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A Guide to Refinancing Your Home

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re a homeowner who’s re-examining your mortgage in 2019, you may find yourself considering refinancing it. Before you dive into the process, there are some things you should know. To refinance a mortgage, homeowners first pay off their current loan and replace it with a new mortgage. This may allow homeowners to lower their mortgage rates, which can be especially beneficial if you entered a mortgage agreement with a high interest rate. These rates fluctuate based on market conditions, so if you bought a home during a period of high interest rates, you may be able to lower the rate with a refinance.

By committing to a mortgage with lower interest rates, you can also lower your monthly payments. Over time, even saving $50 a month can add up to thousands over the life of the loan.

Still, there are pros and cons to refinancing, and you should be familiar with the costs and benefits before making adjustments to your existing mortgage. Below is a guide to help you decide whether refinancing your home is the right choice for you and your household.

Why would consumers choose to refinance?

There are a number of reasons why homebuyers choose to refinance their homes. They include:

  • Lower interest rate. By refinancing, consumers have the opportunity to lower their mortgage interest rates. If your credit has improved since your initial home mortgage, or if market interest rates have fallen in that time period, you may be able to get a mortgage with a lower interest rate during the refinancing process.
  • Cut monthly payments. By lowering your interest rate through a home refinancing, you can also lower your monthly mortgage payments. Monthly payments are directly correlated with your home loan’s interest rates, so when you are able to adjust your interest rates lower, you’ll also save money each month.
  • Adjusting length of mortgage term. When refinancing a home, you can also opt to adjust the length of the mortgage term, either by increasing or decreasing it. For example, you can switch from a 30-year mortgage to a 15-year mortgage or vice versa. By adjusting to a longer mortgage, you’ll reduce your monthly payments. However, by prolonging the life of the loan, you’ll ultimately pay more for the total cost of your loan as interest rates add up over time. You can also choose to decrease the term of your mortgage. By changing from a 30-year loan to a 15-year loan, you will increase your monthly payments, but you’ll pay off the loan more quickly, thus reducing the interest costs over the course of the loan.
  • Change from adjustable-rate mortgage (ARM) to fixed-rate. You may be able to switch from an ARM to a fixed-rate mortgage when refinancing. With ARMs, mortgage payments change periodically as market interest rates shift. When refinancing, you can change from an ARM to a fixed-rate mortgage, giving you a more stable, locked-in payment plan.

Refinancing as rates are rising

Mortgage rates are not stagnant. They fluctuate over time, sometimes sharply. If you purchased a home during a time when mortgage rates were higher than they are currently, you can lower that interest through a successful refinancing.

Mortgage rates were on the rise throughout 2018 and have been predicted to remain the same or move higher in 2019. With market uncertainties ahead as rates possibly hit a high of 5.8% this year, you’ll need to look closely at refinancing your mortgage.

If you entered a mortgage agreement with a lower interest rate than those in the current market, refinancing may not be right for you unless you’re opting to change the length of the mortgage term. On the other hand, if you currently have an ARM and are worried interest rates will continue to rise, you may consider refinancing in 2019.

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Determine if the mortgage is affordable

Unfortunately, refinancing isn’t free. You may find yourself already familiar with some of the costs associated with refinancing, as they are similar to the ones you encountered when first taking out a mortgage. You may have to pay loan-origination fees, points on the principal, closing fees, appraisal and inspection fees, attorney fees and others.

Be prepared to pay between 3% to 6% of the remaining principal during the course of refinancing a home to pay for the above expenses, as well as any prepayment penalties you may incur from your lender.

These fees may cancel out the savings you would incur by refinancing your home.

Calculate potential savings from refinancing

Doing the math to see whether fees and other associated costs add up to more than the savings will help you see if you could benefit from when you refinance a home. You may find that it’s better to pay off your mortgage quicker by increasing your monthly payments rather than entering a refinancing agreement.

If your main goal with a refinancing is to shorten the term of your loan, you may be able to do so by paying more toward your principal each month. Even increasing monthly payments by $50 each month can add up to thousands saved in interest costs and reduce the life of your loan by a few years.

When deciding whether to carry out a home refinancing, tally up the costs, any penalties and other fees to calculate the break-even point for your new loan. Before entering a new loan agreement, you can estimate how long it will take you to break even between refinancing costs and your new, lower mortgage rate.

Cash-out refinancing vs. traditional refinancing

There are a few different ways to refinance your home. Namely, there are the options for a cash-out refinance or a traditional refinancing.

  • Cash-out refinance. A cash-out refinance allows you to replace your current mortgage with a new mortgage worth more than you now owe on your existing loan. You can then take the remaining difference out in cash. Homeowners often use this cash to pay for home improvements or to pay for a child’s education. If you’re seeking such a loan, be cautious — many advisers counsel against using the cash-out refinance to pay off credit card, car loans and other unsecured or short-term debt.
  • Traditional refinance. A traditional refinancing is centered on replacing an existing mortgage with a new one. Homeowners may consider a traditional refinancing to reduce interest rates and monthly payments, as well as to decrease or increase the course of the loan term.

Getting the best rates

Shop around for lenders to get the best rates when refinancing a home. Keep your eyes on the market to see how mortgage interest rates are trending in order to land the best rate. Also, shop around for a lender that offers lock-in rates, which is a lender’s commitment to maintain the terms of a specific interest rate while your refinancing application is being processed. Lenders may charge you a flat lock-in fee.

You can also increase your chances of refinancing with a new, improved mortgage interest rate by focusing on the state of your other personal finances, particularly your credit score. You may be eligible for better interest rates or lower monthly payments if you’ve improved your credit score since you entered your initial mortgage agreement.

It’s also possible to negotiate closing costs, including the cost of a title search and title insurance. If you have insured your home’s title within the last 10 years, you may be eligible for a discount. Ask the lender holding your title insurance policy if it can reissue your policy, rather than conducting a brand-new title search again, and you may be able to save on these costs.

Conclusion

There’s no foolproof way to predict the state of the housing market; as such, you can expect mortgage interest-rate fluctuations every year.

The same is true for 2019, which is why you’ll need to consider refinancing with care. Evaluate why you want to refinance, whether it’s to shorten the life of the loan, decrease monthly payments or to move from an ARM to a fixed-rate mortgage.

Be sure to calculate the costs saved versus expenses that arise during the loan process, keep your eye on the loan markets and make sure to find the best possible rate for yourself when exploring refinancing your home.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anne Bouleanu
Anne Bouleanu |

Anne Bouleanu is a writer at MagnifyMoney. You can email Anne here

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Mortgage

What Is CAIVRS, and How Might It Affect You?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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You may not have heard of CAIVRS (pronounced KAY-vers), but that doesn’t mean this database may not be critical in determining your ability to obtain a federal home loan.

CAIVRS, an acronym for the Credit Alert Verification Reporting System, was created in 1987 by the U.S. Department of Housing and Urban Development (HUD). Essentially, CAIVRS is a database that gives those processing federal credit loan applications the ability to search for individuals with potential credit problems in a centralized location.

Those loan processors are then able to review and prescreen applicants, checking whether the applicants have become delinquent or defaulted on any loans, as well as any other factors that make an individual or household a creditworthy applicant — or a risky one. If you are in the CAIVRS database due to delinquency or default on a federal loan, you will not be able to qualify for an FHA-backed loan until the problem is rectified or an error in inclusion is resolved.

Understanding CAIVRS

Several government agencies are involved in making the CAIVRS program work. They maintain records that CAIVRS then uses to allow lenders to search an applicant’s creditworthiness, pulling information from the following departments.

Which agencies are involved with CAIVRS?

  • HUD
    • HUD is a federal department that handles issues related to housing in the U.S., and is responsible for programs and policies that deal with housing needs. This department aims to provide adequate housing across the country, enforcing equitable housing policies.
    • Lenders can gather information from HUD including bankruptcy status, divorce and legal assumptions such as whether an existing or prior home loan was current at the time of the legal assumption.
    • Reports to CAIVRS if they have paid out an insurance claim on a loan on behalf of a borrower in the last three years.
    • CAIVRS can also access exceptions such as whether, in the previous three years, an applicant has become a disaster victim or is a seller of a property that is a primary residence.
    • HUD reports if an applicant is currently delinquent on an FHA loan.
  • The Department of Veterans Affairs (VA)
    • The VA provides resources for current and former members of the U.S. military, including health care, education, disability services and financial assistance for veterans seeking homeownership, among others.
    • Offers mortgage programs that include lower mortgage rates and assistance such as no or low down payment offers.
    • If a veteran is applying for a government-backed home loan, including a VA loan, lenders will still search for those individuals on CAIVRS to ensure veracity of the Verification of VA Benefits.
    • The VA will submit to CAIVRS information on delinquencies and defaults, and whether insurance claims have been paid back by VA programs.This applies to loans backed by the federal government, including the Interest Rate Reduction Refinance Loan (IRRRL) program and the Native American Direct Loan (NADL) program.
  • The Department of Education (DOE)
    • The DOE creates policies regarding education, financial aid for students and schools, as well as how to oversee the distribution of DOE funds. It also manages and distributes student loans.
    • The DOE provides to CAIVRS student loan status, including whether a recipient of a student loan has become delinquent on or deferred his or her loans backed by the U.S. government.
  • The Department of Agriculture (USDA)
    • The USDA offers loans for those in rural areas. The USDA loan is designed to help first-time homebuyers and others who have trouble securing a standard loan to obtain mortgages with low and fixed interest rates and no down payment.
    • The USDA will report information on loans to CAIVRS, including whether an applicant has defaulted on a loan, entered delinquency or submitted claims on federally supported loans such as the Single Family Housing Repair Loan and the Single Family Housing Direct Loan.
  • The Small Business Administration (SBA)
    • Through partner lenders, the SBA helps set guidelines to make it easier for small business owners to get loans for their business.
    • The SBA will submit information on any applicant who defaults or enters delinquency on these loans.
  • The Federal Deposit Insurance Corporation (FDIC)
    • The FDIC insures deposits of at least $250,000 at banks and other financial institutions, evaluating and reducing risk for consumers.
    • Reports to CAIVRS when borrowers have entered delinquency.
  • The Department of Justice (DOJ)
    • The DOJ keeps records on those who have not paid back court fees.
    • These debtor files are reported to CAIVRS.

How to determine if you have a clear CAIVRS report

Unfortunately, consumers can’t check for themselves to see whether they are in the CAIVRS database, as it was designed for lenders to check the financial status of potential borrowers seeking FHA-backed loans.

If you would like to know whether you’re currently in the CAIVRS database, approach your lender and ask them to initiate a CAIVRS report search. If you’re on CAIVRS, you won’t qualify for federal mortgages, so the earlier in the process that you seek out this information, the better.

Your potential lender will need your tax ID or Social Security number to run this check. After the lender has entered this information, HUD will inform the lender of your current status, including whether your name shows up in CAIVRS and why. You may wind up in CAIVRS for a number of reasons — defaulting on a previous mortgage, being delinquent on a student loan or for any of the other issues listed above.

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How long do delinquencies stay on CAIVRS?

If you show up in the CAIVRS database due to delinquencies on federal debt, you won’t qualify for any FHA-backed loans. However, you won’t stay on CAIVRS forever if you rectify your financial situation and stay current on your payments going forward. Those on CAIVRS will remain on the database for a three-year waiting period, after which they will be able to qualify for FHA loans, if eligible at that time.

Are there exceptions to this rule?

Not everyone who has entered delinquency or defaulted on a loan will appear on CAIVRS. If you meet any of the following exceptions, you may still be eligible for FHA-supported loans:

  • Bankruptcy
    • If you were forced into bankruptcy due to long-term illnesses, an illness that was not insured or the death of the primary household income source, you may still qualify for federal loans.
  • Assumptions
    • If the primary loan buyer qualified for an FHA-backed loan, then defaulted on it, you may still qualify for a government loan. To prove eligibility, you must provide information showing that the loan was not currently in default status when you sold your previous home.
  • Disaster victims
    • Disaster victims will still qualify for federal loans if they can prove they were current on a loan before the disaster occurred.
  • Divorce
    • If, during divorce proceedings, your ex-spouse was awarded your then-home or property, you may still be eligible to receive funding for a federal loan.

What if you are on CAIVRS by mistake?

If you believe you have been placed on the CAIVRS database in error, you will have to act through your lender to remove yourself from it. Most often, those who have been incorrectly placed in the database got there by having their identity stolen.

When the perpetrator stole your identity to acquire, and then default on, a loan, that series of events may have caused you to end up on CAIVRS. You must work with your lender to prove you did not obtain, then default on, the loan in question in order to remove yourself from the database.

Conclusion

Once you find yourself in the CAIVRS database, you can be prevented from qualifying for a federally backed loan, adding additional challenges to buying a home for both first-time and repeat homebuyers.

However, there are ways to remove yourself from CAIVRS to still qualify for a loan. Get in touch with your lender as early as possible in the homebuying process to find out whether you’re in this database. If you are, take the necessary steps to get yourself removed, if possible, to ensure that buying a home with an FHA-backed loan remains an option.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anne Bouleanu
Anne Bouleanu |

Anne Bouleanu is a writer at MagnifyMoney. You can email Anne here

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Home Refinance Quotes

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