What is mortgage loan modification, and is it a good idea?

Trouble paying your mortgage? You have options

You might be wondering about mortgage loan modification if you’re:

  • Experiencing financial hardship due to the coronavirus
  • Having trouble making your monthly mortgage payments
  • Currently in mortgage forbearance but worried about what will happen when forbearance ends

The good news is, help is available. But mortgage relief options are not one-size-fits-all.

Depending on your circumstances, you might be eligible for a loan modification. Or, you might be able to pursue another avenue like a refinance. Here’s what you should know about your options.

Check your refinance eligibility (Feb 17th, 2021)


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What is loan modification?

Loan modification is when a lender agrees to alter the terms of a homeowner’s mortgage to help them avoid default and keep their house during times of financial hardship.

The goal of a mortgage loan modification is to reduce the borrower’s payments so they can afford their loan month-to-month. This is typically done by lowering the mortgage rate or extending the loan’s repayment term.

“A mortgage loan modification does not replace your existing home loan or your lender,” explains Karen Condor, a finance and insurance expert with Loans.org.

“However, it restructures your loan in the interest of making it more manageable when you experience difficulties in making your mortgage payments.”

How mortgage loan modification works

With a loan modification, the total principal amount you owe won’t change.

“But the lender may agree to a lower interest rate, reduced loan length, or a longer payoff period,” says Elizabeth Whitman, attorney and managing member of Whitman Legal Solutions, LLC.

Any of these strategies could help reduce your monthly mortgage payments and/or the total amount of interest you pay in the long run.

Modification can also include switching from an adjustable-rate mortgage to a fixed-rate mortgage and rolling late fees into your principal, adds Condor.

Note, loan modification is intended to make a mortgage more affordable month-to-month. But it often involves extending the loan term or adding missed payments back into the loan — which may increase the total amount of interest paid.

Refinancing into a new loan, on the other hand, often reduces the monthly payment and the total interest cost.

Loan modification vs. refinance

A refinance is typically the first plan of action for homeowners who need a lower mortgage payment.

Refinancing can replace your original loan with a new one that has a lower interest rate and/or a longer term. This may offer a permanent reduction in mortgage loan payments without negatively affecting your credit.

However, borrowers going through financial hardship might not be able to refinance.

They may have trouble qualifying for the new loan due to a reduced income, lower credit score, or unexpected debts (such as medical expenses).

In these cases, the homeowner might be eligible for a mortgage loan modification.

Loan modification is usually reserved for homeowners who are not eligible to refinance due to a financial hardship.

Mortgage modification is usually reserved for borrowers who do not qualify for a refinance and have exhausted other possible mortgage relief options.

“With a loan modification, you work with your existing bank or lender on modifying the terms of your existing mortgage,” explains David Merritt, a consumer finance litigation attorney with Bernkopf Goodman, LLP.

“If you’ve defaulted on your existing mortgage, chances are your credit has been negatively impacted to the point where a new lender would be wary to give you a new loan.”

“Typically a refinance is not possible in this situation,” says Merritt.

That means there’s no real contest between loan modification vs. refinancing. The right option for you will depend on the status of your current loan, your personal finances, and what your mortgage lender agrees to.

Check your refinance eligibility (Feb 17th, 2021)

Loan modification vs. forbearance

Forbearance is another way servicers can help borrowers during times of financial stress.

Loan forbearance is a temporary plan that pauses mortgage payments while a homeowner gets back on their feet.

For example, many homeowners who lost their jobs or had reduced income were able to request forbearance for up to a year or more during the COVID pandemic.

Unlike forbearance, mortgage loan modification is a permanent plan that changes the rate or terms of a home loan.

Forbearance and loan modification can sometimes be combined to make a more effective mortgage relief plan.

For instance, a homeowner whose income is still reduced at the end of their forbearance period may be approved for a permanent loan modification.

Or, a homeowner approved for mortgage modification may also have part of their unpaid principal forborne (put off) until the end of the repayment period.

Who is eligible for a loan modification?

To qualify for a loan modification, a borrower usually must have missed at least 3 mortgage payments and be in default.

“Sometimes, a borrower who has experienced financial setbacks, which makes a default imminent, can qualify for a loan modification. But not everyone in default under their mortgage is eligible for a loan modification,” explains Whitman.

“Borrowers whose financial setback is so severe that they will never be able to repay their mortgage won’t receive a modification, nor will borrowers who have the ability to make mortgage payments either from their income or savings.”

“Borrowers whose financial setback is so severe that they will never be able to repay their mortgage won’t receive a modification” –Elizabeth Whitman, attorney & managing member, Whitman Legal Solutions, LLC

In addition to providing a hardship letter or statement, prepare to provide proof of income, two years’ worth of tax returns, and bank/financial statements, says Condor.

Be aware, however, that your lender is not obligated to provide a loan modification.

“Once a lender has an executed contract — meaning the loan — they don’t have to change it. Many [homeowners] are denied a mortgage loan modification,” Gallagher explains.

“If the lender desires to modify the terms, per your request, then you have a starting point.”

How to request a loan modification

The process for requesting a loan modification will vary depending on who manages your loan.

The first thing you need to do is contact your loan servicer. This is the company to which you send payments, and the one you need to work with to determine your options for loan modification.

Some mortgages are managed, or “serviced” by the original lender. But most home loans are serviced by a separate company.

For instance, you may have received the loan from Wells Fargo, but now make payments to U.S. Bank.

The loan servicer is the company that takes your monthly mortgage payments; you can find yours by checking the name and contact information on your latest mortgage statement.

Many borrowers begin the process by sending a ‘hardship letter’ to their servicer or lender. A hardship letter is simply a note that describes the borrower’s financial difficulties and explains why they can’t make payments.

The lender will likely request financial information and documentation, including bank statements, pay stubs, and proof of your assets.

These documents will help your lender understand the full scope of your personal finances and determine the correct path for mortgage relief.

Mortgage loan modification programs

Your loan modification options will depend on the type of loan you have and what your lender or loan servicer agrees to.

Conventional loan modification

“Fannie Mae, Freddie Mac, and private lenders of conventional loans have their own modification programs and guidelines,” says Charles Gallagher, a real estate attorney.

In particular, Freddie Mac and Fannie Mae offer Flex Modification programs designed to decrease a qualified borrower’s mortgage payment by about 20%.

Flex Modification typically involves adjusting the interest rate, forbearing a portion of the principal balance, or extending the loan’s term to make monthly payments more affordable for the homeowner.

To be eligible for a Flex Modification program, the homeowner must have:

  • At least 3 monthly payments past due on a primary residence, second home, or investment property
  • Or; less than 3 monthly payments past due but the loan is in “imminent default,” meaning the lender has determined the loan will definitely default without modification. This is only an option for primary residences

Certain hardships can trigger “imminent default” status; for instance, the death of a primary wage earner in the household, or serious illness or disability of the borrower.

Unemployment is typically not an eligible reason for Flex Modification.

Borrowers who are unemployed are more likely to be placed in a temporary forbearance plan — which pauses payments for a set period of time, but does not permanently change the loan’s term or interest rate.

In addition, government-backed FHA, VA, and USDA loans are not eligible for Flex Modification programs.

FHA loan modification

The Federal Housing Administration offers its own loan modification options to make payments more manageable for delinquent borrowers.

Depending on your situation, FHA loan modification options may include:

  • Lowering the interest rate
  • Extending the loan term
  • Rolling unpaid principal, interest, or loan costs back into the loan’s balance
  • Re-amortizing the mortgage to help the borrower make up missed payments

In some cases where extra assistance is needed, FHA borrowers may be eligible for the FHA-Home Affordable Modification Program (FHA-HAMP).

FHA-HAMP allows the lender to defer missed mortgage payments to bring the homeowner’s loan current. It can then request that HUD (FHA’s overseer) further reduce the monthly payment by opening an interest-free subordinate loan of up to 30% of the remaining loan balance. The borrower only pays principal and interest based on 70% of the balance, and can pay back the remainder upon a sale or refinance of the home.

Deferring this extra principal amount can help make it easier for FHA borrowers to get back on track with their loans.

FHA-HAMP is typically combined with one of the loan modification methods above to lower the borrower’s monthly payment.

Eligible FHA borrowers must complete a trial repayment plan to qualify for either loan modification or the FHA-HAMP program. This involves making on-time payments in the modified amount for 3 months straight.

VA loan modification

Veterans and service members with loans backed by the Department of Veterans Affairs can ask their servicer about VA loan modification.

VA loan modification can roll missed payments back into the loan balance, as well as other delinquent homeownership costs like unpaid property taxes and homeowners insurance.

After these costs are added to the loan, the borrower and servicer work together to establish a new repayment schedule that will be manageable for the veteran.

Note, VA modification is unique in that the interest rate might actually increase. So while this plan can help veterans bring their loans current, it won’t always reduce the homeowner’s monthly payments.

“For VA loan modification, several requirements apply,” notes Condor. She explains:

  • “Your VA loan must in default
  • You must have since recovered from the temporary hardship that caused the default
  • You must be able to support the financial obligations of the modified VA loan
  • And you must not have modified your VA loan in the past three years”

Some homeowners with VA loans may qualify for a ‘Streamline Modification.’

Streamline Modification does not require as much documentation as the traditional VA modification plan, but includes two extra requirements:

  • The combined principal and interest payment must drop by at least 10%
  • The borrower must complete a 3-month trial repayment plan to prove they can make the modified payments

Talk to your loan servicer about options for your VA loan.

USDA loan modification

USDA loan modification is for homeowners whose current loans are backed by the U.S. Department of Agriculture.

A USDA loan modification allows missing mortgage payments (including principal, interest, taxes, and insurance) to be rolled back into the loan balance.

USDA modification plans also allow a term extension up to 480 months, or 40 years total, to help reduce the borrower’s payments. And the servicer can lower the borrower’s interest rate, “even below the market rate if necessary,” according to USDA.

Servicers may cover up to 30 percent of the homeowner’s unpaid principal balance using a mortgage recovery advance.

Contact your loan servicer to find out whether you’re eligible for a USDA loan modification.

Is mortgage loan modification a good idea?

A mortgage loan modification is worth pursuing for the right candidates.

“A modification can give you a second bite at the apple and get you out of the default or foreclosure process, allowing you a chance to remain in your home,” says Merritt.

But caveats apply.

“Typically, a modification will take all of your missed payments and add those to the outstanding principal balance,” Merritt says.

Say your current mortgage has an outstanding balance of $300,000. Assume you missed $50,000 in payments. In this example, your modified balance would be $350,000, which is called ‘capitalization.’

“But imagine your home’s value is only $310,000,” adds Merritt. “Here, a modification would allow you to stay in your home and avoid foreclosure, but you would owe more than your house is worth. That would be a problem if, say, two years after modification you wanted to sell your home.”

Refinancing and other alternatives to modification

Loan modification isn’t your only option, thankfully.

Possible alternatives include refinancing, forbearance, a deed-in-lieu of foreclosure, or Chapter 13 bankruptcy.

Refinancing

As mentioned above, you should first check if you’re eligible to lower your interest rate and payment with a mortgage refinance.

You’ll have to qualify for the new mortgage based on your:

  • Credit score and credit report
  • Debt-to-income ratio
  • Loan-to-value ratio (your loan balance versus the home’s value)
  • Income and employment

It may be difficult to qualify for a refinance during times of financial hardship. But before writing this strategy off, check all the loan options available.

For instance, FHA loans have lower credit score requirements and allow higher debt-to-income (DTI) ratios than conventional loans. So it may be easier to refinance into an FHA loan than a conventional one.

Streamline refinancing

Homeowners with FHA, VA, and USDA loans have an additional option in the form of Streamline Refinancing.

A Streamline Refinance typically does not require income or employment verification, or a new home appraisal. Even the credit check might be waived (though the lender will always verify you have been making mortgage payments on time).

These loans are a lot more forgiving for homeowners whose finances have taken a downturn.

Note, Streamline Refinancing is only allowed within the same loan program: FHA-to-FHA, VA-to-VA, or USDA-to-USDA.

Check your Streamline Refi eligibility (Feb 17th, 2021)

Other mortgage relief options

Refinancing typically requires a loan-to-value ratio of 97% or lower, meaning the homeowner has at least 3% equity.

However, “borrowers who have less than 3 percent equity in their homes may qualify for Fannie Mae’s HIRO program,” suggests Whitman.

This ‘High-LTV Refinance Option‘ is intended for homeowners with Fannie Mae-backed loans who owe more on their mortgage than the property is worth.

“Other choices for borrowers with little or no equity in their homes include a consensual foreclosure or a short sale, which involves selling the property for less than the outstanding mortgage amount.”

What should you do?

Whitman continues, “Any borrower who will struggle to repay their mortgage and other debts after a loan modification should consider whether it is better to dispose of their home and find a more affordable housing option.”

To better determine if a refinance or mortgage loan modification is the right strategy for you, consult with your loan servicer, an attorney, or a housing counselor.

Mortgage loan modification FAQ

What happens when you get a loan modification?

The goal of a loan modification is to help a homeowner catch up on missed mortgage payments and avoid foreclosure. If your servicer or lender agrees to a mortgage loan modification, it may result in lowering your monthly payment, extending or shortening your loan’s term, or decreasing the interest rate you pay.

How do I get a mortgage loan modification?

Contact your mortgage servicer or lender immediately to alert them of your financial hardship and ask about loan modification options available. Be ready to provide all documentation requested, which can include financial statements, pay stubs, tax returns, and more.

How long does loan modification last?

Expect your loan modification process to take anywhere from one to three months, according to finance and insurance expert Karen Condor. Once your loan modification has been approved, the changes to your interest rate and/or loan terms are permanent.

Does loan modification hurt your credit?

A mortgage loan modification under certain government programs will not affect your credit. “But other loan modifications may negatively impact your credit and show up on your credit report. However, since your mortgage usually must be in default to request a modification, your financial difficulties are probably already on your credit report,” explains attorney Elizabeth Whitman.

Can you be denied a loan modification?

Yes. A mortgage loan is a contract, and the mortgage lender isn’t obligated to agree to a loan modification. “Borrowers whose financial situation is such that they will never be able to repay their mortgage loan, as well as borrowers who do not cooperate with lender requests, are likely to be denied a modification,” says Whitman.

How much does mortgage modification cost?

While there are no closing costs for a mortgage modification, your lender may charge a processing fee. “If your modification involves extending your loan’s term, that means you’ll pay more interest over the life of your loan,” explains attorney Charles Gallagher.

Do you have to pay back a loan modification?

Paying back a loan modification will depend on the type of modification you are given. “Your lender can apply a reduced interest amount to your loan’s principal on the backend that you must later pay back,” says Condor. “With a principal deferral loan modification, your lender reduces the amount of principal paid off with each payment. But the amount of principal your lender deferred will be due when your loan matures or the home is sold.”

Understand your options

Mortgage loan modification is typically reserved for homeowners who are already delinquent on their loans.

If you’re worried about mortgage payments, get ahead of the issue by checking your eligibility for a refinance or contacting your loan servicer about options before your loan becomes delinquent.

Many homeowners are facing financial hardship right now, and many lenders and loan servicers are willing to help. But help is only available to those who ask for it.

Verify your new rate (Feb 17th, 2021)

Source: themortgagereports.com

Can you sell your house after refinancing?

Are you considering a refi before you sell?

There are a number of reasons you might want to refinance your home before selling it.

Maybe you want to cash out home equity for repairs. Maybe you’ve already moved and you’re paying two loans. Or maybe you’re just looking for a lower interest rate and monthly payment.

Understand most lenders won’t let you refinance if the home is already listed for sale.

But if it’s not listed, there’s no rule that says you can’t sell your house after refinancing.

However, you might run into a few roadblocks. Here’s what you should know. 

Verify your refinance eligibility (Feb 15th, 2021)


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How soon can you sell your house after refinancing?

Many mortgage lenders don’t dictate how often you can refinance your mortgage. But they might impose restrictions on how soon you can sell after refinancing.

Owner-occupancy clauses

Depending on the language in your refinance agreement, you may have an owner-occupancy stipulation that stops you from selling (or renting out the house) within the first 6-12 months after refinancing. 

By signing the refinancing paperwork, you affirm that you “intend to occupy the home as your primary residence for a period of usually one year.” 

If your agreement doesn’t include this stipulation, you can sell at any time after refinancing.

But if your agreement does include this clause, selling too soon could trigger legal issues with your lender. 

The good news is that this isn’t a hard and fast rule. Some lenders will not enforce this clause if you have extenuating circumstances or a valid reason for selling within this window.

If you plan to sell after refinancing, make sure to look for owner-occupancy clauses in the refi agreement and ask your lender what it considers an acceptable reason to sell before the waiting period is up.

Prepayment penalties

Even if you don’t have an owner-occupancy clause in your refinance agreement, your agreement might have a prepayment penalty.

This is a fee that some lenders charge when a borrower pays off their mortgage loan early, usually within the first three years of getting the loan.

Most new mortgage loans do not have prepayment penalties. But make sure you review your mortgage paperwork to confirm this before selling your home. 

In cases where one does apply, there are two types of prepayment penalties: a hard penalty and a soft penalty. 

A hard penalty restricts both selling and refinancing within the first three years, whereas a soft penalty only applies to refinancing. 

If you have a hard penalty and sell within the penalty-period, you’ll pay either a percent of the remaining loan balance or a certain number of month’s worth of interest.

This is need-to-know information because prepayment penalties are costly.

Let’s say you have a 2% prepayment penalty and a remaining loan balance of $200,000. In this example, you would pay your lender $4,000.

Again, prepayment penalties are rare; but on the off chance your loan has one, you’ll want to be aware of it before selling.

Verify your refinance eligibility (Feb 15th, 2021)

Can you refinance while your home is listed for sale?

There are several seemingly good reasons to refinance while your home is listed for sale.

Maybe your adjustable-rate mortgage is about to reset, and you want to lock in a fixed-rate mortgage in case the property doesn’t sell. Or maybe you already moved, and you’re currently paying two mortgages.

Even if you have a valid reason for refinancing after listing your home, understand that many lenders will not refinance under these circumstances. 

If you want to refinance while the home is listed, you may have to remove the listing and keep it off the market 3-6 months.

From a lender’s perspective, you don’t intend on living in the home long-term, so approving the refinance is too risky.

You might find another home before renting or selling this one and let the old mortgage default.

Lenders have to protect themselves. They may have to cover the cost of foreclosure if they refinance real estate that’s listed for sale, then the mortgage defaults after selling it on the secondary market.

So in most cases, no, you cannot refinance your home while it’s listed for sale. The lender will require that you remove the listing, and you might have to keep it off the market for at least three to six months.

However, there are likely some non-traditional lenders, hard money lenders, and others who may consider a property that was just removed from a sale listing.

Is it a good idea to refinance right before you sell?

Even if you’re given the green light to refinance right before selling, should you?

First, let’s dive into a few reasons why someone might consider refinancing before selling their current home.

Reasons you might want to refinance before selling

As earlier mentioned, if mortgage rates are on the upswing, you might refinance to quickly convert an adjustable-rate mortgage to a fixed-rate mortgage and avoid a possibly higher rate down the road.

Some homeowners might want to refinance for a better interest rate and monthly mortgage payment to save money while preparing to sell.

Or, maybe you want to pull a little cash from your equity with a cash-out refinance. If you have enough equity, you could use the money to make improvements to the property before listing.

This could potentially increase the home’s value and help you get a better offer from home buyers when you do sell.

Drawbacks to refinancing before you sell your home

Although you might have good reasons for refinancing before selling, it doesn’t always make financial sense.

Remember, refinancing isn’t free. There are closing costs to consider, which range from 2% to 5% of the loan balance — the same as when you bought the home.

Selling a house after refinancing means you’re less likely to recoup what you spend at closing.

For example, if you pay $5,000 in closing costs, and refinancing reduces your mortgage payment by $250, you’ll need to live in the home for at least another 20 months to break even.

In addition, if you plan to move, refinancing could make qualifying for a mortgage on your new home a little more difficult.

For instance, paying closing costs could reduce savings for a down payment on your new loan. And applying for a refinance could take a couple of points off your credit score, which might have a bigger impact on your future interest rate than you’d think.

If you plan to move, it generally makes more sense not to refinance, and to put your cash towards the down payment and closing costs on your next property instead.

Is a no-closing cost refinance a good idea?

You might ask: Couldn’t I just get a no-closing cost refinance?

This is a good question, but it’s important to understand how a no-closing cost mortgage works. 

The benefit of this strategy is that you avoid paying closing costs out of pocket. The downside is that a no-closing cost refinance typically involves paying a higher mortgage rate to compensate for the lender absorbing these fees. 

Or, the lender might simply roll the closing costs into your new mortgage, thus increasing your total mortgage balance.

So although a no-closing cost refinance lets you keep money in the bank, you’ll pay the price in other ways. 

Still, it could be a good idea — but only when a higher rate still results in monthly savings, or when rolling closing costs into the balance doesn’t cut too much into your home equity. 

And if you think you’ll sell in the near future, make sure you understand the refinance agreement before moving forward 

Look for an owner-occupancy clause, prepayment penalties, and count the upfront cost to determine whether refinancing makes financial sense.

You should only refinance if you’ll see a real financial benefit — not just a lower interest rate.

What are today’s refinance rates?

Today’s refinance rates are at historic lows. Many homeowners stand to save by refinancing — but if you plan to sell in the near future, a refi isn’t always the best move.

If you’re on the fence, talk to a loan officer or mortgage broker who can help you explore your options.

Before signing on, you should fully understand and how a refinance will affect your personal finances as well as your homeownership plans in the short- and long-term.

Verify your new rate (Feb 15th, 2021)

Source: themortgagereports.com

President Biden could reduce FHA mortgage insurance premiums. Here’s what it means for you

FHA mortgage insurance might get cheaper this year

“Mortgage industry abuzz with speculation of FHA MIP cut,” stated one trade magazine on January 28. And that journalist was right.

Many insiders are confidently predicting a big cut in the Federal Housing Administration’s (FHA’s) annual mortgage insurance rates.

FHA borrowers currently pay 0.85% annually in mortgage insurance premiums (MIP). That’s $1,700 per year, or $140 per month, on a $200,000 mortgage.

So it’s no wonder a possible MIP rate cut is big news. It could help new home buyers and refinancing homeowners save big on their housing payments.

Verify your FHA loan eligibility (Feb 8th, 2021)

Why experts think Biden will lower mortgage insurance premiums

Lowering FHA mortgage insurance rates isn’t a new idea from President Biden. It’s a holdover from former President Obama’s agenda.

American Banker magazine explains “The Department of Housing and Urban Development under former President Barack Obama had announced a scheduled 25-basis-point [0.25%] reduction in the FHA’s annual mortgage insurance premiums just before President Donald Trump took office.”

But Trump reversed this change at the start of his term, leaving FHA MIP rates at 0.85% per year.

Now, says American Banker, “observers expect the Biden administration to follow through on that 25-basis-point cut and potentially go even further.”

Lowering FHA MIP costs would be right in line with President Biden’s goals of expanding affordable housing opportunities for low- and middle-income families.

Of course, this is only speculation for now. No official announcements have been made.

But the pervasiveness of the rumor — and the absence of denials from the administration — mean a change seems likely.

So potential home buyers and FHA homeowners should be aware of what the (potential) change would mean for them.

What an MIP reduction could mean for you 

There’s good news and bad news.

The bad news is that if you already have an FHA loan if and when the reduction takes effect, you won’t see any savings. You would have to refinance into a new FHA loan to see the reduction.

The good news is that if you haven’t applied for an FHA loan yet if/when the cut is announced, you can likely take advantage of the new, lower fees.

But just how much would home buyers and refinancers stand to save?

A 25-basis-point reduction means MIP rates would fall by 0.25%. So you’d be paying 0.6% of your loan balance each year instead of the 0.85% that nearly all FHA borrowers now pay now.

These mortgage insurance rates are calculated annually but charged monthly.

Example: 0.25% MIP rate cut

Let’s say you plan to borrow $200,000 with an FHA loan. Your MIP rate at current levels would be 0.85%, making an annual charge of $1,700 — or $140 per month.

Now let’s assume the new MIP rate falls to 0.6%.

Your annual charge tumbles to $1,200. And your new monthly MIP cost would be exactly $100 per month.

That’s a saving of $500 a year, which few of us would sneeze at. But there’s a possibility that the savings could be even bigger.

Example: 0.50% MIP rate cut

American Banker wondered whether the Biden administration might “potentially go even further.”

So how does the math work if annual MIP rates were to be cut a little more — to 0.5%?

Assuming the same $200,000 loan, a 0.5% rate would reduce the annual payment to $1,000. And that would make the monthly payment just $83 versus $140 per month at current levels.

That would save you $700 a year over your current payment.

Rates haven’t changed yet…

Remember: this is just speculation. Unless and until an official announcement is made, you should continue to budget for your full, existing 0.85% MIP rate.

But if you’re considering a home purchase or refinance later this year, you should keep an eye out for news from the Department of Housing and Urban Development (HUD).

If a change is announced, it could be worth waiting on that application until you can secure the lower rate.

Verify your FHA loan eligibility (Feb 8th, 2021)

What happens to existing FHA loans?

Homeowners with an existing FHA loan may not benefit from lower mortgage insurance premiums right away.

An MIP rate reduction likely would not change the terms of your current mortgage.

So if a change is announced, you’d have to refinance into a new FHA loan to take advantage of MIP savings.

Keep Streamline Refinancing in mind

The good news is that FHA borrowers may well be in line for an FHA Streamline Refinance — a simplified, low-doc refi program.

FHA Streamline loans typically come with minimum paperwork, low costs, and no credit check. You likely won’t need a new home appraisal or income verification.

However, you’ll have to pay closing costs yourself — only the upfront mortgage insurance charge can be rolled into the loan balance.

And cashing out is not allowed with the FHA Streamline program. If you want cash-back with your refinance, you’ll need the FHA cash-out loan, which requires full underwriting.

How the MIP cut could contribute to the FHA Streamline “net tangible benefit” rule

Right now, FHA Streamline Refinances have a requirement that you gain a ‘net tangible benefit’ (some clear monetary advantage) as a result of using one.

This typically means you need to lower your ‘combined rate’ (mortgage interest plus mortgage insurance) by at least 0.5%.

Say the Biden administration does cut MIP rates by 0.25%. Under the current rule, you’d also need to lower your mortgage interest rate by 0.25% to be eligible for Streamline Refinancing.

But with rates trending downward through 2020 and into 2021, it’s quite likely that a 0.25% reduction is in reach.

But do keep in mind that your current FHA loan has to be at least 210 days old before you’re allowed to refinance.

When could the change take place?

Some mortgage industry insiders are expecting an announcement during President Joe Biden’s first 100 days in office. And they may be proved right.

But there’s a reason we rarely quote speculation from mortgage industry insiders. They’re often wrong.

And the fact is, nobody outside the government knows whether there will be an announcement at all, let alone its likely date. Which raises an important question: What are you supposed to do with this information?

What are you supposed to do with this information?

We wouldn’t be sharing this speculation with you if we didn’t think there was a good chance of the rate cut really happening. But there’s no guarantee it will.

So you probably shouldn’t change immediate plans to purchase a home or refinance.

Today’s FHA mortgage rates are at historic lows — and your interest rate has a much bigger impact on your total loan cost than your mortgage insurance rate.

If you wait on a rate cut and miss today’s low interest rates, it could negate your savings. You could also risk losing out on your dream home by waiting for financing.

Keep in mind, you only need to wait 210 days — about 7 months — from your FHA home purchase or refinance before you can refinance again.

If Biden does cut MIP rates, the change will be long-term. So you can always refinance if it makes financial sense for you to do so later on.

Verify your FHA loan eligibility (Feb 8th, 2021)

Will other aspects of FHA loans change?

Most people who opt for an FHA loan do so because it’s the easiest, most affordable path to homeownership that’s open to them.

American Banker describes FHA borrowers as, “traditionally first-time homebuyers and largely minorities and lower-income earners.”

And they choose FHA loans because they can get approved with lower credit scores and higher existing debts than Fannie Mae, Freddie Mac, and other conventional loans usually allow.

None of that’s likely to change if the Biden administration comes through with the rumored changes.

The only difference should be the amount these borrowers have to pay for their annual mortgage insurance.

Remember, there’s also an upfront mortgage insurance (UFMIP) fee equal to 1.75% of the loan amount. Most borrowers roll this into their loan balance so they don’t have to pay it at closing.

So far, we haven’t heard talk of the UFMIP rate changing — only the annual mortgage insurance premium of 0.85%.

The bottom line

An FHA MIP reduction would be a great win for borrowers, helping to keep monthly housing costs low.

If you plan to buy a home or refinance via an FHA loan later this year, there’s a good chance you could see lower mortgage insurance premiums.

But if you’re already in the process of buying or refinancing, we don’t recommend waiting on news of lower MIP rates. You’re likely to see bigger savings by taking advantage of today’s ultra-low mortgage rates.

Verify your new rate (Feb 8th, 2021)

Source: themortgagereports.com

VA loan refinance scams and how to avoid them

Beware of unsolicited offers

Unfortunately, some shady mortgage companies try to make a profit by
urging homeowners to refinance — even when it’s not in their best interest.

Veteran homeowners tend to be targeted by refinance scams more often, because the VA’s lenient loan guidelines make it easier for lenders to ‘churn’ these loans and make money quickly.

The best thing you can do to avoid scammers is to be very wary of unsolicited refinance offers. Mortgage offers that come out of the blue and seem too good to be true, usually are.

If you do want to refinance your home, research loan programs
and interest rates on your own and choose a reputable, transparent lender.

Check your VA loan refiance options with top lenders (Feb 1st, 2021)


In this article (Skip to…)


Signs of a VA loan refinance scam

There are a few red flags that can reveal a scammy or misleading VA
refinance offer.

If you’ve been contacted by a mortgage company about refinancing,
the Consumer Financial Protection Bureau (CFPB) says to look out for:

Low interest rates without specific terms

An ultra-low interest rate offer that’s not clearly accompanied by
the terms of the loan is likely misleading.

A homeowner might refinance for this new interest rate, only to be
surprised by higher-than-expected loan costs or unaffordable monthly payments.

There are a few ways advertised interest rates could be deceptive.

  • Surprise mortgage points. Buying mortgage points or ‘discount points’ can lower your interest rate significantly. However, each point costs 1% of the loan amount (or $1,000 for every $100,000 borrowed). Some lenders advertise below-market rates without indicating the borrower will have to pay a hefty fee at closing to actually obtain that rate
  • Adjustable-rate mortgage vs. fixed-rate mortgage. Adjustable-rate mortgages (ARMs) typically have lower advertised rates than fixed-rate mortgages (FRMs). This can make an ARM look more attractive upfront. However, that low rate is subject to change after the initial fixed-rate period of 5, 7, or 10 years. This could leave the homeowner with a much higher mortgage rate and payment later on. If you’re expecting a fixed interest rate and payment, make sure the lender is not advertising an ARM rate
  • 15-year vs. 30-year mortgage. Similarly, 15-year FRMs typically have lower rates than 30-year FRMs. However, monthly mortgage payments are much higher because the loan must be paid off in half the time. Despite lower interest rates, 15-year mortgages are unaffordable for many borrowers

Any mortgage offer should include the terms of the new home loan as
well as
the interest rate. Look for:

  • Annual percentage rate (APR)
  • Loan term (repayment period, often 15 or 30 years)
  • Type of mortgage (ARM or FRM)
  • Mortgage points included on the advertised rate

Also remember that interest rates vary from one borrower to the
next.

An advertised rate isn’t likely to be the exact rate you’re offered;
that will depend on factors like your credit score and home equity.

So even if a refinance offer looks perfectly legit, you’ll need to
apply with the company and get a custom rate quote to know how good of a deal
it can truly offer you.

Get a VA refinance rate estimate (Feb 1st, 2021)

Offers to skip mortgage payments

The Department of Veterans Affairs explicitly prohibits lenders from
advertising that borrowers can skip one or two mortgage payments when
refinancing. A lender might list this as a benefit because there are not real
benefits to your refinance; or because it wants the offer to look better than
it is.

An offer that says you can skip mortgage payments when refinancing
should be avoided.

Offers to receive cash from an
escrow fund

Most homeowners pay their property taxes and homeowners insurance into an escrow account. Their mortgage lender stores the payments in escrow before distributing them to the insurance company and tax authority when they’re due.  

After refinancing, a homeowner might receive an escrow refund if they had cash leftover in the account at the time the new loan closes.

This is not a unique benefit of a VA mortgage, nor is it a reason to
refinance.

Plus, you’ll likely need the money to fund a new escrow
account on your new home loan.

Aggressive sales tactics

Borrowers should be extremely wary of lenders with aggressive sales tactics.

If a lender emails, mails, or calls you multiple times, there’s
likely a reason it’s so eager to get you to refinance — because it will benefit
them. It’s not necessarily good for you, though.

If you’re on a federal or state do-not-call list, remind lenders
that it’s illegal to call or text you without prior consent. Do-not-call laws
lead to hefty fines for any lender that violates them.

Be sure to do your due diligence before refinancing. It’s relatively
quick and easy to get mortgage quotes online or over the phone from a lender of
your choice.

Shop around to learn more about the terms and rates you’d really
qualify for on a VA refinance loan. Odds are, the company desperate for your business
is not going to be your best choice.

No-cost refinance offers

Lenders might also tempt homeowners to refinance by advertising a ‘no-closing cost’ or ‘no out-of-pocket cost’ refinance. These programs may not be what they seem.

Unlike some other loan types, VA loans do not allow refinancing homeowners to roll closing costs into their loan balance. Only the VA funding fee can be included in the loan amount; the rest of your refinance closing costs are due upfront.

It is possible to have the lender cover part or all of your
closing costs. This is known as a “lender credit.”

But it’s not a free ride — in exchange for lender credits, you’ll
usually pay a higher interest rate on your new loan. This could raise your
mortgage costs significantly in the long run.

So, when a lender advertises no closing costs on a VA refinance, it
really means you’ll increase the cost of your loan by paying higher interest
for the rest of your mortgage term.

Two major VA refinance scams to look out for

There are two main VA loan refinance scams that both involve loan “churning.” That’s when lenders encourage those with VA loans to refinance when it provides little or no benefit.

This is also known as “equity
stripping” or “equity skimming,” because the scammers may suck the equity out
of your home, unnoticed by you because you pay nothing out-of-pocket for your
refinance.

Churning is intended to line lenders’ pockets at the expense of borrowers.

Scam 1: The cash-out refinance

When
you’re short of cash, you may want to dip into some of the equity you’ve built
up in your home. That process is called cash-out refinancing.

For the right homeowner, a VA cash-out refinance can be a great idea. It lets you tap up to 100% of your home equity at a low interest rate.

But
cash-out refinancing isn’t for everyone. Your home equity isn’t free money —
and it’s important to understand the implications of a cash-out refi before
jumping in. 

Refinancing
means you’re resetting the clock on your mortgage. If your 30-year mortgage has
25 years left to run, for example, you’re starting over with another 30 years of
payments.

And
a refinance comes with closing costs. These often total 2-5% of the loan
amount, which can easily add up to thousands of dollars out-of-pocket.
Remember, the VA funding fee is the only closing cost that can be financed.

Scammers
may
try to get borrowers to refinance in this way repeatedly. But that keeps
resetting the clock. And it keeps putting fees from closing costs into lenders’
pockets. So the lender profits at the borrower’s expense.

Again,
cash-out refinancing can be a good strategy. But you need to make the decision
on your own or with a financial advisor; not based on a lender tempting you
with promises of untapped home equity.

Scam 2: The bad refinance

Generally speaking, it’s a
good idea to refinance to a lower interest rate. Your monthly payments are
lower. And your overall cost of borrowing falls. What’s not to like?

Well, it depends on what you
have to do to get that lower rate.

Suppose you have a $300,000 mortgage at a 4.25% interest rate that you’ve been paying for five years. Your current balance is $266,170, and your principal and interest payment are $1,476.

You could lower your payment to $1,309 by refinancing without even changing the interest rate.

That’s because you’re stretching out the repayment of the remaining balance to a new term, and extending your repayment by five years.

An unscrupulous lender will
refer to the $167 a month difference as “savings.” But clearly you are saving
nothing — in fact, you’ll pay more in interest in the long run.

Most lenders don’t just offer
to refinance your old loan at the same rate, however. They offer a lower rate — and they might
even offer to do the loan at no out-of-pocket cost to you.

For instance, you might
get a 3.75% mortgage rate, at a cost of three points (3 percent of
your loan amount), plus other fees — perhaps a total upfront
cost of $10,000.

Your new payment drops from
$1,476 to $1,279, “saving” you nearly $200 a month. But the
total amount of interest remaining actually increases from $158,800 to
$185,300. So the “cheaper” refinance loan will cost you an extra $26,500 if you
keep it the full loan term.

And if you don’t stay the full loan term? You might save month-to-month, but don’t forget: closing costs were $10,000. You’d need to keep the loan 50 months (over 4 years) just to make back the money you spent on refinancing.

Is the VA Streamline Refinance legit?

The VA Streamline Refinance (also known as the Interest Rate Reduction Refinance Loan, or IRRRL) is a legitimate refinance program backed by the U.S. Department of Veterans Affairs.

The IRRRL program is meant to
make refinancing simpler and more affordable for veterans and service members.
It has lenient documentation requirements and no new home appraisal.

But although it’s a safe program
on its own, the Streamline Refinance is sometimes the vehicle for VA mortgage
scams. And you can see why.

The VA wanted to make
refinancing from one VA loan to a new VA loan cheap, easy, and
straightforward. It eased up on many bureaucratic procedures, which
is helpful for borrowers but may have left IRRRLs more vulnerable to abuse.

Since these loans are easier to
approve and often close faster than traditional refinances, VA Streamline refis
are more attractive to scam lenders intent on “churning” loans to turn a
profit.

However, that doesn’t mean a VA Streamline Refinance can’t give you a fantastic deal. They typically do. It just means you need to choose your lender with care.

As with any refinance loan, make sure you compare IRRRL offers from multiple lenders to see which can offer the best deal. And use care when comparing rates — just because you can drop your rate, doesn’t mean you’ll save money in the long run.

Compare loan fees and total interest costs on your IRRRL offers to make sure the loan really benefits you.

Check your VA Streamline Refinance options (Feb 1st, 2021)

When is a VA loan refinance a good idea?

We just described a number of ways refinancing can have a negative
impact on homeowners. But these warnings are not intended to scare you away
from refinancing.

Rather, these examples should illustrate how important it is to
fully understand a refinance offer before signing it. You should be aware of both
the short- and long-term costs, and feel confident the new loan benefits you.
 

When done right, refinancing isn’t just worthwhile — it can save you
huge amount of money. Refinancing can also help you access home equity to cover
important expenses, like home renovations, consolidating debt, or paying
college tuition.

The trick is to refinance only when the outcome meets your financial
goals.

Often, that means refinancing for a low enough interest rate that
you’ll save money on monthly mortgage payments and total interest costs.  

But that’s not always the case.

If your income has been reduced and you need to save money each
month, it might make sense to refinance for a lower monthly payment even if
your long-term cost is a bit higher.

On the flip side, it might make sense to accept higher monthly
payments if your goal is to shorten your loan term and pay off the home early.

Or maybe you want cash out. In that case, your new interest rate might not be ultra-low. But that shouldn’t matter as much.

There are many different scenarios where it makes sense to refinance. But in every case, it needs to be a personal decision based on your current mortgage and your long-term goals.

If you’re not sure whether a refinance is a good decision, talk to a
trusted financial advisor or contact a reputable mortgage lender that can walk
you through your options and help you decide what the right move is.

Verify your VA loan refinance eligibility (Feb 1st, 2021)

How to find a safe VA loan refinance

VA homeowners have two main refinance options: the VA Streamline
Refinance (IRRRL) and the VA cash-out refinance.

The right refinance loan for you depends on your goals.

  • If you simply want to lower your interest rate and
    monthly payment, the IRRRL is generally the best option. There’s no reason to take
    cash out from your home equity if you don’t need it for a specific purpose —
    and no lender should urge you to cash-out if you don’t need to
  • If you do need to tap your home equity, you’ll
    apply for the VA cash-out refinance. The Streamline program does not allow
    homeowners to receive cash at closing

The VA cash-out program can also help veterans and service members
with non-VA loans refinance into a VA home loan.

For example, a homeowner with an FHA loan who has VA loan
eligibility could use the cash-out program to switch loan types without
actually taking cash out.

To find the best deal on your refinance loan, you should apply with
at least three lenders and compare their offers.

You can do this on your own by applying to lenders individually. Or, you can work with a mortgage broker who will help you understand your loan options and find the best lender for your needs.

The vast majority of mortgage lenders are decent companies —
scammers are in the minority. But you still need to look at multiple companies
to be sure you’re getting the best deal.

Start with well-known lenders that get positive customer reviews. If you have friends or family members who have refinanced a VA loan in the past and had a good experience, it’s also worth asking them for recommendations.

How to compare VA refinance offers

After you apply with a few lenders, you need to make sure the “Loan Estimates” they send you compare with their initial offers.

Loan Estimates are standard
documents detailing your loan offers; including your approved interest rate, loan amount,
loan type, and loan terms.

Lenders are required to send you
an Estimate after you apply, and they shouldn’t change anything
without a good reason, which must be explained to you.

Later, at least three days
before you close, you’ll get a “Closing Disclosure” that sets out all the terms
of your new mortgage in an easy-to-understand format. That’s your last chance
to make sure you’re getting the deal you want — and the one you were promised —
without derailing your refinance.

A mortgage loan is not binding until you’ve signed your final closing papers. If anything looks amiss before that point, you have the right to bring it up with your lender or simply walk away.

As the borrower and homeowner,
the power in the transaction is in your hands.

What are today’s VA refinance rates?

Mortgage rates are very low right
now, and VA loan rates are generally the lowest of any loan type.

If you think a refinance is the right move for you, check today’s rates to see how much you could potentially save.

Remember, mortgage rates vary by lender and by borrower, so you need to shop around to find your best offer.

Verify your new rate (Feb 1st, 2021)

Source: themortgagereports.com

What is a home equity loan and how does it work?

Make the most of your home equity

As home values increase, so does the amount of equity available to homeowners.

But home equity isn’t liquid wealth; the money is tied up in your home. To access your home’s value, you either need to sell or take out a loan against the property.

One option is a cash-out refinance, which lets you tap equity and refinance your existing loan, sometimes to a lower rate.

But what if you’re happy with your current mortgage? Another option is a home equity loan, or ‘second mortgage,’ which lets you cash-out without a full refinance. Here’s what you need to know.

Check your home equity financing options (Jan 24th, 2021)


In this article (Skip to…)


What is a home
equity loan?

A home equity loan or ‘HEL’ is
a type of mortgage, often called a ‘second mortgage,’ that lets you draw on
your home equity by borrowing against the home’s value.

Unlike a cash-out refinance, a home equity loan lets you cash-out without touching your primary mortgage loan. So if you already have a great interest rate, or you’re almost finished repaying the original loan, you can leave its terms intact.

A home equity loan can also help homeowners who own their homes outright and don’t want to refinance the entire home value just to access equity.  

How home
equity loans work

Home equity loans are mortgages just like your original home loan. They
are secured by your property, and if you don’t make your loan payments,
you can lose your house to foreclosure. Just like you can with a “regular”
mortgage.

A home equity loan can be
structured to deliver a lump sum of cash at closing, or as a line
of credit that can be tapped and repaid, kind of like a credit card. The second type is known as a
home equity line of credit (HELOC).

If your interest rate is fixed
(this is the norm), you’ll make equal monthly payments over the loan’s term
until it’s paid off.

The fixed rate and payment make
the HEL easier to include in your budget than a HELOC, whose rate and
payments can change over the course of the loan.

A home equity loan can be a good idea when
you need the full loan amount at once and want a fixed interest
rate.

For example, if you wanted to
consolidate several credit card accounts into a single loan, or if you needed to
pay a contractor upfront for a major renovation, a HEL could be a
great choice.

Check your home equity financing options (Jan 24th, 2021)

How much
can you borrow on a home equity loan?

How much cash you can borrow through a home equity loan
depends on your creditworthiness and the value of your home.

To find your possible loan amount, start by subtracting the
amount you owe on your existing mortgage from the market value of your home. For
example, if your home is valued at $300,000 and you owe $150,000 on your
existing mortgage, you own the remaining $150,000 in home equity.

Most of the time you can’t borrow the full amount of equity,
but you may be able to tap 75-90% of it.

In the example above, that means you could likely borrow between
$112,500 and $135,000, minus closing costs.

You could use this money for home improvements, debt consolidation, or to make a down payment on a vacation home or investment property.

Home equity
loan interest rates

When you apply for home equity
financing, expect higher interest rates than you’d get on a first mortgage due
to the extra risk these loans pose for lenders.

Fixed home equity interest rates for borrowers with excellent credit are about 1.5% higher than current 15-year fixed mortgage rates.

Home equity interest rates vary
more widely than mainstream first mortgage rates, and your credit score has
more impact on the rate you pay.

For example, an 80-point difference in FICO
scores can create a 6% difference in a home equity
interest rate.

Home equity lines of credit
(HELOCs) have variable interest rates. This means your monthly payment depends
on your loan balance and the current interest rate. Your payment and rate can
change from month to month.

Home equity loans can have
variable interest rates, but most of the time the rate and payment are fixed.

About home equity lines of credit (HELOCs)

The home equity line of credit, or
HELOC, offers more flexibility than a home equity loan. But it makes
budgeting harder.

HELOCs have a ‘draw period’
in which you’re allowed to tap the loan amount up to your
credit limit. You can withdraw and repay funds as needed during
these first years.

There is a minimum payment —
usually the amount needed to cover the interest due that month. At any given
time, you pay interest only on the amount of the balance you
use.

When the draw period
ends, you can no longer tap the credit line and must repay it over a predetermined number of
years. With its variable
interest rate, your payment could change every month.

Some HELOCs allow
you to fix your interest rate when you enter the repayment period. These are
called “convertible” HELOCs.

HELOCs are ideal loan options for
expenses that will be spread over a longer period of time, or
as a source of emergency cash.

For instance, you might take a
HELOC to serve as an emergency fund for your business. Or you could use it to
pay college tuition twice a year. HELOCs are also great for home improvements
that take place in stages over an extended period of time.

How
second mortgages work

If you’re considering a home equity loan or home equity line of credit, it’s important to understand how these ‘second mortgages’ work.

One important point is that you keep your existing mortgage
intact. You continue making payments on it as you’ve always done.

The HEL or HELOC is a second, separate loan with additional
payments due each month. So you’d have two lenders and two loans to make
payments on. 

Lenders consider second mortgages to be riskier than first
mortgages.

The primary mortgage lender gets paid first if a loan defaults and
the home is sold in a foreclosure. The second mortgage lender — which holds the
HEL or HELOC — may get paid less than it’s owed. Or it may not get paid at all.
(A second mortgage lender is also known as a “junior lien holder.”)

Due to this extra risk, home equity loans charge higher interest
rates than a primary mortgage. A cash-out refinance might come with lower rates.

Home equity loans are also a bit harder to qualify for. You’ll typically need a credit score of at least 680-700 for a home equity loan, as opposed to 600-620 for a cash-out refi.

More
differences between first and second mortgages

Besides the interest rate, there
are a few other distinctions between first and second mortgages. Second mortgages have:

  • Shorter loan terms — Home equity loans and lines of
    credit can have terms ranging from 5 to 20 years, with 15
    years being the most common. The shorter repayment time reduces risk to lenders
  • Smaller loan amounts
    Many first
    mortgage programs allow you to finance 95%, 97%, or
    even 100% of your home’s purchase price. Most home
    equity lenders max out your loan-to-value at 80% to 90% of your equity
  • Lower fees — While some still charge origination fees, HELOC
    lenders, for example, often absorb most or all of
    the fees. Home equity loan fees for title insurance and escrow are usually much
    lower than those for first mortgages.
  • Faster processing — Home
    equity loans usually close much faster than first mortgages. You may get your
    money in a couple of weeks, as opposed to 1-2 months

Also, your second mortgage lender may not require a full appraisal. This could save hundreds of dollars in closing costs compared to getting a first mortgage.

Cash-out refinance vs. home equity loan

Home equity loans and lines of
credit aren’t the only ways to borrow against the cash value of your home.

Some homeowners prefer a cash-out refinance loan, which has a few advantages:

  • One loan — Since cash-out refinancing replaces your existing mortgage while also unlocking equity, you’d have only one mortgage loan instead of two
  • Lower interest rates — Cash-out refinance rates are lower than home equity loan or HELOC rates. In addition, since you’d be replacing your existing mortgage with a new mortgage, all of your home debt could be re-cast at today’s lower interest rates
  • Opportunity to pay off the house early — Shorter loan terms require higher loan payments each month, but they can save a lot in interest charges over the life of your loan. A cash-out refinance offers an opportunity to shorten your current loan term from a 30-year fixed to a 15-year fixed mortgage, for example

Cash-out refinancing isn’t for everyone. If your first mortgage is
almost paid off, for example, you’re probably better off with a second
mortgage.

If your existing mortgage rate is already near today’s rates, your savings from refinancing might not eclipse the closing costs and other borrowing fees. In that case, a second mortgage is probably the way to go.

Check your cash-out refinance options (Jan 24th, 2021)

Other alternatives to home equity loans

If you recently bought or refinanced your home, you probably
don’t have enough equity built up to warrant a second mortgage or a cash-out
refinance just yet.

In this case, you’ll need to wait until your home’s market
value increases and your original mortgage balance decreases, generating enough
equity to qualify for a new loan from a bank or credit union.

But what if you need cash sooner? You may want to consider:

Personal loans

Personal loans do not require backing from home equity. They
are ‘unsecured’ loans, requiring only a high enough credit score and income to
pay back the loan.

Since the loan is not secured against your property as
collateral, interest rates are much higher.

You can find personal loan amounts up to $100,000, but if you
have bad credit or a high debt-to-income ratio, you’ll have limited options.

Applicants with excellent credit histories have more loan
options, but since personal loans require no collateral, they can’t compete
with the low interest rates you’d get on a secured mortgage.

And unlike a mortgage, the interest you pay on a personal loan
is not tax-deductible, even if you use the loan to fund home improvements.

Credit cards

With their annual fees and high
annual percentage rates, credit cards should be a last resort for long-term
borrowers — unless you can get a no-interest credit card and pay it off before
the promotional rate expires.

If a credit card offers a 0% APR
for 18 months, for example, you may be able to keep the card balance until
you’re able to get a second mortgage loan to pay off the card. If you time it
right, you’ll avoid the credit card’s punitive charges.

However, this is a risky strategy. If you don’t have enough equity or a sufficient credit score to qualify for a cash-out mortgage now, it could be difficult to improve your financial situation enough to get one before the credit card promotion expires. This could land you with high credit card debt and no good way to pay it off.

What are
today’s home equity mortgage rates?

As noted above, home equity loan
rates are more sensitive to your credit history than first
mortgages. Rates can also vary more between lenders, which makes it important
to shop for a good deal.

To get an accurate quote, you’ll
need to provide an estimate of your credit score and your property value.

Verify your new rate (Jan 24th, 2021)

Source: themortgagereports.com