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What Is a Refinance?

Refinancing means replacing your current home loan with a new one. This is often done to save money. JVM Lending can guide you through this process.

There are two main kinds of refinances; both of which have financial value to homebuyers. The two types of refinances are a rate and term refinance and a cash-out refinance.

5 Things to Know About Refinancing Your Home

For those looking to refinance, we recommend familiarizing yourself with the following 5 things:

How Does Your Credit Score Impact Your Refinance?

Your credit score deeply influences your refinancing options. It’s a number that lenders use to gauge how likely you are to repay your loans. If your score is 760 or above, you’re in an excellent position, likely to get access to the most favorable interest rates out there.

However, it’s vital to note that the credit score you think you have might not be the one lenders see. There might be variations between the score you find on platforms like Credit Karma and the one used by mortgage lenders during the refinancing process.

Why does this difference occur? Mortgage lenders look at three credit scores obtained from the major credit agencies: Experian, TransUnion, and Equifax. From these three scores, they use the median or middle score to evaluate your loan eligibility and the interest rates you’ll receive.

For a clearer understanding of what to expect, take some time to review your credit history carefully. Look for any errors on your credit report or areas that need improvement. If you’re unsure, experts at JVM Lending can assist you in this process. They can perform ‘soft’ or ‘hard’ credit checks, explaining the details and implications of each, to give you a clearer picture of where your credit stands.

Understanding Debt-to-Income Ratio in Refinancing

Your Debt-to-Income (DTI) ratio is a critical factor when you want to refinance, much like when you first get a mortgage. This ratio is crucial as it helps lenders see if you can handle more debt.

DTI is a straightforward measure. It’s a comparison between the money you earn each month (income) and the money you owe (debt). For a successful refinance, your DTI ratio should be within acceptable limits. Different loan types, like Conforming or FHA loans, have different DTI requirements, often capped at percentages like 42% or 49.99%.

So, what does this mean for you? First, be aware of your monthly income and the total amount you owe each month. Having this information helps you understand whether you qualify for refinancing.

To start, tally up your monthly debts. This includes mortgage payments, car loans, credit card bills, and other debt. Then, divide this total by your gross monthly income. The resulting percentage is your DTI.

For example, if you owe $2,000 each month and earn $5,000, your DTI is 40% ($2,000 / $5,000 = 0.40 or 40%). If the program you’re interested in requires a DTI below 42%, you’d likely qualify.

Understanding your DTI is a good starting point in the refinancing process. If you’re unsure or need help calculating, don’t hesitate to reach out to experts like JVM Lending for guidance. They can provide clarity on DTI requirements for various loan programs and help you understand if refinancing is a smart move for you.

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Understanding Refinancing Costs

Like a purchase transaction, refinance transactions also come with closing costs. On average, closing costs on a refinance can average anywhere between 2%-6% of your loan amount.

When it comes to determining the closing costs, there are two types of refinances to pursue: a “no-cost” refinance or a regular (rate and term) refinance. A no-cost refinance is not free; it simply means that the lender will offer a credit (in exchange for a slightly higher interest rate) to cover all non-recurring closing costs for the transaction.

Non-recurring closing costs are those specific to the transaction, including loan fees, title fees, appraisal fees, recording fees, etc. The borrower is still required to pay all closing costs that would be incurred regardless of the refinance, including those related to the impound account (property taxes and homeowners insurance) and pre-paid interest.

When discussing the potential costs associated with a refinance, it’s important to note that your lender is still required to prove that there is a tangible net benefit to you as the borrower for undergoing the refinance. During a “no-cost” refinance, your lender will ensure that you will be refinancing into a new loan with either a lower interest rate or lower principal & interest monthly payment; for a ‘regular’ refinance, your lender will conduct a cost-benefit analysis to ensure that you will recoup the upfront costs incurred to close the refinance with the monthly savings from the refinance’s lower interest rate (within a reasonable period of time).

How Much Home Equity Do You Need To Refinance Your Home?

Equity is key in refinancing. It’s the value difference between your home and your remaining mortgage balance. In simple terms, if your home is worth more than what you owe, you have equity.

For cash-out refinances, equity is vital. Here, you exchange your home’s equity for cash by taking on a larger loan. This extra cash can be used for significant home repairs or paying off debts.

When you refinance, an appraiser will estimate your home’s value. This process helps determine your equity. To ensure a fair appraisal, inform the appraiser and your lender about recent home improvements or upgrades, as these increase your home’s value.

Understanding your home’s equity is crucial in the refinancing process. If you need assistance or have questions about equity and refinancing, consult with experts like JVM Lending. They can guide you through the appraisal process and help you understand how much equity you need to successfully refinance your home.

How Long Does A Refinance Take?

Although similar to a purchase transaction in terms of the formal loan approval process, a key difference between a purchase and refinance is that a refinance will take longer. On average, refinances can take 30-45 days. We always recommend moving as quickly as possible, whether it’s responding to your lender or uploading the requested documentation, to ensure you can complete your refinance without any unforeseen factors emerging to interfere down the road.

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Why Should I Refinance?

Under a rate and term refinance, you are exchanging your existing mortgage loan with another mortgage loan that offers either a lower interest rate or more favorable loan terms. A lower interest rate may be available for a variety of reasons – for example, maybe the market took a dip and rates are now lower than when you purchased, or maybe you originally had a 30-year loan and can now qualify for a 15-year loan (which is associated with lower interest rates). A different mortgage term involves switching loan products – for example, maybe your credit score improved significantly and you’d like to refinance from an FHA loan into a Conforming loan, to remove the monthly mortgage insurance payment that would otherwise be required throughout the life of the FHA loan.

Under a cash-out refinance, you as the homeowner are using the equity in your property to obtain a higher loan amount. The higher loan amount allocates cash to you as the borrower, which can be used for either major property repairs/remodeling or debt consolidation. It is important to note that cash-out refinances are usually associated with higher interest rates, so you may be sacrificing a lower rate for the extra cash.

Overall, a refinance is a great opportunity for many homeowners to lower their monthly mortgage payment, make improvements on their property, or consolidate debt.

If interested in a refinance, please reach out to the JVM Team at (855) 855-4491 or at [email protected].

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