Debt consolidation, also known as cash-out refinance, might provide financial relief. It combines several of your monthly debts into one new loan. This leaves you with a single monthly payment you can afford and reduces the interest you pay on your debt.
Refinancing happens when you replace your existing loan with a new loan that pays off the debt of the old loan. The new loan should come with better rates and/or loan terms in order to improve your financial situation.
Each of the refinance option is specifically designed to meet your goals in refinancing your mortgage. In fact, today’s low-interest-rate environment motivates many to consider home refinance options. Potentially, you could save money for monthly expenses and over the life of your loan. Consult your lender regarding the costs and benefits of the refinance options to prepare for the requirements, expenses, and time.
OPTION 1: Cash-out Refinance
A cash-out refinance involves getting a new mortgage for more than you owe on the existing loan and withdrawing the difference in cash. This refinance options works if you managed to build up significant equity with your monthly payments and your home’s appreciation. Borrowing cash against the equity of your house can be used for debt consolidation, home improvements, or however you see fit.
Cash-out refinances tend to have slightly higher mortgage rate since you are trying to borrow more money. It requires you at least 20% equity in order to qualify for a conventional or FHA cash-out refinance. On the other hand, a 10% equity is required for a VA cash-out refinance. The USDA program does now allow any cash-out transactions.
OPTION 2: No Cash-out Refinance
No cash-out refinance primarily refinances the remaining unpaid balance on your mortgage. This refinance option could make financial sense if you are looking to:
Transfer from one mortgage to another
Many borrowers opt for refinancing to acquire a much secured and stable mortgage.
An adjustable-rate mortgage (ARM) that no longer makes financial sense can still be refinanced with this kind of option.
Lower the mortgage rate
If you have purchased your home when mortgage rates were higher than they are today, you may opt for a no cash-out refinance. Thus, your monthly payments and the total amount of interest that you pay over the life of the loan could be reduced.
Build equity faster
You may consider refinancing your loan with a shorter term once your financial situation has improved. For instance, you purchased your home before with a 30-year fixed-rate mortgage, then you can refinance it now into a 15-year fixed-rate mortgage. You may have refinanced into a lower mortgage rate and your payments will still be higher. However, you can build your equity a lot faster and own your home sooner while paying less in the overall interest.
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OPTION 3: High-LTV Refinance
Two major agencies named Fannie Mae and Freddie Mac, offer a refinance option for mortgages with a high loan-to-value (LTV) ratio. LTV ratio pertains to the percentage of the home’s value being financed through a mortgage. The higher the LTV ratio, the more money you are borrowing for your home purchase or refinance.
Both agencies’ high-LTV refinance programs require the existing loan to be originated on or after October 1, 2017. Also, the minimum LTV ratio required for single-family homes is 97.01%. Both programs are reserved for homeowners with the conventional loans.
Enhanced Relief Refinance could make sense for those refinancing with loan-to-value ratio exceeding the maximum allowed for a standard no cash-out refinance product. It may help obtain an affordable monthly payment by reducing the mortgage rate and monthly payment, replacing an ARM with a fixed-rate mortgage, or reducing the mortgage term.
In order to be qualified for this option, you should meet the following criteria:
- The note date of your loan being refinanced must be originated on or before October 1, 2017.
- Freddie Mac must be your loan owner.
- You must be up to date with the payments. No 30-day delinquencies for the past 12 months.
- The mortgage you are refinancing must not be refinanced recently through HARP. HARP refers to the federal program launched in 2009 but expired on December 31,2018.
Why Mortgage Refinance is Ideal in 2021?
The following are some of the reasons to consider the abovementioned refinance options in 2021.
- Stable Mortgage Rate – Switching to a fixed-rate loan provides stability in your monthly expenses. This works as an option especially if your ARM with a low initial rate will soon expire. This relieves your worries of covering unaffordable rates once they increased.
- Getting Rid of the Mortgage Sooner – You are allowed to refinance with a shorter term if you are planning on paying off your mortgage earlier and shrinking the interest costs. You may be having a higher monthly payment but that could save you a huge amount of interest payments over time. Additionally, you can build home equity faster than a 30-year fixed loan.
- To Tap the Equity – Home equity refers to the difference between the loan balance and the value of your home. According to Core Logic’s Home Price Index data, home prices rose 6.7% from September 2019 to September 2020. This meant higher property values to more equity. With cash-out refinance, you could acquire more cash intended for other financial goals.
- Improved Financial Situation – Once your income has finally increased and paid off a huge portion of your debt, a drop in your debt-to-income (DTI) ratio and boost in your credit score could qualify you for a better mortgage rate.
Consult your existing lender to discover your refinance options. You may also seek advice from other lenders who are available. Feel free to shop around and do comparison to get the best competitive rates for your refinance.
Take note of the new rates and term for this refinance as you will be responsible for all the associated costs. It may take quite long, but these processes could save you a lot of money and time in the foreseeable future.
