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Mortgage

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.

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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.

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.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

Here are the Best Low- or No-Down-Payment Mortgages

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.

Should you refinance with your current lender?
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It’s an often-cited rule of thumb, but you don’t actually need a 20% down payment to get a mortgage. In fact, you can get a home loan with little money down, and even a no-down-payment mortgage.

Assuming you’re financially prepared for all of the other responsibilities of homeownership, consider the following mortgage programs.

No-down-payment mortgage options

USDA loans

The U.S. Department of Agriculture (USDA) insures home loans made by approved lenders to eligible homebuyers in designated rural areas. As the program states, USDA loans were created to improve the quality of life in rural areas by giving families the opportunity to own a “modest, decent, safe and sanitary” home as their primary residence.

There’s no required minimum down payment or mortgage insurance, but there are guarantee fees. A portion of the fee is paid upfront and is 1% of the loan amount; the other portion is 0.35% of the loan amount and is paid annually.

To be eligible, you must:

  • Have a low-to-moderate income for your area
  • Buy a home in a designated rural area
  • Have a preferred minimum 640 credit score
  • Have a maximum 41% debt-to-income (DTI) ratio

VA loans

The U.S. Department of Veterans Affairs (VA) also offers a no-down-payment mortgage option guaranteed through its VA loan program. These loans cater to active-duty military service members, veterans and eligible spouses, and are offered by private lenders.

Borrowers aren’t required to make a down payment, but there is an upfront funding fee — which ranges from 1.4% to 3.6% of the loan amount — to help offset the program’s costs to taxpayers. The loan must be used to purchase a primary residence.

To be eligible, you must:

  • Have a certificate of eligibility from the VA
  • Have a preferred minimum 620 credit score
  • Show proof of stable income
  • Have a maximum 41% DTI ratio

Low-down-payment mortgage options

Fannie Mae HomeReady® and Standard 97% LTV

Fannie Mae has two low down payment conventional loans: HomeReady® and Standard 97% LTV. The HomeReady® mortgage program is open to both first-time and repeat homebuyers, while the Standard option requires at least one borrower to be a first-time buyer.

Borrowers can’t earn more than 80% of their area median income (AMI) if applying for a HomeReady loan. Additionally, if all borrowers on either a HomeReady or Standard loan are first-timers, at least one of them must complete an online homebuyer education course.

Both programs also require private mortgage insurance (PMI) if you make a down payment of less than 20%, though PMI can be removed after you reach 20% equity.

To be eligible, you must:

  • Have a 620 credit score
  • Have a 3% minimum down payment
  • Have a maximum 50% DTI ratio

Freddie Mac HomeOne and Home Possible

Freddie Mac’s HomeOne mortgage is reserved for first-time homebuyers and doesn’t include any income restrictions. The Home Possible® loan is an option for first-time and repeat buyers with a low to moderate income.

Your income must not exceed 80% of the AMI for a Home Possible® loan. You may qualify without a credit score, but your minimum down payment rises from 3% to 5%. Cancellable PMI is required for borrowers who put down less than 20%.

There’s a homebuyer education requirement for both HomeOne and Home Possible® programs when all borrowers on the loan are first-timers.

To be eligible, you must:

  • Have a 3% minimum down payment
  • Have a minimum 660 credit score
  • Have a maximum 50% DTI ratio

FHA loans

The Federal Housing Administration’s (FHA) low down payment home loans require just a 3.5% contribution and a 580 credit score. You can also qualify for an FHA loan with a credit score of 500 to 579 if you have at least a 10% down payment. Other FHA loans, such as construction-to-permanent loans and 203(k) loans, have the same credit score and down payment requirements.

FHA loans require upfront and annual mortgage insurance premiums (MIP). The upfront premium is 1.75% of the loan amount; the annual premium ranges from 0.45% to 1.05%, is divided by 12 and paid in monthly installments as an addition to your mortgage payment. Borrowers who put down at least 10% only pay mortgage insurance for 11 years; putting down less means you’ll pay MIP for the life of your loan.

To be eligible, you must:

  • Have a 580 credit score and 3.5% down payment
  • Have a 500 to 579 credit score and 10% down payment
  • Borrow within your county’s FHA loan limits
  • Have a maximum 43% DTI ratio

Good Neighbor Next Door

The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development (HUD) allows homebuyers in certain public service professions to buy a home at a 50% discount. If you qualify for and use an FHA loan to buy a home, the down payment is only $100, instead of the minimum 3.5% that’s usually required.

Eligible borrowers must buy a home located in a HUD revitalization area and commit to live in the home for at least three years. They must also sign a silent second mortgage for the discounted amount, though no payments are required if all program requirements are met.

To be eligible, you must:

  • Be a full-time pre-K through 12th grade educator, emergency medical technician, firefighter or law enforcement officer
  • Buy a home in a HUD revitalization area
  • Qualify for a conventional, FHA or VA loan
  • Live in the home for at least three years

Pros and cons of no or low down payment

Pros

Cons

  • Buy a home sooner. It can take years to save up for a larger down payment. By contributing 0% down or the lowest possible amount, you can reach your homeownership goal in less time.

  • Avoid depleting your savings. If you limit how much money you contribute to your home purchase, you can leave some of your emergency savings intact. Lenders want to know that you can weather financial hiccups, such as a job loss or income reduction.

  • Start out with less equity. The less money you put down, the less home equity you’ll have initially. This means your ownership stake in your home is much smaller, which may lead to pocketing less money if you need to sell in a few years.

  • Take out a larger mortgage. A no- or low-down-payment mortgage means you’ll be close to financing 100% of your home’s purchase price. A larger mortgage means a higher monthly payment amount.

  • Pay more in interest over time. The more money you borrow, the higher your interest rate typically will be. This also means you’ll pay more in interest over the life of your loan.

FAQs about mortgage down payments

Yes, there will be closing costs to pay on your home loan. Mortgage closing costs can range from 2% to 6% of your loan amount. You can pay these costs out of pocket at the closing table, or ask your lender about a no-closing-cost mortgage. With this type of loan, your lender will either increase your mortgage rate or add the closing costs to your loan amount, instead of having you pay those costs upfront.

It depends on the type of mortgage. Conventional loans require private mortgage insurance when you put down less than 20%, and it can be canceled after you’ve built at least 20% equity in your home. All FHA loans require mortgage insurance premiums, but if you put down 10% or more, you can get rid of MIP after 11 years.

Reach out to your loan officer and real estate agent for help identifying any down payment assistance programs you might qualify for. You should also check with your state’s housing finance agency.

Many loan programs let you use monetary gifts from family members, friends and others to help cover your down payment, but there must be a specific paper trail for the gift. The donor will need to submit a gift letter to show that you won’t have to repay the money being gifted to you. Consult your lender for specific guidelines.

Yes, your down payment amount can affect your mortgage rate. The less money you put down, the riskier you can appear to lenders, and they can account for this risk by raising your mortgage rate.

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Fact Checked By: Deborah Kearns

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.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

5 Home Loans for People With Bad Credit

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.

You don’t need a perfect credit score to get a mortgage — there are home loans for people with bad credit. But before getting this type of mortgage, find out how a lower credit score affects your overall borrowing costs.

Buying a home with bad credit

It’s possible to buy a home with bad credit — you could have a credit score as low as 500 and still qualify for a mortgage. The lower your credit score, though, the fewer lending options you’ll have and the higher your mortgage rate will be.

FICO scores, the credit scores used by most lenders, typically range from 300 to 850. Having a lower credit score translates to higher risk for a lender, and vice versa. Any score 669 or lower is considered “fair” or “poor.” Here’s a breakdown:

  • Exceptional: 800 and higher 
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 580 and lower 

Lenders like to see high credit scores because it exhibits an ability to manage debt, make on-time payments and use credit responsibly. Your creditworthiness will come into question if you plan on buying a home with bad credit, but it doesn’t have to hold you back from homeownership.

5 home loans for bad credit

Consider one of the following home loans for bad credit.

Fannie Mae HomeReady

Fannie Mae’s HomeReady mortgage program is an option for both first-time homebuyers and repeat buyers with limited access to down payment funds and a fair credit score. This conventional home loan has cancellable mortgage insurance for those who put down less than 20%, and gives borrowers the option to use boarder or rental income to help them qualify. If all borrowers on a loan are first-timers, at least one borrower is required to complete a homeownership education course.

Eligibility requirements include:

  • A minimum 620 credit score
  • A minimum 3% down payment
  • A low- to moderate income

FHA Loans

Mortgages backed by the Federal Housing Administration (FHA) could be considered bad credit home loans because they make it easier for low-credit-score homebuyers to get a mortgage. FHA loans have a low down payment requirement, but you’ll pay mortgage insurance premiums (both upfront and annual) for the life of your loan. If you put down at least 10%, you can get rid of mortgage insurance after 11 years.

Eligibility requirements include:

  • A minimum 10% down payment for a 500-579 credit score
  • A minimum 3.5% down for a 580+ credit score
  • Borrowing within your county’s FHA loan limits

USDA loans

The U.S. Department of Agriculture (USDA) insures mortgages funded by approved lenders through the USDA home loan program. There’s no minimum required credit score, but a 640 score could help you get approved automatically if you meet employment and income requirements.

Eligibility requirements include:

  • No minimum required down payment
  • Meeting local income limits
  • Buying a home in a designated rural area

VA Loans

The Department of Veterans Affairs (VA) also offers bad credit home loans through approved lenders for active-duty service members, veterans and eligible spouses. The VA doesn’t have a specific credit score requirement, but lenders may require a minimum 620 score. No down payment is required. Additionally, most borrowers will have to pay an upfront funding fee to offset the cost of VA loans to taxpayers.

Eligibility requirements include:

Non-qualified mortgage loans

The loans discussed above are all qualified mortgages, meaning they meet certain requirements that establish a borrower’s ability to repay a loan. There are also non-qualified mortgage (non-QM) loans, which have more wiggle room for high-risk borrowers, such as accepting credit scores below 500.

Eligibility requirements include:

  • Demonstrating your ability to repay the loan
  • A minimum down payment up to 20%
  • A maximum debt-to-income ratio of up to 55%

How to get a home loan with bad credit

Use the following list of tips as a resource to help you get a bad credit home loan.

  • Avoid applying for new credit. A new auto loan, credit card or personal loan application means you’ll have new inquiries on your credit reports, which can drop your credit score.
  • Dispute any credit report errors. Finding and disputing inaccurate information on your credit reports could improve your credit score and help lenders see you as a less risky borrower.
  • Pay your bills on time. Your payment history makes up the biggest chunk of your credit score at 35%, according to FICO. Making on-time payments can help boost your score and demonstrate your creditworthiness as a borrower.
  • Lower your outstanding debt load. Pay down your credit card and loan balances. Lenders don’t want to see that your income is stretched too thin to afford a mortgage. Keep your credit usage below 30% of your maximum credit limit across each of your accounts.
  • Don’t close any accounts. Closing old accounts, especially credit cards, shortens your overall credit history and can negatively impact your credit score.
  • Have your rent payments reported to the credit bureaus. As long as you’ve been maintaining an on-time rental payment history, having your rent payments reported to the bureaus may boost your score.
  • Make a larger down payment. A larger down payment can compensate for a lower credit score. Don’t completely drain your cash reserves, though. Keep three to six months’ worth of living expenses in a savings account for emergencies.
  • Pay for mortgage points. If you have the extra cash, consider buying mortgage points to lower your interest rate and overall loan costs. One point is equal 1% of your loan amount and can lower your rate by up to 0.25%.

Should you get a bad credit home loan?

Home loans for bad credit come with more risk for lenders, so you can expect to pay more as a borrower. Crunch the numbers with a mortgage calculator to help you determine whether to move forward with a bad credit mortgage or wait until your credit profile improves.

Here’s an example of how your credit score can affect your costs on a 30-year, fixed-rate mortgage:

 620 credit score760 credit score
Mortgage rate4.84%3.25%
Loan amount$200,000$200,000
Monthly payment
(Principal and interest)
$1,054.17$870.41
Total interest cost$179,501.82$113,348.55

As you can see, improving your score from “fair” to “very good” could amount to a mortgage payment that is nearly $184 less each month, saving you more than $2,200 each year and more than $66,000 in interest over the term of your mortgage.

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.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.