Refinancing Options Regardless of Mortgage Rates

Since the media has over zealously expounded on the issue of tighter bank lending standards, a number of homeowners that could refinance their existing mortgages are overlooking this option due to the concern over being denied for a new home loan. 

While, it is difficult to refute the argument that bank mortgage lenders are more conservative in their home loan underwriting practices since the credit crisis began, this by no concludes that mortgage loans for refinance transactions are any more difficult to obtain than one for a purchase.  In fact, quite the opposite is true.  In general, mortgage loan approvals for a refinance transaction are easier to obtain than a purchase transaction. 

A key difference between a mortgage refinance a mortgage for a purchase transaction from the mortgage lenders point of view is the equity in the home or down payment.  A standard mortgage is evaluated based only a few factors, the most significant being the credit of the borrower, the income relative to the debt payments and the equity in the home. 

The equity is measured by the loan to value.  On a purchase, the loan to value is a reflection of the down payment amount where a 10% down payment would lead to a 90% loan to value.  With a refinance the loan to value is the loan amount divided by the property value for example; a $100,000 loan request for a property worth $125,000 would have a loan to value of 80%. 

Even with the recent reduction of property values over the past years, most homeowners find that their home is their most valuable financial asset and the mortgage they have is their largest debt.  Consequently, reviewing the existing mortgage interest rate, monthly payment, mortgage balance and potential mortgage options is a prudent financial decision.

As part of the mortgage review, in order to assess the benefits and costs of a mortgage refinance, a variety of factors should be considered, including: mortgage interest rate, type of mortgage, expected holding period for the mortgage or home and tax consequences.

With mortgage rates at or near record low levels, homeowners that have not refinanced yet or purchased their home during the last period of low rates, should compare their mortgage rate with the current mortgage rates and measure this against the other loan factors such as the length of time to hold the loan and tax savings.

When evaluating the mortgage interest rates, note that mortgage interest rates charged on a home loan will vary greatly depending on the type of mortgage.  Fixed rate mortgages offer the benefit of locking in a rate and knowing exactly what the monthly mortgage payments will be for the term of the mortgage.  Generally the longer the mortgage term, the higher the mortgage rate.  A 15 year term mortgage not only pays the home loan off in shorter time period but generally has a slightly lower interest rate as well.

When reviewing your mortgage options, be sure to factor in how long you intend to keep your home as well as your ability to handle potentially higher rates in the future with ARMs.  If you plan to downsize and move to a smaller home in a few years, a 5 year ARM would provide a much lower interest rate than a traditional 15 or 30 year fixed rate mortgage.

For homeowners that itemize your tax deductions, the interest that is paid on a mortgage loan may be deductible.  Refinancing a mortgage and taking cash out may provide the money to pay off higher rate loans, such as credit cards or auto loans, and provide a tax deduction as well.

It is possible that a refinance to maximize savings and improve finances can be accomplished in several ways, including:
Lowering the monthly mortgage payments.
Obtaining cash back by accessing the home equity.
Eliminating private mortgage insurance
Using equity to pay off high interest debts such as credit cards or loans.
Changing mortgage terms to pay off the home loan faster.
Switching loans to a fixed rate mortgage from an ARM or adjustable rate mortgage.