you don’t have an immediate need for.”
And compared with an actual credit card, a HELOC has a much lower interest rate, so it’s likely a cheaper financing option for you.
The post Need Cash? 3 Ways To Tap Your Home Equityâand Which One’s Right for You appeared first on Real Estate News & Insights | realtor.com®.
Source: realtor.com
If and when you take out a mortgage, youâll be faced with an important choice. To pay or not pay mortgage points. In short, those who pay points should hypothetically secure a lower interest rate than those who do not pay points, all else being equal. Thatâs because mortgage points, at least the ones that [&hellip
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These days, things are changing so fast, itâs tough to keep up. Thatâs especially true in the mortgage industry, where interest rates and the overall home loan landscape are shifting with such head-spinning speed, it’s easy for outdated information to circulate, leading home buyers and homeowners astray.
You may have heard, for instance, that everyone can score a record-low interest rate, or that refinancing is a no-brainer, or that mortgage forbearance means you don’t have to pay back your loan, ever. Sorry, but none of these rumors is trueâand falling for them could cost you dearly.
To help home buyers and homeowners separate fact from fiction, we asked experts to highlight some rampant mortgage mistruths out there today. Whether you’re looking to buy or refinance, these are some reality checks you’ll be glad to know.
Thereâs a lot of buzz about record-low mortgage interest rates lately. Most recently, a 30-year fixed-rate mortgage dropped to 2.88% for the week of Aug. 6, according to Freddie Mac.
This is great news for borrowers, but here’s the rub: “Not everyone will qualify for the lowest rates,” explains Danielle Hale, chief economist at realtor.com®.
So who stands to get the best rates? Namely, borrowers with a good credit score, Hale says. Most lenders require a minimum credit score of about 620. Some lenders might require an even higher threshold (more on that later).
Your credit score isn’t the only factor affecting what interest rate you get. It also depends on the size of your down payment, type of home, type of loan, and much more. So, keep your expectations in check, and make sure to shop around to increase the odds you’ll get a good rate.
Many assume today’s low interest rates mean that getting a mortgage will be a breeze. On the contrary, these low rates mean just about everyone is trying to get a mortgage, or refinance the one they have. This glut of applicants, combined with the uncertain economy, means some lenders may actually tighten loan requirements.
In fact, a realtor.com analysis found that 5% to 20% of potential borrowers may struggle to get a mortgage because of these stricter standards. And getting a mortgage could become even tougher if the recession gets worse.
For example, some lenders may also require higher minimum credit scores and larger down payments. In April, JPMorgan Chase began requiring a 700 minimum credit score and 20% down payment.
Jason Lee, executive vice president and director of capital markets at Flagstar Bank, says some lenders arenât offering the loans that are considered riskierâsuch as jumbo loans, which exceed the conforming loan limit (for 2020, that max is $510,400).
“There arenât as many loan products available,” Lee says.
And even if you do manage to get a loan, it may take longer than you’d typically expect.
âBased on low rates and a high volume of refinances, loans are taking longer to complete from application to closing,â says Staci Titsworth, a regional mortgage manager for PNC Bank.
As such, borrowers should ask their lender how long the process will take to close, and make sure theyâre aware of the expiration date on the interest rate theyâve locked inâsince with rates this low, they could go up.
âMost lenders are locking in the customerâs interest rate so itâs protected from market fluctuations,” Titsworth adds.
âWith mortgage rates hovering near record lows, a refinance can make sense and can help free up monthly cash flow,â Hale says.
Still, not everyone should refinance. Homeowners should make sure to take a good hard look at their situation to see whether it makes sense for them.
For one, it will depend on your current interest rate. If it’s low already, it may not be worth the troubleâparticularly since refinancing comes with fees amounting to around 2% to 6% of your loan amount.
Given these upfront costs, refinancing often makes sense only if you plan to remain in your house for a while.
In general, ârefinancing is a good idea for homeowners who plan to live in the same home for several years, because they will reap the monthly savings over a longer time period,” Hale explains.
Many people assume that you can find your dream home first, then apply for the mortgage. But that’s backwardânow more than ever. Today, your first stop when shopping for a house should be a mortgage lender or broker, who can get you pre-approved for a home loan.
For âa buyer in a competitive market, it’s typically essential to have pre-approval done in order to submit an offer, so getting it done before you even look at homes is a smart move that will enable a buyer to move fast to put an offer in on the right home,â Hale says.
Mortgage pre-approval is all the more essential in the era of the coronavirus pandemic. Why? Because many home sellers, leery of letting just anyone tour their home, want to know a buyer is seriousâand has the cash and financing to make a firm offer. As such, some real estate agents and sellers require a pre-approval letter before a potential buyer can view a home in person.
Nonetheless, according to a realtor.com survey conducted in June of over 2,000 active home shoppers who plan to purchase a home in the next 12 months, only 52% obtained a pre-approval letter before beginning their home search, which means nearly half of home buyers are missing this crucial piece of paperwork.
Aside from getting their foot in the door of homes they want to see, home buyers benefit from pre-approval in other ways. Since pre-approval lets you know exactly how much money a lender will loan you, it also helps you target the right homes within your budget.
After all, as Lee points out, âYou donât want to get your heart set on a home only to find out you canât afford it.â
The record unemployment caused by the COVID-19 pandemic means millions of Americans have struggled to pay their mortgages. To get some relief, many have been granted mortgage forbearance.
Nearly 8% of mortgages, or 3.8 million homeowners, were in forbearance as of July 26, according to the Mortgage Bankers Association.
The problem? Many mistakenly assume that mortgage forbearance means you won’t have to pay your loan, period. But forbearance means different things for different homeowners, depending on the terms of the mortgage and what type of arrangement was worked out with the lender.
âForbearance is not forgiveness,â Lee says. âRather, itâs a timeout from having to make a mortgage payment where your servicerâthe company you send your mortgage payments toâwill ensure that negative impacts to your credit report and late fees will not occur. However, because forbearance is not forgiveness, you will need to reach some sort of resolution with your loan servicer about the missed payments.â
The paused payments may be added to the back end of the loan or repaid over time.
âIt does not forgive the payments, meaning the borrower still owes the money,â Hale says. âThe specifics of when payments need to be made up will vary from borrower to borrower.â
The post 5 Rampant Mortgage Myths You’ll Hear These DaysâCompletely Debunked appeared first on Real Estate News & Insights | realtor.com®.
Source: realtor.com
