Category: Home Loan

Is Now a Good Time to Refinance Your Mortgage?

Refinance Your Mortgage ApplicationRefinance Your Mortgage

To refinance or not to refinance is not the question here. Thanks to the ongoing pandemic, the Federal Reserve has kept the interest rates fairly low. But is now a good time to refinance? Unfortunately, the answer is not that simple.

Refinancing your mortgage refers to the process of taking out a new loan to replace the present mortgage. The mortgage is one of the substantial financial burdens. So, it makes sense to seize any opportunity to reduce the burden a little. That means you could refinance your mortgage and save.

With many homeowners seeking to make better use of the interest rates and refinance, it may soon be late. For example, the average interest rate on a 30-year fixed-rate mortgage was below 3% in April 2021. But by May, it has increased to 3.28% and will continue to increase. However, this increase was predicted by many groups, including Fannie Mae and The Mortgage Bankers Association.

Here is everything you need to know about refinancing:

When Is a Good Time to Refinance Your Mortgage?

Generally speaking, mortgage refinance is a good idea to lower the interest rate by at least .5% – 1%. This will substantially lower your monthly payment.

Moreover, the new loan will be based on the balance of the original mortgage. So, if you had paid some of your principal, refinancing could lower your monthly payments and save money.

In addition to that, how long do you want to stay in your home? What are your financial goals? What is your home equity and your current credit score? These factors also play an essential part in refinancing. So, if everything works out, now is a good time as any to refinance your mortgage.

Is Refinancing Worth It?

Refinancing is worth it if you use it for the right reasons. If not, it can quickly increase your financial burden. While lower interest rates may be attractive for one person, others may prefer to refinance for higher monthly payments.

While .5% – 1% makes sense, even a modest 25% makes sense if the costs are low. So instead of looking at the new interest rate, look at the broad picture. Consider how much you will save per month, how much you will save over the loan term and the closing costs.

How Does Refinancing Your Mortgage Loan Work?

The refinancing process is similar to the mortgage loan. You can replace the current loan with a new loan, often with a lower interest rate. After you refinance your existing mortgage, you will have a much favorable interest rate. Monthly payments will be lowered, and possibly a different lender than your original loan.

However, with the new mortgage, you would be resetting the clock depending on the terms. For example, consider you are five years deep in your 30-year mortgage with 25 years on the clock. If you refinance for 30 years, you would be extending the loan terms. However, if the term is 20 years, you would be able to pay off the loan sooner by five years.

Keep in mind that you’d have to pay closing costs which can be a few hundred dollars. Alternatively, they can be anywhere between 2% to 5% of the loan amount. In addition, it may include an origination fee, appraisal fee, and discount points.

According to Ellie Mae’s Origination Insight Report, the average time to refinance a conventional mortgage is about 38 to 48 days in 2019-2020. However, it can take more than a week longer than a conventional loan for FHA and VA loans.

Why Should You Refinance Your Mortgage?

Refinancing doesn’t come free. So, if you are looking to refinance your most significant debt, you better have a good reason. As such, you need to have a clear head about your refinancing goals.

Here are some of the reasons why someone would refinance a mortgage.

Save Money on Lower Monthly Payments

Refinance Your Mortgage - Save Money on Lower Monthly PaymentsEven the slight difference in the interest rate can create a noticeable impact on your monthly mortgage payments. For example, consider a 30-year $300,000 loan with a fixed interest rate of 4% and a payment of $1,567. Refinancing the loan to the same period with a 3.25% interest rate, your monthly payment drops by $134. This amounts up to $48,420 over the life of the loan.

With a lower interest rate, your new monthly payment will most likely shrink. In addition, it allows you to save money. You can put up the monthly savings against your principle. Or use it for other expenses like an auto loan or maybe your retirement fund.

However, it makes sense to pay off the home loan instead of refinancing for lower payments. At the same time, you may have to sacrifice your savings, including your retirement savings, to finish your loan first. But the advantage is that you will have a home with no mortgage payments. Now you can get back to savings and investments.

Save on Interest Costs

A low-interest rate decreases the mortgage interest you pay throughout the loan.

Both the interest rate and loan term decide how much you save in interest costs over the life of the loan. Reducing one or both factors can result in increased savings both in mortgage interest rates and monthly payments. However, you can prepay the interest in paying for mortgage points.

Ensure that you shop around with multiple lenders for better mortgage rates and terms. Before seeking a new lender, ensure that you check with the current one. They may even offer a better rate if you stick with them.

Get Shorter Loan Term

In 2019, Freddie Mac reported that 78% of borrowers refinanced from a 30-year fixed-rate mortgage to a similar loan. In addition, 14% went from a 30-year fixed to 15-year. And a last 7% refinanced from a 30-year fixed to a 20-year fixed.

Freddie Mac also reports that people refinancing their 30-year mortgages to 15-years pay less interest over a long period of time. They also shave years off your loan. On the downside, your monthly mortgage payment will increase. However, this can help save the interest payments if the property doesn’t qualify for an interest deduction.

Tap into Home Equity

With refinancing your mortgage, you can convert the equity into money and borrow it on your current loan. In such a case, the lender gives you the difference as check or cash which is called a cash-out refinance. However, the condition is that, to qualify for the loan, you need to have enough equity, at least 20% or more.

A survey by Black Knight indicates that 45 million homeowners have tappable equity lying unused. With a cash-out refinance, you can convert the equity to usable money, which you can use for investments or home improvements.

Consolidate Debt

Refinancing offers a low interest rate compared to other mortgages. Hence, it is attractive for homeowners looking to pay off debts. Since the loan allows you to tap into the equity, you can take advantage of the cash-out refinance option. You can use to consolidate debts like personal loan, credit card debt, student loans, or home loan into one single loan. Your loan balance depends on the equity you decide to cash in.

Keep in mind that if your home equity falls below 20%, you may have to pay mortgage insurance on an FHA loan.

Remove Private Mortgage Insurance (PMI)

PMI comes into the picture when you do not have enough down payment for a mortgage. It can cost you a considerable sum every month until the home equity builds to 22%. At this juncture, your lender is required to cancel it if the monthly payments are current.

However, you can get rid of mortgage insurance early by refinancing your loan. But they are an expensive option with closing costs as high as 2%-5% of the loan amount. But if you have other benefits such as a low-interest rate and short break-even point, you can opt for refinancing.

If you are stuck with an FHA loan, and you may be paying PMI for 11 months or even the life of the loan. This depends on how big your down payment was. In such a case, refinancing may be the only option.

Ability to Switch Mortgage Types

Some borrowers refinance their mortgage to convert their adjustable-rate mortgage (ARM) and lock in on a fixed-rate loan. This is true if the current mortgage rates are low and not planning to sell shortly.

In the same line, it makes sense to move from an ARM to a fixed-rate loan in certain situations. For example, this works if you plan to sell in a few years and are not afraid to take on a higher interest rate. It eliminates the fear of future interest rate hikes.

Is Refinancing a Bad Idea?

No rule says refinancing your mortgage is a bad idea. On the contrary, if done right, refinancing your loan can help save a few hundred dollars at least. However, certain factors can drive up the expenses and cost you more in the long run, so caution is advised.

Longer Loan Term – To calculate the profitability of the refinancing loan, take the mortgage rates as well as loan term for a complete picture. Do not take refinance if you aren’t saving enough.

Higher Closing Costs – The closing costs come with unnecessary fees such as loan processing and application fees. Moreover, if you cannot pay the upfront costs and instead add them to your mortgage, you’ll end up paying more.

Moving Soon – If you see yourself moving soon, it is a bad idea to refinance your current mortgage. This is because you are not likely to save enough to outweigh the loan’s closing costs.

Is it Worth Refinancing a 30-Year Mortgage into a 15-Year Mortgage?

At the beginning of a 30-year loan, most of the monthly payments go towards the interest costs. Unless you pay into the principal, you would not be able to build home equity for many years to come. Or you can refinance it into a 15-year loan. While this helps to build the equity, you’ll be taking on a higher monthly payment. If you are someone looking for a lower monthly payment, it may not be ideal for you.

With a 15-year mortgage, you are looking at:

Refinance Your Mortgage Pros and ConsPros

  • Low-interest rate
  • Low-interest costs
  • Pay off the mortgage quicker

Cons

  • Higher monthly payment
  • No flexibility
  • No leeway in case your financial situation worsens
  • Less investment and savings

However, you can refinance the current loan to a longer term and tide it over if the situation warrants it. When personal finances change for the better, you can save up and pay the principal faster.

Am I Eligible for a Mortgage Refinance?

To refinance your mortgage, you’d have to go through a refinancing process, starting with the application. FHA and VA loans qualify easier than conventional loans.

The qualifying criteria for a mortgage refinance are similar to a new mortgage. The most important of them are:

Credit Score: Most mortgage lenders require a credit score of 620 to be eligible for mortgage refinance. However, for a competitive interest rate, you need at least 740.

Debt-to-Income (DTI) Ratio: The lower the DTI ratio, the better your interest rate. However, it depends on the lender as well. Few go as high as 43% for conventional loans, while 50% for FHA loans.

DTI Ratio = Total Monthly Debts ÷ Total Monthly Income

Apart from these, mortgage lenders create their eligibility criteria. As such, there are a few other factors that lenders consider:

  • Credit history
  • Employment history
  • Payment history on the current loan
  • Home equity
  • Home’s current value

Once you meet the lender’s criteria, you’ll receive an offer with the interest rate depending on the risk you pose. However, you may not get approved or receive favorable terms if your credit history has taken a wrong turn since the first mortgage.

What to Consider Before Refinancing

Before you refinance the loan, consider why you want to refinance your mortgage. To start with, how long do you intend to stay in your home? If you are planning to move in the next few years, stop right there. Refinancing is not the right option for you.

Current Interest Rates: The success of refinancing lies in the interest rate. Even the slightest change in the rate can create a huge impact. Hence, experts recommend you interview several lenders, including your current lender, to find one suited for your current financial situation.

Mortgage Term: Refinancing to a lower interest rate can help you save money but not increase the mortgage terms. That can be counterintuitive since you end up paying more interest over the life of the loan.

Cost of Refinancing: Ensure that you stay in your home at least until you recoup the cost of the refinancing. Refinancing comes with closing costs, including the exact fees and services as when you purchased your home. So, if there is a chance that you may move before you recoup the costs, refinancing is not one of the best financial decisions.

Find the Best Refinance Rates

Just like your initial mortgage, you need to take some time and shop around for better interest rates for the new loan. Look for independent vendors, credit unions, banks, and online comparison sites. If not, you can approach a mortgage broker who can open venues that were previously hidden. They can do the legwork and get you access to vendors and better loan terms.

Make a list of preferred vendors and submit 3-5 requesting loan estimates. It has the estimated interest rate, closing costs, annual percentage rate, and monthly payment. When it comes to mortgages, you’d be better off with a loan that has a high APR, high monthly payment but no fees. Experts suggest you do not pay closing costs with cash; instead, lock it in with the loan amount. And invest the money or stash it for an emergency fund.

Conclusion

Refinancing is a shaky subject, to say the least. While it has its benefits, it is not without drawbacks as well. Refinance loans work well only if you focus on the long-term goals and not on the short term. Having said that, you should go for it, as refinancing could get you through a financial rough patch. A higher credit score, lower debt-to-income ratio, or increased equity could all help you qualify for a better interest rate.

Priority Lending in Tucson LogoSo, is now a good time to refinance? As a rule, the best time to refinance depends on your financial situation. With the interest rates at record lows refinancing can lower your monthly mortgage payments and increase your monthly savings.

Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

Unmarried Couples Buying a House

Unmarried Couple Buying a HouseEvery year the number of cohabiting is increasing. According to the US Census Bureau, there were around 18 million unmarried couples living together in 2016 (a 29% jump from 14 million in 2007), and one can only assume that the count has been increasing steadily.

Another research by the National Association of Realtors states that 9% of the homebuyers are unmarried couples.

It looks like more and more unmarried people prefer to buy houses together and not wait for marriage. However, there are many risks associated with buying a house jointly with your significant other, especially if you are not married.

There are many factors, both financial and economic, that couples need to consider before taking such a big step.

This article takes you through the information you need to know about buying a house together as unmarried couples, mortgage loans, and a few tips to help protect yourself in case of any fallout.

Can an Unmarried Couple Buy a House Together?

Yes! You can buy a house with your partner without being married. However, unlike married couples, you may want to spell out how much percentage of the house each of you holds.

You can own the home as sole ownership, joint tenancy, or tenancy in common.

Moreover, the terms of the mortgage may also vary. While few lenders allow the couples to apply for mortgages together, the others consider you and your partner as individual entities.

Joint Home Ownership: Married Couples vs Unmarried Couples

Joint ownership happens when more than one person holds the title to a property, in our case, a home. They enjoy equal rights.

Married or not, homeownership can be a decades-long obligation that should not be taken lightly. When done right, you end up with a home and good equity and credit score. But, on the other hand, you may also end up in a financial nightmare should something go wrong.

The most significant advantage is that you can easily afford a home (especially in the current economic situation) when there is someone else to shoulder the burden. With two incomes, you can easily save for a downpayment and also pay the monthly bills that come with a home.

There are a few disadvantages to owning a home along with a significant other. Firstly, you would be caught in a legal and financial crisis if your partner decides to walk away. You would have to shoulder the mortgage and bills alone until legal action is taken.

Buying a House as an Unmarried Couple

Buying a house along with your partner is a risky business. It is a major commitment that should not be taken lightly. You should take some extra steps to protect yourself.

Here is how you can buy a house as an unmarried couple in five simple steps:

Be Aware of the Risks - Person Jumping Over PitfallBe Aware of the Risks

Buying a house as unmarried couples carries more risk than their married counterparts. The reason being, there are laws that stipulate the division of assets in the case of divorce or death, but the same does not exist for an unmarried couple.

The situation becomes even riskier when two people are on the deed but one person on the mortgage. In this case, if the partner fails to make payment, the partner on the deed can lose their home and any money they put into it.

Furthermore, it can be challenging to qualify for a mortgage.

Financial Transparency

The financial health of the couple is crucial for a mortgage application. So, you should sit together as a couple and be transparent about your finances, including credit card balances, student loans, car payments, etc., before making any decisions.

  • Credit Score: The credit score, along with the information in the credit reports, play an essential part in getting the mortgage approved.
  • Debts and Income: Debt-to-income ratio helps the lender decide on your financial stability. Lower the DTI, better your chances are of getting the loan.
  • Expenses: Discuss with your partner how much he/she can put forward for the down payment, mortgage payments, closing costs, bills, etc.

In case both the partners apply for a mortgage together, they are equally responsible for the payment-so missing payments can affect the credit scores for both. So a better idea would be to save for 3-6 months’ worth of payments before you commit to buying a house.

Mortgage

Depending on the financial situation, you can either apply for a mortgage together or have one person’s name on the mortgage. The former is ideal if you and your partner have good credit scores, while the latter works if either one of you has a bad score.

In short, the partner with solid financials, credit score, and DTI gets better mortgage terms and mortgage interest rates.

Choose the Right Type of Ownership

One final thing you may want to come into an agreement on is the deed. The deed is a formal document that dictates the title of the home. You have three options when it comes to deeds:

  • Sole ownership – Ownership is where one partner’s name appears in the title. It can be helpful when one person has poor financial standing. However, the person whose name is not on the deed does not have any legal rights and would have to address the same in a cohabitation agreement.
  • Joint tenancy – Joint tenancy is when both the partners own an equal share in the home and are co-owners of the property. It ensures that you and your partner have equal rights to the home.
  • Tenants in common – With tenants in common, the share is decided by how much each person is paying into the house.

You may want to consult with a real estate lawyer to find the best way to hold title for your situation.

Cohabitation Property Agreement

A cohabitation property agreement is essentially a contract that dictates what happens when the relationship breaks up. It protects the financial interests of both partners. This is something you need to discuss and come to an agreement with your partner.

The agreement includes:

  • Share of the property
  • Type of ownership
  • Share of expenses
  • Division of assets
  • Buyout agreement
  • Dispute process

Questions Unmarried Couples Should Ask Before Buying a House

Questions Unmarried Couples Should Ask Before Buying a HouseAccording to a Coldwell Banker Real Estate survey, one in four unmarried couples between the ages of 18 and 34 buy a house together.

Despite that, unmarried couples have more to lose when their relationship comes to an end, especially when there is a house at play.

Since you are not treated the same as married couples, you need to ensure that you cover all your bases. So here are some important questions you may want to ask.

What Are the Laws for Unmarried Couples?

Law treats unmarried couples like individuals; hence it is up to the couples to decide how the home is handled in case of separation or death to mitigate the risks.

Prepare a cohabitation property agreement with the exit strategy, buyouts, how that property should be divided, etc.

Who Is Applying for the Mortgage?

The mortgage rates are dependent on the credit scores of both partners. So, if one person’s score is lesser, it will impact the interest rates. Hence it is best for the home loan to be on the person with a good credit score as well as DTI ratio.

What if One Partner’s Name Is Not on the Mortgage?

There isn’t much you can do if your name is not on the mortgage, but you can ensure that it is on the title of the house. However, the person who is on the mortgage is responsible for the payments.

How Will You Divide Ownership and Equity?

If the financial burden is divided evenly, the title and equity also follow the same path. However, it is not always the case. In this situation, the person who contributes the most financially has a better share.

Who Gets the House Post-Breakup?

Assets can complicate a breakup. For example, in the absence of a cohabitation property agreement, you can buy out the other partner’s share of the property, or both the partners can sell the house.

Sometimes the bank can also force the sale of the property. The same happens when one person dies. However, to take the partner’s name off the mortgage, you’d have to refinance it in your name.

How Will You Handle Household Repairs and Upgrades?

As much as this looks silly, you cannot know the compatibility as co-owners unless you address these questions. Again, these are better addressed in the cohabitation property agreement.

Things to Consider When Buying a House with Your Partner

There are a few key factors individuals may want to consider before buying a property as unmarried couples:

  • Evaluate your relationship. Are you ready for buying a house together? What would happen if you break up?
  • Ensure that you are buying a house for the right reasons.
  • Who is applying for the mortgage? The person with a better income, credit score, debt to income ratio, and financial standing will qualify for better mortgage terms.
  • Choose the ownership title that’s right for you. i.e., sole ownership or joint tenancy or tenancy in common
  • Get a cohabitation property agreement. Ensure that you plan for every scenario.
  • Determine how the costs such as property taxes, homeowner’s insurance, and HOA fees are split.
  • Discuss the future plans before making any big decisions related to your home.
  • Even if you live together, you cannot file your taxes jointly. You may have to either split what you have paid towards mortgage interest, property taxes, and mortgage insurance or let the person with the highest income take all the deductions.

Tools and Tips for Unmarried Home Buyers

  • Tips for Unmarried Couples Buying a HouseKeep track of your finances and maintain written records. Any cohabitation property agreement you may have is useless unless you have proof of who paid for what.
  • Consult with a real estate lawyer and ensure that you have the proper protection in place in case of any breakup.
  • Plan for worst-case scenarios. Ensure that you have a backup plan.
  • Consider opening a joint bank account where both the owners contribute an equal sum every month.

Types of Mortgages for Unmarried Home Buyers

Any two or more people can buy a home together and not significant others. It can be friends, colleagues, business partners, or any other qualifying individuals. You and your partner can apply for any home loan: conventional, FHA, USDA, or VA.

Here are the different mortgage options available for unmarried home buyers:

  • FHA – Considering a downpayment of just 3.5%, FHA seems to be the better option for most first-time home buyers. However, to qualify for the same, it should be the primary residence for both of you. With FHA, you need not have joint bank accounts. You also need not show proof of living together before applying for the mortgage.
  • USDA – You may want to consider the USDA loan if your property is in a rural area. Eligible properties may even get 100% financing.
  • VA – While VA allows an unmarried couple to apply for a loan, you may not get 100% financing.
  • Conventional Loans – If you and your partner have a good credit score and a 20% down payment, consider a conventional mortgage.

How to Protect Yourself When Buying a House with Your Partner

What if the relationship doesn’t work out? What if the other partner dies?

When buying a home jointly, having both the partners’ names on the title is not enough to protect you. Here’s how you protect yourself and your investment in case of any separation or death.

Before you start house hunting as a couple, get your partner’s financial information including credit cards, student loans, and other debts. You may want to make sure he/she is ready to take on the financial burden that comes with owning a new home.

What kind of title you want? If your title says tenants in common, the house will not transfer to you on your partner’s death. To ensure that you both are protected, the title should read joint tenants or tenants with the right of survivorship. With either of these, the survivor will inherit the home along with the mortgage, and other expenses on the death of the other.

Consider having a cohabitation property agreement with your partner. It should cover the legal ramifications of eventualities like:

  • What if you break up?
  • What happens if one partner dies?
  • How do you split the monthly payments and other bills?
  • What if one person wants to sell the home?

Conclusion

Owning a home is always an investment that pays back a long period of time. It is gratifying when done correctly.

Buying a house is a long-term venture that requires a lot of time, care, and thought process before committing. You both should be able to view it as a financial endeavor rather than being an emotional one.

You should be willing to do the homework and research your part before jumping on the bandwagon. Ensure that you consult with professionals every step of the way. That way, you can avoid potential pitfalls and move forward. Ensure that you know what you are getting into, trust your significant other, and plan for the worst-case scenario.

Priority Lending LogoPriority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

Second Mortgages

Second Mortgages2020 was a financially sound year for homeowners since the home equity has an average gain of $26,300 last year. According to Corelogic, an average homeowner has more than $200,000 in equity.

The pandemic brings in unprecedented financial difficulties, during which time you may need access to a large amount of money. Consider tapping into the equity and take out a second mortgage.

This article walks you through the inside workings of second mortgages, closing costs, interest rates, pros and cons, qualifications, requirements, the application process, and much more.

How Does a Second Mortgage Work?

The second mortgage is a loan similar to the one used to purchase your home. The reason it’s called a 2nd mortgage is that it is next in line to be repaid after your purchase loan.

Since it uses your home as collateral, the second mortgage lender can repossess your home if you fail to repay. In that case, the loan used to purchase your home is the first one to be repaid. The remaining, if any, will go towards the second mortgage.

Second mortgages tap into your home’s equity, which is the current market value of your home minus the loan balance. In most cases, lenders would let you borrow 85% of the home equity, depending on your credit score.

And, since the second mortgage loan is taken against your home, it has a lesser interest rate than other loans such as personal loans or credit cards. Depending on your choice of loan, it can either be a fixed rate or variable rate.

Types of Second Mortgages

The common types of second mortgages are:

  • Home Loans: The lender gives you a lump sum where you get the entirety of the loan amount to use as you wish. The loan is then repaid in fixed monthly payments. Generally, they come with a fixed interest rate and a fixed term.
  • Equity Lines of Credit: The lender gives you a line of credit from where you draw a certain amount of money as and when you wish, just like a credit card. Line of credit usually comes with adjustable rates.

Since they are secured against your home, they are cheaper than most loans but not as much as the first mortgage.

Is a 2nd Mortgage a Good Idea?

Second mortgages can be a great source of money when you require a lump sum at a reasonable rate of interest. They are a good idea when used for things that have long-term value.

Most people take out a second mortgage for things that have a long-term value, such as:

  • Home Improvements – You can proceed with home improvements such as a kitchen remodel or bathroom renovation, etc.
  • Debt Consolidation – The loan gives you the chance to pay off high-interest loans such as student loans, credit cards, etc.

However, it is not advisable to use it for inconsequential things that do not add value.

Closing Costs on Second Mortgages

As with the primary mortgage, the second mortgage also has closing costs, though reasonably reduced. Even then, it amounts to 5-6% of the loan amount.

For loans up to $200,000, the lenders charge a “flag” title insurance policy with a flat fee of $125 and a sub-escrow fee which is $225 -$250.

Additionally, the standard fees such as the recording fees, notary fees, and the payoff fees amount to $60-$150. And then, there are the administrative fees charged by the lenders that come to $250.

Apart from that, you may have to pay an additional cost of $300 – $400 if an appraisal is required. Finally, the credit fees come to $15 – $30.

How Much Home Equity Do You Need for a Second Mortgage?

Though equity requirements vary, second mortgage lenders prefer that you have a 15% – 20% equity in your home.

You can borrow up to 85% of the home’s equity, which is 85% of your home’s value – any loan balances. For example, consider your home’s worth to be $300,000 and loan balance $200,000.

85% of $300,000 = $240,000.

2nd mortgage would be $240,000 – $200,000 = $40,000.

Does a Second Mortgage Have Any Tax Benefits?

The tax benefits primarily depend on the kind of debt.

When your second mortgage is used to buy, build or improve a primary/second home, it becomes a home acquisition loan. If the home acquisition debt and the home equity debt combined together come up to $1.1 million, you could deduct all your interest in that particular year.

However, if the home acquisition loan is $2,000,000, you’ll be able to deduct only half of the total interest paid that year.

Can You Get a Second Mortgage to Buy Another House?

Yes! You can use a second mortgage to buy another house. Tapping into the home equity allows you to enjoy better rates of interest and tap into the financial resources that lay untouched otherwise.

If your second home is an investment property, home equity is often the least expensive option since they have lower interest rates.

Are Second Mortgage Rates Higher than First Mortgage Rates?

Second mortgages have higher interest rates than the first mortgage. This poses a risk to the lenders since they are second-in-line to be paid in case of foreclosure.

However, a second mortgage has lower interest rates than other unsecured loans such as personal loans and credit cards.

How Much Does It Cost to Get a Second Mortgage?

Second mortgages cost 2%-5% of the mortgage amount both in upfront costs and those that are paid over a period of time. Most of these are similar to that of the primary mortgage but are paid separately since they are considered to be separate loans.

Pros and Cons of Second Mortgages

Second mortgages, as with every other loan, come with their own pros and cons. Talk with your lender and consider the risks to make sure the second mortgage loan is the right one for you.

Pros of a Second Mortgage

Lump-Sum: Second mortgages allow you to borrow a significant amount of money. Since the loan is secured by your home, you would be able to borrow much more than unsecured loans.

Lower Interest Rate: Second mortgages have lower interest rates than other loans since they use real estate as collateral which reduces the risk to the lender.

Tax Benefits: In certain cases, the interest accrued will be eligible for tax benefits. According to the Tax Cuts and Jobs Act, you’ll be able to claim deductions if used for home improvements.

No Limits: Second mortgages give you the freedom to use the mortgage amount as you wish. You can use it for big purchases you wouldn’t be able to afford otherwise.

Cons of a Second Mortgage

Risk of Foreclosure: Since the loan uses your home as collateral, you run the risk of foreclosure if you fail to pay it back.

Closing Costs: Second mortgages can be expensive, much like your primary mortgage. The closing costs can end up in thousands of dollars in origination fees, appraisals, credit checks, and more.

Interest Rate: Though the rate of interest is much lesser than your credit card, it is higher than your purchase loan.

Undue Pressure on Your Budget: A second mortgage adds to your debt burden even with your low-interest rate. It can place pressure on your budget, especially if you are living paycheck to paycheck.

Requirements for Second Mortgage

To qualify for a second mortgage in the form of a home equity loan or HELOC, you’ll need:

  • A credit score of 620
  • A debt-to-income ratio of 43%
  • A decent amount of equity

Below is the paperwork your lender will require before closing the loan:

  • Copy of the deed to the property
  • Tax appraisal
  • W-2 (last 2 years)
  • Tax returns (last 2 years)
  • Paystub (current)
  • Proof of income (child alimony, disability payments, child support, lawsuit settlement, inheritance, and other sources of income)
  • Copies of bank statements (3-6 months)
  • Open credit accounts
  • Current loan statement
  • Homeowners insurance

Apply for a Second Mortgage

In terms of getting a second mortgage, the application process is similar to a primary mortgage; you do not need any home appraisal or inspection. However, you may need an assessment to determine the current value of your home.

To start with, talk with your lender to check if you are eligible for other financing options, including refinancing.

Here’s the application process for the second mortgage.

  • Calculate the equity in your home and how much you can borrow.
  • Gather all the required documentation, preferably in digital format, to speed up the timeline.
  • Shop around different lenders for better rates. Compare the lenders and financing options for your situation.
  • Once you finalize the lender, make sure you fill out the application with the correct details, or it may delay the approval.
  • Fax or email the documentation to save time and expedite the process.
  • Letting the lender know the reason for the loan may help with the approval process.
  • Your lender may want to conduct an appraisal and inspection if it hasn’t been done in the last six months.
  • Review the disclosure documents and verify the payment terms.
  • Ensure that the terms of the loan match with what you have agreed to.

Piggyback Loans

Second Mortgages - Piggyback LoansPiggyback loans — also known as 80-10-10 loans — are an entirely different kind of second mortgage. Rather than borrowing against your home equity, you get a loan piggybacking the primary mortgage. In short, you’d be using two mortgages to purchase your home. The first mortgage typically covers 80% of the home price, and the second mortgage covers 10%. The remaining 10% is covered by your down payment.

It is generally used to cover parts of the down payment and avoid private mortgage insurance (PMI), as well as avoid taking a jumbo loan where the interest rates are significantly higher.

First Mortgage vs. Second Mortgage

Similar to a first mortgage, a second mortgage is also taken with your home as collateral.

The first mortgage is the primary loan that you take to purchase your home. The interest rates are significantly lower than many other loans. Additionally, they are also tax-deductible. However, the closing costs may be high and needs to be paid upfront.

The drawback is that you do not possess the ownership of the property until you pay back the loan. And defaulting on the monthly payment can lead to foreclosure, with the primary mortgage being paid first.

On the other hand, the second mortgage is taken on the home equity in addition to the primary mortgage. The rate of interest is high when compared to first but lower than the unsecured loans.

Second Mortgage vs. Home Equity Loan

Home equity loans are pretty similar to second mortgages that many confuse between the two. They are alike in every aspect, including that they use home equity to finance the loans. You’ll need to retain 20% home equity to qualify for both these loans.

The rate of interest is fixed so are the payment terms. You make a monthly payment, failing which you will face foreclosure. A home equity loan is available in a lump sum similar to the second mortgage.

Second Mortgage vs. Home Equity Line of Credit

Second Mortgages Versus Home Equity Lines of Credit (HELOC)A home equity line of credit (HELOC) is also quite similar to a second mortgage in that it is financed by home equity. It has a revolving credit line from where you can borrow money and then make monthly payments, just like your credit card.

A HELOC also has a draw period, say ten years, where you can borrow money. After the draw period comes the repayment period, during which time you have to pay it off. Once you have paid it back, you can use the money on your credit line repeatedly without applying for more home equity lines of credit.

Like the second mortgage and the home equity loan, your home is at risk of foreclosure if you miss monthly payments.

Conclusion

By taking out a second mortgage, you tap into the home equity to finance your home improvements, big purchases, and such. While it has its risks, the lower interest is an attraction.

You can use a second mortgage to make substantial improvements to your home, settle debts on loans that carry a higher interest rate. Like the purchase loan, it is taken against the real estate, which means that the first mortgages have priority when the borrower defaults.

You need not take out a second mortgage from the same lender as your primary loan. Shop around and find the lender who carries the best rates. Also, look around for other loans appropriate for your financial situation.

Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

Types of Housing Loans: Choose the Right One

Housing Loans

Types of Housing Loans: Choose The Right One

Are you worried about figuring out the best type of mortgage to buy your dream home?

If yes, then stick to this post until the very end, and you’ll soon realize that choosing amongst the different types of home loans isn’t that problematic. When you wisely choose between the different types of mortgages, you could easily save a lot on your down payment, fee, and interest.

You just need to know the types of loans available, and if you’ve budgeted a down payment amount, reviewed your credit, then you would have more clarity for choosing the right home loan plan for you.

Fixed-rate Loan

It is a type of the most common conventional loan, where the life of the loan is typically around 15-30 years. In this type of loan, you are supposed to pay a single interest rate every month until you completely pay the loan. A Fixed-rate loan also includes a down payment.

Eligibility Criteria

Recommended for homeowners who possess a permanent job and are comfortable paying a fixed amount of savings every month. If you plan to stay in the same house as long as you are paying the loan amount, this kind of loan would be best suited for you. Anyone who plans to move after a little while must consider other loan options.

Adjustable-rate Mortgage

Adjustable-rate mortgages (ARM) offer mortgage interest rates lower than a fixed-rate mortgage for a certain period, such as five or ten, rather than the entire life of the loan. Unlike Fixed-mortgage rates where the interest rate is adjustable, only the initial interest rate is fixed for a certain period of time. After this initial period, the interest rates reset at yearly or even monthly intervals. ARMs are also referred to as variable-rate mortgages or floating mortgages.

Eligibility Criteria

It is well suited for home buyers with lower credit scores. Because it is generally not possible to get reasonable rates on fixed-rate loans if your credit score is low, therefore an adjustable-rate mortgage can help push those interest rates down enough to put homeownership within your reach.

This type of loan will also be an excellent option for you if you wish to move and sell your home before the fixed-rate period is up. The only problem with ARM is that your monthly payments can fluctuate.

FHA LoanFHA Loan

Are you bothered about the down payment amounts involved in different mortgage types? Then FHA or Federal Housing Administration loan is for you. With the help of this loan, you can borrow as much as 96.5% of your home’s total value. Unlike other typical loans that involve at least 20% of your home’s purchase price as the down payment. With an FHA loan, you’ll need to make a down payment of just 3.5%

Eligibility Criteria

FHA is usually recommended to homebuyers with very meager savings. To qualify for this loan, buyers must have a credit score of at least 580. Even If your credit score falls between 500 and 579, you can still apply for an FHA loan, but you’ll have to make a 10% down payment.

VA Loan

VA loan could be the best alternative to a conventional loan if you have served in the United States military. Veterans that qualify for a VA loan easily bag their sweet home with zero down payment and no mortgage insurance requirements.

Eligibility Criteria

The US Department of Veterinary Affairs backs the VA loans, and therefore VA has strict requirements for people to qualify for it. If you are active in military service and have served for 90 continuous days, you will be eligible for this loan type.

If you want to know more about the criteria for a VA loan, proceed to this post.

USDA Loan

The USDA Rural Development loan is designed primarily for families residing in rural areas. It is a Government-backed loan in which the government finances the entire 100% of the home price. USDA-eligible homes need no down payment and are offered discounted mortgage interest rates to boost.

Eligibility Criteria

People living in rural areas who are facing financial issues can access USDA-eligible home loans. These home loans are particularly designed to bring homeownership within easy reach with affordable mortgage payments. To comply with the USDA loan, your debt cannot exceed more than 41% of your income. Also, you’ll have to purchase the mortgage insurance with the FHA.

Frequently Asked QuestionsPeople Also Ask

  1. How many different types of housing loans are there?

There are a total of 8 types of mortgage loans for buyers and refinancers. These include fixed-rate, FHA, VA, adjustable-rate, USDA, interest rate mortgage, and Jumbo mortgage.

  1. What are the 4 types of housing loans?

The 4 main types of personal loans are-

  • Unsecured Personal Loans
  • Secured Personal Loans
  • Fixed-Rate Loans
  • Variable-Rate Loans
  1. Which type of loan is the cheapest?

The secured loans typically offer the lowest interests as compared to unsecured loans. The reason being lenders may consider a secured loan to be lesser risky as there’s an asset that backs up your housing loan.

Conclusion

Many new home buyers get confused while choosing the right mortgage plan, as there are several options to choose from. One best tip to make this process a bit simpler would be to figure out certain things. Nailing down things like your budget and down payment and reviewing your credit score will help you have a better idea as per your requirements.

Related to housing loans: Mortgage Calculators

Refinancing a Mortgage – Your 2021 Guide

Refinancing a Mortgage - Your 2021 GuideMortgage refinancing is when you pay off your existing mortgage by obtaining a new loan. With the existing one paid off, the new loan takes its place, which you then pay in monthly installments.

But it isn’t as easy as it sounds; Did you know that the costs could be 3-5% of the loan amount, which could be $2,000-$5,000?

The COVID-19 pandemic has caused the mortgage rates to lower to the 3’s from the 4’s of 2019. If you want to refinance, now is the best time before the rates rise again in mid to late 2021.

This article walks you through everything you need to know about refinancing, its types, pros, and cons, mistakes to avoid, tax implications, etc.

What Is Refinancing a Mortgage?

Refinancing is a process by which you obtain a new loan either to pay off the current one or to consolidate the debt, on the condition that the new interest rates are lower with better terms. With refinancing, the borrowers negotiate a new loan agreement with lower monthly payments, a better monthly payment structure, and change the loan type.

Types of Refinancing

No two refinance loans can be the same. They vary in many ways depending on their debt, mortgage, and also the reasons for refinancing. Having said that, there are three types of refinancing loans.

  • Rate-and-Term Refinance
  • Cash-out Refinance
  • Cash-in Refinance

Rate-and-Term Refinance

With a rate and term, the loan amount is equal to the mortgage on the home. The homeowners can pay off the original mortgage and get a new mortgage with an altered loan term or mortgage rate, sometimes even both. You can either:

  • Lower the loan term and maintain the interest rate
  • Lower the interest rate and maintain the loan term
  • Lower the interest rate and the loan term

The aim is to reduce the monthly payments and save money. So, you choose whichever option works the best. However, if you shorten the length of your loan, the monthly payments will be higher.

Cash-out Refinance

With a cash-out refinance, you tap into the equity in your home. Home equity is the difference between the mortgage amount and the value of your home. The new loan you get is higher than the mortgage.

You get to pay off what you currently owe on your home and cash out the excess amount. In the case of a debt consolidation refinance, the cash-out will be directed to the creditors.

Depending on the current market, you may be able to get a lower interest rate or shorter term, whatever you may desire.

Cash-in Refinance

With a cash-in refinance, the homeowners can pay down or close out the existing mortgage. The lower the money you owe to the bank, the lower your interest rate. You can also have a shorter loan term too.

There are various reasons why homeowners prefer a cash-in:

  • Lower interest rates and LTV ratio
  • Cancel mortgage insurance premium payments

Pros and Cons of Refinancing Your Home

Refinancing the home allows homeowners to take a breather in times of economic uncertainty. However, you are essentially taking a new mortgage loan with better terms with a refinance than your current loan. But it need not be so since it depends on various other factors.

It pays to understand the process, evaluate the pros and cons before choosing to refinance.

Pros and Cons of RefinancingPros

  • Low monthly payment
  • Lower interest rate
  • Save your interest in the long term by reducing your loan term.
  • Convert from an adjustable-rate mortgage to a fixed-rate mortgage and enjoy the predictability and stability it offers. Locking the rate helps to protect against rising interests.
  • A cash-out refinance helps you pay off the loans and saves you a chunk of money for home improvement projects.
  • Homeowners whose principal is paid off will not be required to pay private mortgage insurance.

Cons

  • Lowering monthly mortgage payments resets the length of the loan.
  • Shifting to a fixed-rate loan prevents you from taking advantage of lowered interest payments in the future.
  • Lowered loan term will increase the monthly payment.
  • Cash-out refinance will cost you more interest throughout the life of the loan.

To Refinance or Not to Refinance

Refinancing your loan will save money, especially when the interest rates are low. You can also build home equity and pay off your mortgage. But are these worth obtaining a refinance?

Here are a few pointers to consider before making a smart financial decision:

  • Can you lower the interest rate by one-half to three-quarters? If so, you can reduce your mortgage payment substantially.
  • Your monthly savings should balance the cost of refinancing.
  • Do not refinance if you plan on moving any time within the next two years. You cannot recoup the cost within this timeframe.
  • Are your proceeds from refinancing going towards retirement savings or on a spending spree? If it’s the latter, do not refinance.
  • Are you cashing out to renovate your kitchen or bathroom? Doing both can increase the value of your home.

Best Time to Refinance Your Mortgage

Your mortgage loan officer has a monthly and a quarterly target to meet. Not everyone can keep up with their targets and will be desperate by the end. As such, you will be able to score better terms on your mortgage.

Considering the above, the best time of the month will be the last two weeks of every month. And the best time of the year for refinancing your mortgage will be the last month of every quarter, March, June, September, December.

The Refinance Application Process

Refinancing a Mortgage ApplicationThe mortgage refinance process can be pretty intimidating, but they aren’t different from applying for a home loan. Here’s a quick overview of the application process:

  • Make sure your credit score is high enough for a new loan.
  • Compare different mortgage loans to find better loan options.
  • Gather all the necessary documentation.
  • Apply for a mortgage refinance and ensure that you do not make any mistakes.
  • Your lender takes over starting with the appraisal process. You are responsible for the cost of the process, which is $300 and $400.
  • Your refinance loan goes through an underwriter who check for the mistake, missing documents, and such.
  • Lock your interest rate so that you get the rate specified in the approval letter. Make sure this happens six days before the closing process, or the closing costs can increase.
  • You can close the loan in the presence of a lawyer or notary public.
  • The three days right of cancel period comes into effect, after which the lender will pay off your old mortgage, and the new refinance loan will be in effect.

Documents Needed for Refinancing a Mortgage

Your lender might require these documents before you qualify for a refinance loan.

  • Pay stubs (for the last 2-3 months)
  • W-2 and/or 1099-MISC forms (for the past two years)
  • Tax returns
  • Statement of assets (including bank statements, retirement accounts like 401k, bonds, stocks, mutual funds, life insurance policies, etc.)
  • Statement of debts
  • Homeowners’ insurance

Mortgage Refinance Requirements

The first step in the refinancing process is to make sure you are eligible for loans and be prepared for the lengthy process. Here are the minimum requirements to apply for a mortgage refinance:

  • You may need six months or a year after you own a property with your name on the title to apply for a mortgage loan.
  • An adequate credit score of 620 or higher.
  • A 20% home equity is the minimum requirement for refinancing.
  • Your debt-to-income ratio should be 50% or lower. If you have a higher DTI reduce your loans before applying for a refinance.
  • Ensure that you can afford the closing costs. Some lenders may roll it into your new loan.

Costs of Refinancing a Mortgage

A refinance comes with costs and fees that you would have to pay beforehand. So, it pays well to consider how much the refinance would save over the years:

  • Origination fee: Up to 1.5% of the loan amount
  • Application fee:$75 to $500
  • Credit report fee:$30 to $50
  • Home appraisal:$300 to $400
  • Home inspection:$300 to $500
  • Flood certification fee:$15 to $25
  • Title search and insurance fee:$400 to $900
  • Reconveyance fee:$50 to $65
  • Recording fee:$25 to $250

Refinance Closing Costs: Lower and Avoid Fees

The goal of refinancing is to be able to have spare cash for expenses. But what if you cannot afford the fees?

Here are a few ways by which you can reduce the costs:

  • Improve your credit score and debt to income ratio.
  • Negotiate the fees if possible, especially if you have good credit and stable income.
  • If you go with the same company as your mortgage, you can save money on title fees.
  • Think twice about paying for mortgage points. With good credit, you are already eligible for a low-interest rate.
  • You can also avail of third-party services for a home inspection, title, etc., for inexpensive options.
  • Your lender may waive appraisal fees if your home has been appraised recently.

However, few companies may also offer no costs. But in truth, the lender rolls it into the mortgage loan amount spreading it over the life of the loan.

Pitfalls to Avoid When Refinancing a Mortgage

Pitfalls to AvoidMost homeowners look for low interest in mortgage refinancing. But finding and availing one is not as simple as that. Here are a few mistakes you might want to avoid when looking to refinance a mortgage.

  • Not shopping around for better interest rate: Even half a percentage reduction can save thousands in the long run.
  • Not looking into the terms: Low mortgage interest rates can hide high fees. Ensure you check the closing costs before finalizing the refinance loan.
  • Not Saving enough: To make the refinance worthwhile, you need to make sure that the new interest rate is at least a full percentage lower than the current one.
  • Refinancing frequently: In the chase for lower interest rates, homeowners end up refinancing. With every new loan, you have further fees and an increased loan balance. This cycle may take years to break even.
  • Not taking time to review the documents, including the good faith estimate: Unscrupulous mortgage lenders can add hidden fees to the final documentation. Make sure it matches with the good faith estimate.
  • Cashing out home equity: When you take too much out of your home equity, you leave yourself exposed to financial troubles when the real estate prices fall.
  • Extending the life of your new loan: In the search for a lower interest rate and low monthly payment, your repayment term can increase.
  • Agreeing to prepayment penalties: There is no need for a refinance to have a prepayment penalty for more than 3-5 years. It is a way for your lender to make up for the “no-cost” refinance.

Misguided Reasons to Refinance Your Mortgage

Even with a lower interest rate, refinancing may end up costly for a few due to their closing fees. While everyone has a reason to refinance, here are a few reasons for which you should not refinance your home:

  • Consolidating your unsecured debt like credit card debt into your secured debt; When you miss the monthly payment, you will end up losing your home.
  • Do not refinance to save up for a new home. If you plan to move within two years of mortgage refinancing, you are not saving anything at all.
  • Cashing out for investing in a stock market is not a good idea even when it seems stable. But if you are looking to build your emergency fund or renovate your home.
  • Switch from ARM(adjustable-rate mortgage) to fixed-rate loan only if you are not planning to sell anytime in the near future.
  • If you want to refinance purely to take advantage of the no-cost refinance, the fact is there is no such offer. Mortgage lenders wrap the costs into your loan.

Appraise Your Property Before Refinancing

A home appraisal is an essential step in your refinance process where an appraiser gets you an estimate of how much your home is worth at a current point in time.

They start by taking pictures of every room in the house, along with the exterior. Then by comparing your home to the prices of the other homes in the neighborhood, they finalize a price. Your lender considers this as an upper limit for your home loan.

A low appraisal is a serious problem since it lowers the value of your home, whether you are refinancing or selling. Here are some ways by which you can increase the chances of a better appraisal:

  • Improve the curb appeal by planting new plants and mowing your lawn.
  • Declutter your home and put away everything in its designated place.
  • Ensure that all the appliances and light bulbs work.
  • Touch up the paint if needed. Or repaint if possible.
  • Add small upgrades to increase the home value.

However, you may not always need an appraisal for refinancing. In case you have a VA or a USDA loan, an appraisal may not be necessary at all, and you can refinance up to 120% of your loan value.

Impact of Refinancing on Property Taxes

Refinancing doesn’t affect property taxes in any way. But if you are in a neighborhood with increasing property rates, your appraiser may value your home to be much higher than your earlier assessed value. While this doesn’t increase the taxes in itself, it is an indication that the taxes may increase in the future.

Tax Implications of Refinancing Your Mortgage

While refinancing a mortgage can be a money-saving move, it has profound implications for your tax. Refinance loans are viewed as debt restructures and would not enjoy the same tax benefits as your original mortgage.

For a loan the originated before Dec 15, 2017, the interest will be deducted for a $1 million loan balance. In the case of loans after the cut-off date, the loan balance should be $750K for joint filing and $500k for married filing separately.

Another point to note is that there will be less rate to deduct when refinancing to a lower interest rate during the tax period.

For example, if you pay 5% interest on a 30-year loan and refinance to a 15-year fixed-rate mortgage with a 3% interest, you can see a 40% reduction in interest costs.

While you save money by paying less interest, you would not be able to claim much during the tax period.

Claim Your Refinance Tax Deductions

You can claim your:

  • Mortgage Interest
  • Discount Points
  • Closing Costs

Concerning the discount points and the costs, you can claim these as deductible through the course of your loan. For example, if you have spent $5,000 and $15,000 on these expenses for a 30-year fixed-rate mortgage term, you can deduct $250 and $500 every year from your taxes.

Coming to the mortgage, you can claim the deduction for the interest paid the same year. For example, if you paid $1000 in mortgage rates for the year 2021, you should deduct $1000 from your taxes for the same year.

The Effects that Refinancing a Mortgage Have on Credit Scores

Refinancing a Home - Factors Affecting Credit ScoreMortgage refinancing can affect the credit scores, albeit temporarily, in a couple of ways:

  • Credit Check: With every refinancing, your lender will do a credit check to check your credit standing and history. This is called a hard inquiry which causes your score to drop slightly and momentarily.
  • Applying for multiple loans over a long time period: Every new mortgage loan that you apply for is likely to make a hard credit inquiry every time. And with every check, your credit score can negatively affect your score. Ensure that you place the inquiries within a 14-45 day period to minimize the hit to the credit.
  • Account Closure: Every loan that you close can also lower your credit score. But if the loan is in good standing, the hit to your credit score might be less.

Conclusion

Refinancing makes sense if you are looking to lower the interest rates and mortgage payments. But you may want to research and shop around for better options. Not every lender has the same rates, terms, and costs for closing.

Refinancing is an easy way of hitting your financial goals, but only if you are careful about the refinance process and the lender. With the rates at a record low, you may want to commit before they rise again now that the world is returning to normal. But make sure you do not have any plans to move or sell until you break even.

Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

Other timely articles you may find helpful: