Refinancing Your Mortgage- The Complete Guide

The Complete Guide to Refinancing Your Mortgage

Have you been thinking about refinancing your mortgage, but are not sure where to start? In today’s rate environment, a refinance may help you save money. You may enjoy a lower mortgage payment or be able to borrow money for home improvements at a low-interest rate. 

Borrowers refinance to lower an interest rate, tap into the home’s equity, or remove mortgage insurance in Lake Charles, LA. Other borrowers want to get out of a risky term, such as an adjustable-rate loan choosing a predictable fixed-rate loan instead. 

Keep reading to learn how to refinance your mortgage in today’s competitive rate environment.

How a Mortgage Refinance Works

Since you already own the home in Louisiana and have a mortgage, there’s no seller. Instead, you pay the bank/lender that holds your first mortgage. You borrow at least as much as you owe on the current mortgage, but sometimes more. It depends on the refinancing goal.

You must qualify for a refinance, just like you did with the purchase loan. The steps are as follows:

  • Apply for the refinance loan 
  • Provide the necessary documents including income documentation, asset statements, employment information, and approval to pull your credit report
  • Pay for an appraisal to determine your home’s current value
  • Get through underwriting and obtain a ‘clear to close’
  • Pay your original loan off in full with the proceeds of the loan 
  • Take possession of any remaining funds (if you borrowed more) and use accordingly
  • Start making payments to your new lender

Reasons to Refinance Your Mortgage

Many people refinance to save money, but it is not the only reason. A few other reasons include:

  • Eliminate mortgage insurance – Borrowers pay FHA mortgage insurance for the life of the loan. If you want to drop it, you must refinance into a conventional loan. If you owe less than 80% of the home’s value, you will not pay PMI on a conventional loan either. If you borrow more than 80%, you will pay PMI until you pay the balance below 80% of the home’s value.
  • Change the term – You can extend or shorten your mortgage term by refinancing. For example, some borrowers refinance from a 30-year term to a 15-year term. The shorter-term loans offer lower interest rates and you pay the loan off faster. You can also reverse this if you can’t afford your 15-year payments. Extending the term to a 20, 25, or 30-year term will lower your payments. Just know that you will pay more interest over the life of the loan on a longer-term.
  • Use your equity – If you owe less than your home is worth, you may take that cash and use it as needed. Common uses include debt consolidation, home improvements, or paying for college. Each loan program has a maximum amount of equity that you can tap into; we discuss this in detail below.

Conventional Mortgage Refinancing

Conventional loans, known as Freddie Mac and Fannie Mae Loans, have high loan limits and more property type flexibility. They allow you to refinance your mortgage of a primary residence, second home, vacation home, or investment property. 

The conventional loan limits are as follows:

  • Single-family home $484,350
  • 2-unit home $620,200
  • 3-unit home $749,650
  • 4-unit home $931,600

You also must meet the LTV guidelines. The maximum amount you can borrow depends on the purpose of the loan (rate/term vs cash-out) and the type of property in Louisiana that you are refinancing. Typically, you can borrow more of your home’s equity on your primary home than you could on a second home or investment property.

The maximum LTVs for primary residences are as follows:

  • Rate/term refinance 97% (1-unit), 85% (2-units) 75% (3-units)
  • Cash-out refinance 80% (1-unit), 75% (2-4 units)

The maximum LTVS for second homes are as follows:

  • Rate/term refinance 90% (1-unit)
  • Cash-out refinance 75% (1-unit)

The maximum LTVs for investment homes are as follows:

  • Rate/term refinance 75% (1-4 units)
  • Cash-out refinance 75% (1 unit) 70% (1-2 units)

Conventional loans typically require a minimum 680 credit score, a maximum 28% housing ratio, and a maximum 36% total debt ratio. If you have a higher credit score of at least 720, a lender may allow a total debt ratio of 45%, though.

FHA Refinance

The FHA offers flexible options to refinancing your mortgage. Borrowers with a current FHA loan as well as non-FHA borrowers in Louisiana can qualify.

Current FHA borrowers can use the FHA streamline refinance. This program helps borrowers lower the interest rate/payment or loan term. You cannot access your home’s equity with this program, though. All you need is a timely mortgage payment history (no late payments in the last 12 months) and proof that you benefit from the refinance. You do not need an appraisal, to prove your income or your credit score. Each lender has its own overlays, though, so some lenders may require that they pull your credit or check out the estimated value of your home.

If you do not have an FHA loan now, the FHA cash-out refinance may be an option. Borrowers can borrow as much as 80% of the home’s equity. For example, if you have a current loan balance of $150,000 and your home is worth $275,000, you can take a mortgage as high as $220,000 (80% of the value). This leaves you with $70,000 cash-in-hand after paying off your current loan.

Keep in mind that FHA loans require both upfront mortgage insurance and annual mortgage insurance. Today, borrowers pay 1.75% of the loan amount at the closing and 0.85% of the outstanding principal balance monthly. A $220,000 loan would cost $3,850 upfront and $156 per month in addition to the principal, interest, taxes, and homeowner’s insurance.

VA Refinance

Veterans have two options to refinance:

  • Streamline VA refinance
  • Cash-out VA refinance

The VA streamline mortgage refinance requires little paperwork for approval. First, you must have a current VA loan. You must also be able to prove that you have made your last 12 months of mortgage payments on time and that the refinance saves you money. If you are eligible, you will not need an appraisal or to prove your income. Some lenders, however, may pull your credit – again, this varies by lender.

The VA cash-out refinance is another veteran’s only program, but you do not need a current VA loan to use this option. You can also use it if you want to tap into your home’s equity. The VA allows a max LTV of 90% on cash-out refinances. 

The VA allows loan amounts up to $484,350 in most counties but goes up to $726,525 in high-cost areas. The VA does not set minimum credit score requirements or max debt ratios, but most lenders prefer at least a 620 credit score and a max DTI of 43%. This does vary by lender, as each lender has its own investor overlays to follow.

VA loans have an upfront funding fee equal to 1.5% – 3.3% of the loan amount. The exact amount you pay depends on your veteran status and the type of loan you take out. VA loans don’t require annual mortgage insurance, though.

USDA Refinance

The USDA has three refinance options, but you must have a USDA loan to use any of them:

  • USDA streamline assist refinance
  • USDA streamline refinance
  • USDA non-streamline refinance

The USDA streamlined assist program is the most beneficial. To qualify, you must:

  • Live in the property as your primary residence
  • Have a current USDA loan
  • Made your last six mortgage payments on time
  • Save at least $50 a month by refinancing

That is it – no credit checks, income verification, or appraisal required.

The USDA streamline refinance is similar as you do not need an appraisal or to verify your credit. You do, however, need to verify your income and meet the USDA debt-to-income ratio guidelines, which are 29% for housing and 41% for your total debt ratio. You must also have made your last six months of mortgage payments on time. Borrowers choose this option when they will not save at least $50 on their mortgage but want to refinance. It is also the only option if you want to remove a borrower from the loan.

The USDA non-streamline refinance requires full verification of all qualifying factors, but allows an LTV of up to 100% of the home’s current value. You can wrap your closing costs into the loan, if the appraised value allows for the room. You must have made your last six months of payments on time.

Bottom Line

Refinancing your mortgage serves many purposes. With today’s low-interest rates, you can save money on your mortgage or borrow money for large expenses, such as home improvements or debt consolidation. Taking advantage of the low rates today may be your most affordable option to meet your financial goals. We can help you find the perfect solution for your refinancing needs, helping you save the most money on your mortgage loan in Lake Charles, LA. 

About The Author

Channing Moore

Channing is the owner of Bayou Mortgage. He is passionate about empowering people through education and training to own a home. In his spare time you can catch him at church, reading a book or working on his latest project.

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