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Home Buying and Refinancing

Why refinance?

Navigating a Competitive Housing Market

Flagstar’s Human Interest Rate means that we’re always thinking about ways to keep you and your money thriving. Whatever your financial goals, from low-interest mortgages to high-yield savings, it’s our job to help you get there. That’s why we like to explain banking concepts by breaking them down to basics. We want you to understand all your options and answer all your questions so you can make the most of your money.

 

What is a mortgage refinance?

We know that you might not be totally sure about what a mortgage refinance is, whether it’s complicated or necessary or where to get started. Let us break it down for you, so you can decide if it could be a smart move for your finances and if now is the right time to refi.

 

In the simplest terms and broadest definition, a refinance means taking out a new loan to pay off your existing loan. It can make it possible for homeowners to take advantage of lower interest rates, cash out a part of their home equity or change the terms of their repayment in order to reduce their monthly mortgage costs. It can allow homeowners to reassess their current mortgage terms and change them to a plan that fits better.1

 

So, a refinance might mean:

  • Paying off a loan faster, thereby paying less overall
  • A lower monthly payment due to better interest rates
  • A cash advance against the value of your house (to remodel or make repairs, for example)
  • The canceling or restructuring to remove the Private Mortgage Insurance premium you may be paying if you opened your mortgage with less than a 20% down payment.1

A refinance might not be as time consuming as you think. You’ll be evaluated on similar areas as you would for your initial purchase mortgage (credit score/history, income/employment and assets) and likely require a home appraisal, but you can expect less paperwork and a shorter time to close (typically 90 days).

 

Even better? Some refinancing options don’t require verification. With a “streamlined” refinance program, certain borrowers can bypass the standard verifications through a simplified, speedy underwriting process designed to make things move faster.2

 

When does it make sense to refinance your mortgage?

As with any financial decision, every situation is unique, but we can point you toward a couple of key considerations to take into account while deciding whether you should refinance. Here are some basic guidelines to help you decide:

  • Are the current interest rates at least one full percent lower than your existing rate?
  • Do you plan on staying in your home for at least 5 more years?
Why do you want to refinance your mortgage?

You should consider avoiding unnecessary paperwork, credit checks and appraisals if it won’t ultimately be beneficial. Ask yourself what you’re trying to accomplish.3

  • Do you want to lower your monthly payment?
  • Are you hoping to leverage home equity for a big expense?
  • Are you trying to pay off your mortgage faster?
  • Would you like to convert your loan from an ARM to fixed (or vice versa)?
  • Has your credit remained strong and/or improved?

Read on to learn about how these different types of refinances can work for or against you and to determine the best refinancing solution for you.

 

So, let’s clarify: Why should you refinance? 

To lower your monthly payments.

One of the most common reasons to pursue a refi is to lower your monthly payments. If mortgage rates have dropped and the current market is posting better interest rates than what you currently pay, refinancing can be a very smart choice. It can not only decrease your monthly payment but depending on the term of your new mortgage it could potentially allow you to pay off your mortgage faster. Both are financially savvy moves that could mean big savings for you in the long run.4

 

But it’s important to remember that much like your original mortgage loan came with closing costs, your refinance will, too. So, make sure to factor in things like application fees, appraisal, lender attorney’s fees, origination fees and more. Weigh those fees against any potential savings to make sure the refinance makes sound financial sense for the short and long term.4

 

To leverage your existing equity.

Don’t forget: Your home has inherent value. You have equity. It’s an asset that you can use as collateral to borrow against. That means that you can use a refinance to take cash out of the equity in your home, should you choose to do so.

 

Why would you borrow against your home equity for cash? There are really good reasons and a few reasons that should give you pause. Many choose to take out home equity loans for large expenses, like remodeling or home repairs. These can potentially add to the value of your home and even increase your return on investment when you sell.

 

Here’s how a cash-out refinance works

As an example, let’s say the Walkers want to remodel their home, which will cost $100,000. When they originally purchased the property, the couple borrowed $400,000. Today, they owe $200,000 on their mortgage, which means they’ve built up at least $200,000 in home equity. Over the years, property values have increased in their neighborhood, and their home is now valued at $500,000. The Walkers can convert a portion of their home equity into cash using a cash-out refinance.

In this example, the couple can take out a new mortgage loan for $300,000. The new mortgage would pay off the $200,000 remaining balance from their original loan and leave $100,000 available to pay for remodeling costs.

 

On the other hand, borrowing against your mortgage to pay for college or pay off debt can be risky, and should be carefully considered, weighing potential benefits against potential outcomes.3

 

Refinancing to pay off should be debt isn’t a smart idea unless you’ve already analyzed the way you spend money. What got you into debt in the first place? Do you make a habit of overspending? If there is a chance that you will keep spending money at the same rate after refinancing to pay off debt, you might be better off avoiding temptation, remaining at your current mortgage rate and finding other ways to approach your debt. Start by determining your debt to income ratio and let that guide your decisions.5

 

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1https://themreport.com/daily-dose/05-28-2019/millennials-choose-homeownership-before-marriage

2Please consult your tax advisor for information on your specific situation.