What is mortgage refinancing?
And why you need it
A mortgage refinance replaces your original mortgage with a new one, ideally with a lower your interest rate. You’ll get a new interest rate and other loan terms, and you can make other changes to the loan, such as trading an adjustable-rate mortgage for a low fixed-rate mortgage.
Why refinancing your current mortgage may be right for you
By refinancing, you can access the equity in your home to obtain funds for home renovations, tuition payments, debt consolidation or other major expenses.
If you currently have an adjustable rate mortgage (ARM) that will reset soon and are concerned about rising rates, consider switching to a fixed rate mortgage. This would allow you to enjoy the convenience of a stable monthly payment.
Pay off your home mortgage sooner by refinancing for a shorter term. While your monthly payments may be higher, you may pay less interest over the life of the loan.
Take advantage of favorable mortgage rates to possibly lower your payment and improve your monthly cash flow.
Types of Mortgages
Fixed-rate mortgages keep the same interest rate over the life of your loan, which means your monthly mortgage payment always stays the same. Fixed loans typically come in terms of 15 years, 20 years or 30 years.
Unlike the stability of fixed-rate loans, adjustable-rate mortgages (ARMs) have fluctuating interest rates that can go up or down with market conditions. Many ARM products have a fixed interest rate for a few years before the loan changes to a variable interest rate for the remainder of the term. Look for an ARM that caps how much your interest rate or monthly mortgage rate can increase so you don’t wind up in financial trouble when the loan resets.
Jumbo mortgages are conventional types of mortgages that have non-conforming loan limits. This means the home price exceeds federal loan limits. For 2020, the maximum conforming loan limit for single-family homes in most of the U.S. is $510,400. In certain high-cost areas, the ceiling is $765,600. Jumbo loans are more common in higher-cost areas, and generally require more in-depth documentation to qualify.
The U.S. government isn’t a mortgage lender, but it does play a role in helping more Americans become homeowners. Three government agencies back mortgages: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
A conventional mortgage is a home loan that’s not insured by the federal government. There are two types of conventional loans: conforming and non-conforming loans.
A conforming loan simply means the loan amount falls within maximum limits set by Fannie Mae or Freddie Mac, the government-sponsored enterprises (GSEs) that back most U.S. mortgages. The types of mortgage loans that don’t meet these guidelines are considered non-conforming loans. Jumbo loans, which represent large mortgages above the limits set by Fannie and Freddie for different counties, are the most common type of non-conforming loan.
Generally, lenders require you to pay private mortgage insurance on many conventional loans when you put down less than 20 percent of the home’s purchase price.
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