Cash-Out Refinance

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Apache is functioning normally

In late August, when mortgage rates were well over 7% and beginning their climb toward 8%, Jeff Anderson had a client do what few other homeowners are willing to do: She gave up her 4% mortgage rate.

You’re probably thinking, “Uh, why on earth would she do that?” 

The client wanted to pay off $30,000 in consumer debt, handle home improvement projects and help her daughter start college, said Anderson, a longtime mortgage advisor in Southern California. By doing a cash-out refi, she landed a $340,000 FHA loan and locked in a 6.9% mortgage rate.

“At closing, my client will get $10,000 of cash up-front. We are paying off her current mortgage balance of $280,000 while maintaining more than $200,000 in home equity,” said Anderson, who runs the mortgage broker shop Rancho Capital Home Loans. “She would be saving $550 a month and lower[ing] her debt ratio to slightly below 50% from the current 57%. There is no shortage of cash for her right now.” 

A cash-out refi replaces the homeowner’s current mortgage with a new, larger loan under different terms from the original loan. In return, a borrower receives the cash difference between the new amount borrowed and the old mortgage balance.

When mortgage rates were at historical lows during 2020 and 2021, a record number of homeowners tapped their equity through cash-out refis and still managed to secure low rates on the new mortgage. In 2021, more than $1.2 trillion in cash-out refis were executed.

But since the cost of borrowing has skyrocketed due to the Fed rate hikes, there are far few homeowners willing to give up their sub 4% mortgage and refinance into a mortgage that’s at least 300 basis points higher.

Even though about 30% of mortgage applications are for refinancings, nearly 90% of current mortgage originations today are purchase loans.

But for some low FICO borrowers who need a lump sum of cash, a cash-out refinance can be a sensible option, thanks to their accrued home equity. (The average tappable home equity for homeowners was slightly over $200,000 in August 2023, up from $126,606 in August 2020, according to data from Intercontinental Exchange.) 

Of the overall equity withdrawals, home equity line of credit (HELOC) took up more than half (52%) of the share in Q2, with cash-out refis accounting for the rest. But, the profile of cash-out borrowers made up roughly 90% of all refis during that period, ICE noted. 

The average cash-out borrower looking to refinance had a balance of about $165,000 in August, well down from where it’s been over the past couple of years, Andy Walden, ICE’s vice president of enterprise research, said in an interview.

“They (cash-out refi borrowers) are not not giving up a record low interest rate on a significantly large balance, so they’re okay and are willing to give up that low rate that they have right now. About $100,000 on average is what they’ve been borrowing in recent months. They can get that equity withdrawal at a slightly better interest rate than what you could withdraw equity on a HELOC,” said Walden. 

Cash-out refis are not a fit for every borrower. 

There are alternative ways to tap into home equity without doing a cash-out refi. Home equity loans and HELOCs allow the borrower to borrow against the home equity without having to give up its existing mortgage. They are second mortgages, which means borrowers take them out in addition to their current mortgage.

The cash-out refi option works best for low credit score borrowers with at least 20% equity in the home to qualify, said John Ortega, a loan originator at Mutual of Omaha Mortgage.

Generally, borrowers usually need a debt-to-income (DTI) ratio of 40% to 50% or less and could qualify for a cash-out refi with a credit score of 620. Credit scores for FHA loan borrowers could go down even lower.

Some borrowers are handcuffed from negotiating a HELOC –  the product typically requires a higher credit score – or other type of secondary lending, and are often left with no other option but to refinance.

For the clients that choose to get a cash-out refinance mortgage, Ortega shows how much they could save per month and potentially put the extra cash into paying off the mortgage sooner. 

“When you start to do the consolidation of all this debt, their credit scores will improve rather quickly and put them in a much better position for the future. That’s what it’s really about, it’s not living in the right now. It’s living in what’s going to happen down the road,” Ortega said.

The cash-out refi market is still tiny relative to purchase lending, but every opportunity to help a client is precious.

“It’s a tough gig. A lot of borrowers are reluctant to give up their low mortgage rates,” Ortega said. “But if I can free up their cash flow, the mortgage rate is higher but they have extra money to work with, put it back to the mortgage and get out of debt sooner.” 

Source: housingwire.com

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Apache is functioning normally

Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.

Mortgage rates are likely to stay at frightening levels even after the Halloween season is over. But we may finally see 30-year mortgage rates dip back below 7% next year, Fannie Mae says.

Rates eased somewhat late last week after spiking above 7.5%, but they’ve trended back up again today.

In Fannie Mae’s October housing forecast, researchers predicted that mortgage rates will end 2023 around 7.3%, and that they won’t drop below 7% until the second half of 2024. This means that mortgage affordability will likely continue to be a problem for hopeful homebuyers for the foreseeable future.

“In many ways, the housing market experienced four years of business in a two-year period between mid-2020 and mid-2022,” Doug Duncan, Fannie Mae’s senior vice president and chief economist, said in a press release. “With ongoing affordability constraints and rising mortgage rates, much of that activity has essentially been given back. We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024.”

Buyers may have more luck closer to the end of 2024, when Fannie Mae researchers believe rates could drop to 6.7%, nearly a full percentage point lower than the 2023 highs.

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Use our free mortgage calculator to see how today’s mortgage rates will affect your monthly and long-term payments.

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  • Paying a 25% higher down payment would save you $8,916.08 on interest charges
  • Lowering the interest rate by 1% would save you $51,562.03
  • Paying an additional $500 each month would reduce the loan length by 146 months

By plugging in different term lengths and interest rates, you’ll see how your monthly payment could change.

30-Year Fixed Mortgage Rates

Last week, the average 30-year fixed mortgage rate was 7.57%, according to Freddie Mac. This is an eight-basis-point increase from the week before.

The 30-year fixed-rate mortgage is the most common type of home loan. With this type of mortgage, you’ll pay back what you borrowed over 30 years, and your interest rate won’t change for the life of the loan.

The lengthy 30-year term allows you to spread out your payments over a long period of time, meaning you can keep your monthly payments lower and more manageable. The trade-off is that you’ll have a higher rate than you would with shorter terms or adjustable rates. 

15-Year Fixed Mortgage Rates

Average 15-year mortgage rates were 6.89% last week, according to Freddie Mac data. This is a 11-basis-point increase from the previous week.

If you want the predictability that comes with a fixed rate but are looking to spend less on interest over the life of your loan, a 15-year fixed-rate mortgage might be a good fit for you. Because these terms are shorter and have lower rates than 30-year fixed-rate mortgages, you could potentially save tens of thousands of dollars in interest. However, you’ll have a higher monthly payment than you would with a longer term.

Are Mortgage Rates Going Up?

Mortgage rates started ticking up from historic lows in the second half of 2021 and increased significantly in 2022. But mortgage rates are expected to trend down this year.

In the last 12 months, the Consumer Price Index rose by 3.7%. As inflation comes down, mortgage rates should, too. But we’ll likely need to see price growth slow further before we see substantial drops in rates.

For homeowners looking to leverage their home’s value to cover a big purchase — such as a home renovation — a home equity line of credit (HELOC) may be a good option while we wait for mortgage rates to ease. Check out some of our best HELOC lenders to start your search for the right loan for you.

A HELOC is a line of credit that lets you borrow against the equity in your home. It works similarly to a credit card in that you borrow what you need rather than getting the full amount you’re borrowing in a lump sum. It also lets you tap into the money you have in your home without replacing your entire mortgage, like you’d do with a cash-out refinance.

Current HELOC rates are relatively low compared to other loan options, including credit cards and personal loans. 

How Do Fed Rate Hikes Affect Mortgages?

The Fed has been increasing the federal funds rate to try to slow economic growth and get inflation under control.

Mortgage rates aren’t directly impacted by changes to the federal funds rate, but they often trend up or down ahead of Fed policy moves. This is because mortgage rates change based on investor demand for mortgage-backed securities, and this demand is often impacted by how investors expect Fed hikes to affect the broader economy. 

As inflation comes down, mortgage rates should, too. But the Fed has indicated that it’s watching for sustained signs of slowing inflation, and it’s not going to lower rates again any time soon.

Molly Grace

Mortgage Reporter

Source: businessinsider.com

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Home equity is one of the main benefits of owning a home. Renting puts money into a landlord’s pocket, but owning a home helps you increase the value of your investment over time. When you do build home equity, it opens up cash-out options that can be used for home improvements, education expenses, paying off debt or other projects.

How can you tap into this valuable equity and turn it into cash? Typically you can access equity through a second mortgage, such as a home equity line of credit (HELOC) or a one-time home equity loan, or by using an alternative option like a cash-out refinance.

Let’s take a look at what a HELOC is, how it works and how it differs from other products that allow you to take advantage of the equity you’ve built in your home, like a home equity loan or cash-out refinancing.

What Is a Home Equity Line of Credit (HELOC)?

A home equity line of credit allows you to take out funds based on your home equity and pay it back with a variable interest rate. You can think about it as a credit card: Homeowners have access to a credit line that they can take from and pay back while using their home equity as collateral if they’re unable to make payments. Essentially, HELOCs enable homeowners to borrow against their own home equity.

Generally speaking, HELOCs have lower interest rates compared to similar options, like home equity loans or personal loans. That said, because HELOCs use variable rates, the interest rate will change based on certain benchmark rates and the current market. This, along with the amount of money you’ve spent using the line of credit, will determine your payments.

Although Pennymac does not currently offer HELOCs, we are available to answer any questions you have about how they work or what your other options are. Don’t hesitate to get professional advice. Contact a Pennymac Loan Expert to determine just what you should be doing with your home equity.

How to Qualify for a HELOC

To qualify for a HELOC, you will need a sufficient amount of equity in your home, a good credit score and low debt-to-income (DTI) ratio. Here are some tips to help you start the HELOC process and increase your qualification chances.

Start Building Home Equity

Since you usually need at least 15-20% home equity to qualify for a home equity line of credit, start prioritizing increasing the value of your home. You can build your equity by making slightly larger payments on your principal balance for your current mortgage. You can also consider refinancing your existing mortgage into a shorter-term mortgage.

Know Your Credit Score and History

Your credit score affects your eligibility for a HELOC, similar to when you were a first-time homebuyer applying for a mortgage. Most lenders require a credit score between 580 and 620, although that is ultimately dependent on the type of loan you choose and other qualifying factors.

Decide Why You Need the Funds

You don’t want to be casual with your HELOC spending, so be specific and intentional with borrowing by having a plan in place. While you may use a HELOC to have flexible on-hand funds, that doesn’t mean you should be careless. Set boundaries from the beginning on what you can and can’t spend these funds on, how often you want to make payments, etc.

People often use a HELOC to pay for home renovations, debt consolidation, education and special events, like weddings.

Do Your Research

Talk to multiple lenders, compare rates and benefits and read reviews. Look for a credible lender who is upfront about fees, timelines and other expectations. When deciding who to work with, it’s important to carefully evaluate the HELOC’s fees and terms and the lender’s reputation.

You’ll also want to know the following:

  • The length of the draw period, i.e., how long you’ll be able to access the funds
  • The period of time you’ll have to pay the remaining balance after the draw period ends. Sometimes terms can be 15 years and you may have a steep payment.
  • Is the interest rate fixed once you can no longer access the credit line

Understand Typical Contracts and Look for Fees

Understand the terms of your HELOC agreement. Are there prepayment penalties that prevent you from paying off more of your credit during the draw period? Is there a minimum amount you have to take out, and does it make sense to take out that much with your financial goals? Are there annual fees? What about application fees? Make sure you know the overall cost before signing a contract.

Know Your Debt-to-Income Ratio (DTI)

The debt-to-income ratio is the percentage of your monthly income that goes toward your current debt. Keep in mind that you can only have so much debt before lenders no longer consider you eligible. Paying off debt is a good way to show lenders that you know how to manage your money. Having too much debt, especially compared to your income, will indicate to lenders that you can’t sustain a line of credit with interest. Lenders typically look for your DTI ratio to be less than 43-47%. Reach out to a licensed loan officer who can help you figure out where you stand.

What Can You Use a HELOC For?

Essentially, homeowners can use a HELOC for whatever they need to, though it’s not wise to use these funds for nonessentials or day-to-day expenses. HELOC funds are best used for the following:

  • Home improvement. Home improvement is one of the best uses of HELOC funds. From renovations to additions, projects that increase the value of your home also help contribute to your home equity. Plus, there are potential tax deductions for certain home improvement projects.
  • Emergency funds. If you find yourself without a job or facing other emergencies, HELOCs are a good source of revolving funds that can be carefully managed, even in the draw period. Because interest doesn’t accrue on unused funds, you can use and pay off only what you need.
  • Debt consolidation. Though you should be careful not to generate more unnecessary debt, you can use a home equity line of credit to consolidate current credit card debt. Instead of dealing with high-cost credit card loans, you switch to a low-cost line of credit.
  • Medical bills. Medical bills can add up quickly, especially for unexpected or ongoing health concerns. People often take advantage of the low cost and low interest rates of HELOCs for these types of health expenses.
  • Education costs. Some people also use a home equity line of credit to pay off student loans or pay for tuition, especially because HELOC interest rates can be lower than student loan interest rates.

How Much Can You Borrow?

Even if you have substantial home equity, most lenders only allow you to take out some of what your home equity is worth.

Typically, you can use up to 85% of your home equity value, though it could be less depending on your financial history and other personal qualifications. Factors that influence your overall eligibility, how much you can borrow and the interest rate you may qualify for include:

  • Credit score and credit history
  • Current debt
  • How much home equity you have
  • Reliable income
  • Payment history

How to Pay Back a HELOC

A home equity line of credit is paid back with interest on whatever you take out of your revolving funds. However, HELOCs have a unique two-phase repayment method. These two phases are the draw and repayment periods, though the names can be misleading since you will make payments during both periods.

Phase 1: The Draw Period

The first phase is the draw period. This is when the credit line is open and your funds are available to use.

During the draw period, you can borrow funds as needed and only have to make minimum payments, or sometimes even interest-only payments for what you have borrowed. However, funds aren’t limitless; they’re revolving. If you hit the limit of available funds, you’ll need to pay back some of the money before you can continue borrowing.

The draw period is usually between 5 and 15 years. Some borrowers, like investors, commonly take out the maximum amount of funds and pay it off several times over. More commonly for homeowners, HELOCs can just be paid in minimum payments. Any other payments made on the principal loan during this time will lessen the amount you have to pay back during the repayment period.

Phase 2: The Repayment Period

Once your draw period is over, the repayment period begins when you must make recurring monthly payments. You also can’t take anything more, as access to the home equity line is closed. Payments will vary depending on whether or not you paid any interest during the draw period and how long each period is. Since most HELOC loans use variable interest rates, how the rate changes also affects payments.

Minimum payments may become significantly larger if you choose interest-only payments, so even if you have an interest-only payment option during the draw period, consider both the current and future financial consequences. These two periods aren’t necessarily split evenly, either; a 30-year HELOC loan is common, with a 10-year draw period and a 20-year repayment period.

It’s important to know when your draw period ends and when your repayment period begins so you can properly prepare. If you aren’t prepared to adjust financially, it’s tempting (or necessary) to open other lines of credit to pay what you owe on the HELOC, which can bury you in debt. It’s also possible to refinance if you aren’t ready to or don’t want to enter the repayment period when it arrives.

Pros and Cons of a Home Equity Line of Credit

HELOCs are a great way to put the money sitting in your home to work, but there are both pros and cons that homeowners should be aware of. Not every scenario calls for a HELOC loan, so consider the following benefits and drawbacks.

Advantages of a HELOC

  • Lower upfront costs. Compared to home equity loans, HELOCs tend to have lower upfront costs, which may help a homeowner decide what type of cash-out option they prefer.
  • Low or no closing costs. There are typically no closing costs for HELOCs. If there are closing costs, they are very low.
  • Lower interest rates. Traditional credit cards tend to have higher interest rate fees, but HELOCs generally offer lower interest rates. This makes consolidating debt a bit easier.
  • Interest is charged sparingly. Interest accrues only on funds that you actually use. You may have $200,000 available, but if you’ve only used $20,000, interest is applied just to that 10% utilized.
  • Flexibility. Because you don’t have to pay interest on more than what you’ve taken out, homeowners have much more flexibility and opportunity with their spending. You’ll have affordable funding options if something unexpected pops up or a project costs more than anticipated. You can use it for what you need, even for education.
  • Tax deductions. In some instances, the government allows homeowners with HELOCs a tax deduction for interest payments. Please consult your tax advisor regarding the tax benefits of HELOCs.

Disadvantages of a HELOC

  • Minimum draws. Some lenders require you to use a certain amount of the equity funds for their own benefit. Even if you end up not needing the minimum, you still have to take out and pay back (with interest) that money. Most lenders also charge an inactivity fee if the account isn’t being used.
  • Upfront costs. Though lower cost than other loans, HELOCs may still require application fees, home appraisal costs and other procedures. Consider the upfront expenses and determine if they’re worth the funds you would have access to.
  • Variable interest rates. Variable rates can go up and down depending on the market and federal lending rate, which can affect your monthly HELOC payments. When they are low, it’s great for borrowers, but high-interest rates can take a toll.
  • Fees. Without properly vetting a lender, you may find yourself stuck with unexpected or overwhelming fees such as cancellation fees, application fees, annual fees and prepayment penalties.
  • Potential credit damage. If you are unable to make payments, as with any loan, your credit score will take a hit.
  • Risking your home. Remember, your home is the collateral. If a homeowner mismanages their funds, misses payments and ultimately defaults when the repayment period rolls around, they could lose their home.
  • Attraction to nonessentials. Having large amounts of available funds can be freeing, but some homeowners struggle to use their funds only for essential or intentional spending, which can lead to greater debt that’s harder to pay off. HELOCs are not meant for day-to-day expenses like a regular credit card.

The Difference Between a Home Equity Loan and Line of Credit

HELOCs and home equity loans are similar in that they are both loans that use the value of your house as collateral and tend to have lower interest rates. However, there are some key differences.

What Is a Home Equity Loan?

A home equity loan is a form of consumer debt that allows you to borrow money against your home’s equity. The loan is paid separately in addition to your first mortgage which is why a home equity loan is often called a “second mortgage.” The following are some of the main differences between a home equity loan and a HELOC.

Lump sum payment. Home equity loans aren’t a revolving source of funds like HELOCs are. Instead, homeowners still use their home equity funds, but are given the money as a one-time lump sum.

Fixed interest rate. Unlike a home equity line of credit, home equity loans usually come with fixed interest rates. A fixed interest rate also means a fixed payment — you’ll know exactly what you are going to pay every month regardless of what’s going on in the market.

Prepaid interest costs and closing costs. With a home equity loan, you may have prepaid interest costs that you’ll have to sometimes pay at closing time. You also usually have to pay 2-5% of the loan amount in closing costs, whereas a home equity line of credit doesn’t often have closing costs.

Home equity loans are often used when borrowers need a big sum of cash for a one-time expense. If you need more flexibility, a HELOC loan lets you acquire funds as needed. If you know exactly what you need the money for and prefer fixed payments, a home equity loan is probably best.

HELOC Alternative: Cash-Out Refinancing

HELOCs are flexible and offer a lot of freedom, but they aren’t for everyone. If homeowners don’t want to take out a second mortgage, there are other options like cash-out refinancing.

What Is Cash-Out Refinancing?

A cash-out refinance is a new “first” mortgage that replaces your original mortgage with a new one through refinancing. Unlike the original, a cash-out refinance allows homeowners to borrow cash that they can use as needed. The new mortgage loan will be higher than the old one, and the difference between the loan amounts is distributed directly to the homeowner.

Cash-out refinancing allows you to maintain just one mortgage rather than two while still getting the immediate cash you need. These also offer fixed rates, which some people prefer for consistency.

How do you decide between a cash-out refinance and a HELOC? Determine whether you’d like to replace your current mortgage to get the cash you want (cash-out refinance) or add a second mortgage to get that cash (HELOC). For help understanding which could be the best fit for your needs, talk to a Pennymac loan expert.

HELOC Rates

Most often, the interest rate on a HELOC is variable. Variable rates come with pros and cons, and they are largely dependent on the current market and economy. Your eligibility will also affect the kind of rate you qualify for. Rates usually start lower at the beginning of the loan, or in this case, at the beginning of the draw period.

However, the rates will change based on benchmark interest rates, which can lower or raise your payments in both HELOC phases. Still, many lenders offer caps so that your interest rate won’t exceed a certain percentage. This is especially important to look for in a contract and consider as you’re trying to decide on a lender or on applying for a HELOC.

Also consider that HELOCs are a type of second mortgage, and generally speaking, rates for second mortgages are higher because the lender is taking on more risk.

HELOC FAQs

Here are some of the common questions many homeowners have regarding home equity lines of credit.

How Does Home Equity Work?

Many people want their home equity to work for them instead of being stagnant. That’s why HELOCs, home equity loans and cash-out refinance options exist. Homeowners should understand that though home equity refinancing can be helpful, you’re putting your home at risk if you aren’t properly prepared for the payments. Done correctly, though, home equity can be a great alternative source of funds and debt management.

How Can You Use Your Home Equity?

You can use your home equity loan for all sorts of reasons, as long as the lender hasn’t set certain limitations. Some lenders do limit what the line of credit can be used for, so it’s always best to discuss such limitations with lenders before signing anything. Also remember that funds shouldn’t be used for nonessentials or like a traditional credit card. Most often, people use HELOC loans to add value to their home through home improvement, to pay off extensive bills or expenses or to consolidate their current debt to get a better rate and lower costs.

Can You Pay Off a HELOC Early?

As long as the lender sets no prepayment penalties, you should be able to pay off a HELOC early, even in the draw period. The more you pay off during the draw period, the less you’ll have to spend during repayment. If, for example, the variable interest rate is relatively low during the draw period, you could pay the interest plus a little extra on the principal balance. Again, some lenders will penalize you for paying more than the required minimums, so learn about the lender’s prepayment policies.

How Long Does the Closing Process Take for a HELOC?

Closing a home equity line of credit usually takes 1-2 weeks. However, it can take up to 4 weeks to get everything settled, and even after that, you may have to wait several days or weeks before accessing the available funds. It all depends on the appraisal process, documentation timeline and the lender’s underwriting process.

What’s the Difference Between a HELOC and a Home Improvement Loan?

The main difference between a HELOC and a home improvement loan is how you receive the funds. HELOCs allow borrowers to take out smaller amounts of money depending on how home projects change and evolve. Home improvement loans are also limited to specific home projects, whereas HELOCs can be used outside the home for any purpose.

Is a HELOC Right for You?

A home equity line of credit can be a great solution for established homeowners who need more flexible spending options. If funds are used carefully, for the right reasons and through a reliable lender, borrowing against your home equity is a viable option for many.

However, a home equity loan may be a better option if you could benefit from a lump sum of immediate funds and prefer fixed interest rates and predictable monthly payments. To learn more about turning your home equity into cash in hand, speak with a Pennymac loan expert today.

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Source: pennymac.com

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Fannie Mae on Thursday announced that its Desktop Underwriter (DU) system will include new changes to the maximum allowable loan-to-value (LTV) ratios for two- to four-unit, principal residence, purchase and limited cash-out transactions, as well as other updates to further align the system with recent changes to the Selling Guide.

The new DU update will be rolled out to the system during the weekend of Nov. 18, the company said.

“To expand access to credit and provide support for affordable rental housing, the maximum allowable LTV, CLTV and HCLTV ratios for two- to four-unit, principal residence, purchase and limited cash-out transactions will be updated to 95%,” the update notes read. “This change will not apply to high-balance mortgage loans and loans that are manually underwritten.”

Currently, the maximum allowable LTV on a purchase and limited cash-out refinance for a two-unit property is 85% for both fixed- and adjustable-rate mortgages, and 75% for a three- or four-unit property. These levels and their updates to 95% also apply equally to requirements for the standard, HomeReady and HomeStyle Renovation programs.

Fannie Mae’s maximum LTV ratio for a single-unit home with a fixed-rate mortgage remains unchanged at 97%.

Another update includes the DU system now being able to identify HomeStyle Energy loan casefiles using the “Mortgage loan will finance energy-related improvements” indicator as long as the loan is “also a HomeStyle Renovation loan,” the update notes read.

According to a June announcement about prior Selling Guide updates, eligibility requirements for limited cash-out refinances were revised to say that “at least one borrower on the new loan must be a current owner of the subject property (on title) at the time of the initial loan application,” according to the update notes.

In the latest DU version, the message on all limited cash-out refinance transactions will be updated to “remind lenders of this requirement, and to remind lenders that if the property is currently listed for sale, it must be taken off the market on or before the disbursement date of the new mortgage loan,” the notes read.

Earlier this week, Fannie Mae released its October 2023 update to the Selling Guide aiming to reflect changes in the mortgage industry, its surrounding regulatory environment and Fannie Mae policy positions. One key update is a change to the documentation requirements for rental income that is used in a qualifying decision.

Source: housingwire.com

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Apache is functioning normally

Are you curious about refinancing? When you refinance your mortgage, you’re basically replacing that mortgage with a different loan. Your lender will then use that new mortgage to pay off the old one first, so you’ll only have one monthly payment.

A refinance can have different interest rates and terms—which will hopefully help your finances. A lower interest rate might lower your payments. And if you have a shorter term, you could pay the new loan off faster.

But what if you have bad credit? Can you even refinance with bad credit? The short answer: yes. You definitely have options. Find out more below.

In This Piece:

Can You Refinance with Bad Credit?

Whether or not you get approved for a mortgage can depend a lot on your credit score. But qualifying for a mortgage loan—whether it’s a refi or a new purchase—isn’t impossible with bad credit. In fact, with loan programs such as the Federal Housing Administration, you might get approval with a credit score as low as 500.

Five Options for Refinancing with Bad Credit

Even if you have poor credit, refinancing your home loan is completely doable. Here are some options to consider:

1. Talk to Your Current Lender

If you’re in good standing with your current mortgage lender, talk to them about refinance options. Being in good standing means that you’ve regularly made on-time mortgage payments and haven’t had any issues with your lender.

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Lenders make money on your mortgage. If you want to refinance to extend your mortgage payments—to reduce your monthly payments, for example—the lender could make more money in the future off your loan. Your current lender may want to keep your business, so they’re probably willing to work with you.

2. Use a Cosigner

If you’re not in good standing with your lender or they don’t give you options, you might consider working with a cosigner. A cosigner is someone who has good credit and is willing to be responsible for the mortgage payments if you don’t make them.

Obviously, this is a huge commitment. The cosigner might need to be motivated to help you, and will definitely need to trust you. If you’re attempting this approach, make sure you have a strong financial plan to show your consigner that you’ll make timely payments.

3. Use an FHA Streamline, Simple or Cash-Out Refinance Loan

FHA-backed mortgages are known to have less-strict credit requirements, including refinances. If you’re looking to refinance with bad credit and late payments, you might consider FHA programs—especially if you already have an FHA loan.

Streamline FHA Refinance

Streamline FHA refinance programs are for those with an FHA mortgage who want to refinance with an FHA loan. Your mortgage must be current, and you can’t get more than $500 cash out of this refinance. Appraisals aren’t required for these loans.

There are two types of Streamline loans. One is credit qualifying, where you provide the income and credit documentation you normally would when getting a mortgage. If you’re taking one of the borrowers off the mortgage during the refi, you must use this option.

The other option is non-credit qualifying. At least some credit review—and a review of past performance on your existing mortgage—is required. But it may not be as comprehensive as a credit qualifying loan.

Simple Refinance

Simple refinance is another option that doesn’t allow cash-out. This program is only relevant for refinances on primary residences or a secondary residence with HUD approval. You also have to be up-to-date on mortgage payments.

Cash-Out Refinance

FHA cash-out refinance programs let you get some cash back during refinance if you have equity in your home. You’re limited to 85% to 95% of equity, depending on the status of your current mortgage.

To qualify, you must have had the property for at least 12 months and made the last 12 mortgage payments within the month they were due. Other credit and financial factors may also apply.

4. Apply for a VA Refi Program

The VA provides several refinance options for those who are eligible because they’re qualifying veterans, active-duty service members or eligible family members. As with FHA refinance options, you can find programs that support straight refis or cash-out refis.

Interest Rate Reduction Refinance Loan

This is a refinance option that gets veterans a lower interest rate on their mortgage. Here’s who’s eligible:

  • Veterans
  • Active-duty service members
  • Members of the National Guard or Reserves called to active duty
  • Some surviving spouses
  • Current Reserve and National Guard members (after six years of qualifying service)

Cash-Out Refinance

This VA refinance has the same eligibility requirements as the Interest Rate Reduction Refinance Loan. The loans typically come at market rates and include a VA funding fee.

5. Consider the USDA Streamlined-Assist Refinance Program

The USDA offers a few refinance programs, but notes that the Streamlined-Assist refi is the most popular. It doesn’t require an appraisal unless a subsidy is involved. A full credit review is not required. However, the loan must have been paid on time for the previous 12 months.

Improve Your Credit Before You Refinance

If you can’t find a refinance that works with your credit score—or you don’t find one that works for you—you might want to improve your credit before applying for a refi. Start by accessing 28 of your FICO scores via ExtraCredit.

You can improve your credit by:

Find the Right Mortgage for You

No matter where you’re at, finding a mortgage is an exciting—and overwhelming—process. Whether you’re ready to start looking for a refinance now or want to wait until you’ve improved your credit, browse options for mortgages and rates on Credit.com.

Source: credit.com

Apache is functioning normally

Apache is functioning normally

This article originally appeared on The Financially Independent Millennial and was republished here with permission.

If you’ve been paying attention to the housing market recently, you will have noticed it’s on fire. From Seattle, WA, to St. Petersburg, FL, there isn’t a market that hasn’t been affected by the low mortgage rates and high millennial demand for housing. The market hasn’t seen this much activity ever (even more so than the housing financial crisis of 2008).

Given the recent interest in home buying, we thought it would be prudent to discuss exactly how Americans can afford such large homes. And, why now?  After all these years, why are mortgages and refinances becoming popular all of a sudden? Let’s first discuss the basics of a mortgage and what its advantages are. They’re equally complex and beneficial, so it’s important to ensure we cover all the bases.

What Is a Mortgage Loan?

Simply put, your home secures the mortgage loan. It might be a house, a store, or even a piece of non-agricultural land. Banks and non-banking financial institutions both offer mortgage loans.

The lender gives the borrower cash, and charges them interest on it. Borrowers then pay back the loan in monthly installments that are convenient for them. Your property acts as security against the mortgage. And, your lender retains a charge until the borrower pays the loan in full. As a result, the lender will have a legal claim to the property for the duration of the loan. If the buyer fails to pay the debt, the lender has the power to seize the property and sell it at auction.

What Are the Different Types of Mortgage Loans? 

No matter what anyone tells you, always remember: A mortgage is a debt. Debt is a very polarizing topic to discuss with friends because many of us were raised on the premise that debt is bad. The truth is, some debt is bad, some debt is okay, and some debt is good. Many today would argue that mortgage debt is good since the rate is so low and it affords you a bigger home. 

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Some people believe that debt should be prevented at all costs. Others view it as a means of improving one’s quality of life or as a means of increasing fortune. What’s awful about debt, factually, is reckless credit usage.

Here’s a rundown of the many types of mortgage programs, along with their benefits and drawbacks, to help you determine which is best for you.

A mortgage with a fixed rate

The interest rate is fixed for the duration of the loan. These loans provide a consistent monthly payment and a low-interest rate. Borrowers who wish to pay off their mortgage quicker can typically make extra payments toward the principal, as prepayment penalties are uncommon.

Pro: It’s predictable because the monthly payment is fixed.

Con: Taking out a fixed-rate loan while the interest rates are high means you’re stuck with it for the duration of the loan. The only way out is to refinance at a lower rate.

A mortgage with an adjustable rate (ARM)

After a fixed-rate cycle of months to years, the interest rate on an adjustable-rate mortgage (ARM) varies. Lenders sometimes publish ARMs with a pair of numbers, such as 7/1 or 5/1. Usually, a 5/1 ARM has a fixed rate for five years and then adjusts every year, rounding off if that option exists.

Pro: An ARM’s opening interest rate is often lower than that of a standard fixed-rate loan, so it’s easy to get lured in by the teaser rate. But, it might wind up costing more in interest over the term of your mortgage than a fixed-rate loan. An ARM may be the ideal option for someone who plans to market their home before the rate changes.

Con: Future rate hikes might be significant, leaving many adjustable-rate mortgage borrowers with significantly elevated monthly payments than if they chose a fixed-rate mortgage.

Refinance loan or second mortgage

Sometimes, a homeowner already has a mortgage but wants to change the terms. Maybe they want a lower rate or a longer term. Or maybe, they want to take out more equity from their home. Whatever the case, many options are available! The most common would be refinancing the home mortgage. With mortgage refinance, the homeowner closes out their original mortgage, and obtains another one – ideally with more favorable terms. 

With interest rates so low these past couple of years, refinancing has become much more popular. How often a homeowner refinances is usually a personal decision, but they should consider at least these factors:

  • market interest rate vs their current mortgage interest rate
  • length/term of their loan vs the new one they want to get
  • cost of the loan (“closing costs”) vs keeping still
  • [cash-out refinance only] what to do with the funds

Pros: If you can secure a lower interest rate than your current loan, and the closing costs aren’t significant, then it could definitely be worth refinancing. On the other hand, if you need the money for home renovations, a cash-out refinance may be your best bet.

Cons: Refinancing costs money, so make sure the math works in your favor. 

Conventional loan

The standards for conventional loans are generally more stringent than those for government-backed house loans. When reviewing traditional loan applications, lenders usually look at credit history and debt-to-income ratios.

Pro: A conventional mortgage may be used for a range of property kinds, and PMI would help borrowers qualify for a conventional loan even if they have less than 20% for the down payment.

Con: Compared to government loans, conventional loans have tougher qualification standards and may demand a larger down payment.

Interest-only mortgage

The average age of home purchases has decreased, and an increasing number of millennials are now purchasing their first houses. Typically, the loan duration is determined by the debt-to-income (DTI) ratio and the sum of interest negotiated on the mortgage. For homebuyers, a longer contract means a lower payment, but a longer time to pay off that debt.

Some lenders may offer an interest-only mortgage, meaning the borrower’s monthly fees will cover only the interest. As a result, it’s best to have a strategy in place to ensure that you can have enough money to return the entire sum borrowed at the end of the period.

Interest-only loans may be appealing since your monthly payments are low. But, unless you have a strong strategy to reimburse the capital, at some point, a fixed loan could be the better option.

Pro: Interest-only mortgages allow the borrower to place their capital elsewhere, such as in dividend stocks, a rental property, or other investments. 

Con: Borrowers who aren’t careful with their budget may find themselves never being able to pay off the loan.

Read more: 15 Ways to Generate Passive Income from Real Estate

FHA loan

FHA loans and VA loans are mortgage loans insured by the government and available for potential homebuyers. FHA loans are available to lower-income borrowers and typically require a very low down payment. Also, borrowers get competitive interest rates and loan costs. 

The government does not directly grant Federal Housing Administration (FHA) loans. FHA loans can be issued by participating lenders, and the FHA guarantees the loans. FHA mortgages might be a viable option for those who have a high debt-to-income ratio or a bad credit score.

Pro: FHA loans need a smaller down payment and credit score requirements are lower than conventional loans. Moreover, FHA loans may enable applicants to use a non-resident co-signer to assist them to be qualified.

Con: Unless a borrower puts down 10%, the monthly mortgage insurance will remain a part of the payment for the loan’s life. If a borrower ever wants to remove the monthly mortgage insurance, they must qualify and refinance into a conventional loan.

Read more: How to Improve Your Credit Score

FHA 203(k) loan

An FHA 203(k) loan is a government-insured mortgage allowing funding borrowers with one loan for both home renovation and house purchase. Current homeowners may also be eligible for an FHA 203(k) loan to help pay for the repairs of their current house.

Pro: An FHA 203(k) loan can be utilized to purchase and renovate a home that would otherwise be ineligible for a traditional FHA loan. It just takes a 3.5% down payment.

Con: You must be eligible for the full property value, as well as the price of anticipated improvements, with these loans. The rate may be greater than on a normal FHA loan. You’ll also have to pay both a one-time, and monthly mortgage premium insurance payments.

VA (Veterans Affairs) loan

Home loans for veterans, reservists, and military or National Guard members, as well as qualified surviving married partners, are backed by the US Department of Veteran Affairs. 

In fact, nearly 90% of all VA-backed home loans are made without a down payment.

Pro: You won’t have to put any money down, or deal with PMI payments every month.

Con: On purchase loans, a one-time VA “funding charge” varies from 1.4% to 3.6%.

Fannie Mae homestyle loan

The Fannie Mae homestyle mortgage needs just 3%–5% down, but a credit score of 620 is an option for fixer-uppers.

Pro: You don’t have to pay for mortgage insurance beforehand, and you can terminate it after twelve years or when you have 20% equity on your house. The rate is frequently cheaper than an FHA 203(k) loan.

Con: Credit score requirements must be met.

Reverse mortgage loan

Homeowners aged 62 and above can use a reverse mortgage to convert some of their property value into cash. The age of the youngest homeowner, the loan rate and fees, the heir’s wishes, and payout type are all aspects for the lender to consider.

Pro: There are no monthly payments required, and the homeowner can select between a one-time balloon payout, a monthly payout, a line of credit, or a combination of the three.

Con: The interest rate may be greater than that of a typical mortgage. Mortgage insurance, a direct charge, an initiation fee, and third-party expenses are usually paid by the homeowner.

Final Thoughts

Mortgage loans are given to those who have enough income and assets vs. their debt. Mortgages also aid in the development of credit. They enable homeowners to invest in a home, with the advantage of having a forced-savings component. However, like with any loan, borrowers should be responsible when taking out a mortgage. It’s easy to get carried away and buy more than is necessary (and become house-poor).

Source: credit.com

Apache is functioning normally

Deciding whether to transform your current house into your ideal home or start over with a fresh new space requires careful thought and consideration. There are two options to consider — stay and renovate or move to find something more suitable for your needs. This choice may make some people feel like they are at a crossroads.

Here are some steps you can take to help guide this important decision.

Get an Idea of How Much You Can Afford

If you’re considering moving, it’s important to understand how much of a mortgage you’ll qualify for and how much you can afford to spend on your new home. Connecting with a lender like Pennymac is a great first step. Our Home Connect resource can help set you up for success if and when you’re ready to begin your home search. Explore mortgage options, get BuyerReady Certified and receive advice from trusted real estate professionals.

Get a Comparative Home Analysis

Ask a realtor to provide you with a comparative home analysis to estimate the value of your current home. Determine if your home’s features align with your desires and needs. For example, do you need an extra bedroom to accommodate a new member of the household or your new work-from-home plans?

Understand Your Location Limits

Do you love where you live right now? Suppose you adore your neighborhood or town, but your house just isn’t appropriately sized for you and your loved ones. In that case, consider adding on to your house, whether that’s another bathroom or a second story.

On the other hand, If you have children, you may weigh the desire for a new school district with better academic programs. Or maybe you want to move closer to work. It really boils down to what your main priorities are.

If you’re looking to move to a larger home, keep in mind that a bigger house in your preferred area will likely have higher taxes, utility bills, homeowners insurance premiums and maintenance upkeep costs. On the flip side, if a move means you’ll have a shorter commute, you will save time and transportation costs. Prioritizing your location needs and determining what you are willing to spend or sacrifice to achieve your goals will help influence your decision.

Renovation Reality Check

Choosing whether to remodel or move depends on a lot of factors. Can you be creative with your existing rooms and make relatively easy and straightforward renovations, or are your requirements complex, expensive and challenging to complete?

Hire an architect or contractor to help pinpoint issues with your current house and decide what you need from your home. Want to add a second story? Get estimates on how long that might take and how much it might cost, and determine if you’re okay with living through such a major renovation.

Understanding Your Time Commitment Matters

Buying and selling at the same time can be a lengthy process. Organizing your home and putting it on the market can take months, plus there can be some financial and emotional uncertainty when buying and selling. It may take time to get the sale price you want and to find your ideal next home.

If you decide to move forward with buying and selling your home simultaneously, you’ll want to work with a real estate agent and have a plan for how you’ll manage the process. Timing everything right is essential since you don’t want to be paying two mortgages at once if you’re still waiting to sell your current home.

You’ll also want a savings buffer to help financially manage any complications or slowdowns. For example, you may need to temporarily stay in a hotel or put your furniture in storage.

Contingency Acceptance

A contingency clause in real estate is part of a purchase agreement that outlines specific conditions that must be met in order for the contract to be valid and binding. In some markets, home sale contingency offers are allowed, which means your bid for a house is contingent on the sale of your former abode.

In other markets, home buyer-feeding frenzies can prohibit contingent offers. When you put your house on the market, you have to decide if you’ll buy a new house first or make a contingent offer. If contingent offers are out of the question, you may require a temporary rental after escrow closes on your old home and you’re still looking for your next one.

Closing Costs

In addition to your down payment, you’ll have to pay closing costs, just like you did when you purchased your existing home. After figuring in closing costs, commission, title insurance and additional transaction costs involved in your home sale and purchase, it may be much less expensive to stay in your house and renovate. So don’t forget to calculate closing costs when deciding whether or not to move, but don’t hesitate to negotiate any of those costs either.

Current vs. Past Mortgage Rate, Cash-Out Refinance and Second Mortgage Considerations

A cash-out refinance is when a homeowner refinances their existing mortgage, taking out a new loan for more money than they currently owe. The difference between the new loan amount and the old mortgage balance is given to the homeowner in cash. This allows the homeowner to tap into their home’s equity and use the money for various purposes, including home renovations.

If you have a higher interest rate than the current market, compare keeping your mortgage — and perhaps refinancing at a lower rate and taking cash out to make upgrades — to getting a new house with a new mortgage at a lower rate.

Either way, a lower-rate market can prove to be very favorable whether you stay and renovate or go and start fresh.

However, if your current rate is lower than the current market, it may be in your best interest to explore a second mortgage option that allows you to access the equity in your home while maintaining your low rate on the first.

Evaluate Your Motivators to Move

Many individuals who decide to sell have outgrown their current house and don’t want to build an addition or are too busy to manage an extensive renovation project. There are also those homeowners who have too small a lot to work with, need to move closer to work or are not that vested in remaining in the neighborhood.

Aside from the desire to upsize your home, some other motivators for selling can be:

  • The need for a less expensive home
  • Readiness to downsize
  • The ability to pay cash for the next home
  • The want or need to relocate for a job, school district, family situation, better climate, etc.
  • Favorable market conditions

Identifying the primary motivators for your move can help you decide if you should sell your house now or wait.

Ready to Downsize?

Those in a life stage where they are often uniquely ready to leave behind the maintenance of their current home. Trading in the three-bedroom house for a low-up keep city condo provides more opportunities for enjoying the retirement years.

Here are some signs downsizing may be right for you:

  • Housing expenses have increased and you want to cut costs
  • There are unused rooms in your home
  • You desire a more low-maintenance lifestyle
  • You want a change, such as being closer to family, relocating to a different climate or moving into an amenity-filled active community.

So, What Is the Bottom Line? Should I Sell My House Now?

Making a final decision as to whether or not you should sell your house is as personal and individual as the home you’re thinking about giving up or buying. But with the right calculations and information, you’re closer to finding a long-term solution that will work best for you. Ready to sell your home and begin looking for your new one? Chat with a Pennymac Loan Expert, or use one of our mortgage calculators and start your home buying journey today.

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Source: pennymac.com