California homeowners possess assets that can benefit them financially. With every mortgage payment you make, your equity in your home increases. The more equity you have, the more flexibility you have to use that equity to your advantage.
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Refinancing a home loan is a common strategy to improve your financial position. Whether you have a conventional loan, a Veterans’ Administration (VA) loan, or a Federal Housing Administration ( FHA) loan, the proper refinancing process can be advantageous.
The Benefits of Refinancing in California’s Housing Market
One primary reason to pursue a California refinance is to lower your monthly mortgage payments. The loan can be rearranged with new terms since you have equity to use and a more robust financial background. The easiest way to get reduced monthly payments is to refinance for a lower interest rate, which would lower the total loan amount and change the current monthly payment.
Types of Refinance Strategies – California
Although many homeowners who refinance aim to reduce monthly payments, there are multiple ways to benefit from a refinancing strategy. Here are a few refinancing options you can take advantage of in California.
Rate-and-Term Refinance
A rate-and-term refinance lowers the interest rate on the home loan and extends the loan’s duration. Both actions result in monthly savings because the total cost of the loan decreases, and smaller payments are required to repay the loan over a longer period.
Cash-Out Refinance
A cash-out refinance is another way to access your home equity. With this type of mortgage refinancing, you take out a loan larger than the amount still owed on the first loan’s principal balance. The difference is then paid to you in cash. You can then use this cash to pay off other high-interest debt, fund home improvement projects, or build an emergency fund.
Streamline Refinancing (IRRRL or HARP)
A streamline refinance is ideal for those with government-backed mortgages such as FHA home loans or VA loans. This simplified process makes it easier for owners to pursue a California refinance as long as they meet the lender’s specific requirements. For example, a VA loan can be turned into an interest-rate reduction refinance loan (IRRRL) through streamline refinancing. These government-backed refinances must have a tangible net benefit to be approved.
No-Closing-Cost Refinance
There are closing costs whenever a new home loan is created. However, there are options for a mortgage refinance without those closing costs. This strategy will help you save money upfront and could be helpful if you plan to move soon. However, the costs are higher interest rates and larger loan balances.
Key Factors Affecting Your Refinancing Options
Before you decide on refinancing strategies for your mortgage loan, it is important to understand the factors impacting this loan. Here are some factors to consider when you are thinking about mortgage refinancing.
Current Interest Rates and Market Conditions
The state of the market plays a huge role in the interest rate you will pay on your refinanced loan. If the market is performing poorly, you may not benefit from a lower interest rate. On the other hand, if the market is healthy, this is a great time to lower your mortgage rate through refinancing.
Your Credit Score and Financial Situation
Refinancing is often used by those who have improved their financial circumstances. For example, maybe your credit score has increased significantly since acquiring the original loan amount, and your current credit score would give you access to more competitive mortgage rates. However, if you are strapped for cash, this could be a good time for a cash-out refinance to obtain some financial relief.
Loan-to-Value Ratio (LTV)
Many lenders use LTV to assess the risk of a borrower and the home they are purchasing. It is also essential when considering a refinancing plan. This ratio is calculated by dividing the current loan balance by the market value of your home. The lower the ratio, the more beneficial refinancing can be. With home prices increasing by 9.7% in California since last year, the odds are good that your LTV is improving every year.
Type of Existing Mortgage (Conventional, FHA, VA, etc.)
What type of loan do you have on your home currently? Conventional loan programs have refinancing requirements that are different from those of FHA and VA loans. Make sure you understand the pros and cons of refinancing your particular loan type.
Debt-to-Income Ratio
Debt-to-income (DTI) is a measurement of your monthly debts to your monthly income. If your DTI is high, then refinancing could be a good way to get cash and invest in debt consolidation. However, lenders may have requirements for DTI that will impact your eligibility for refinancing.
Assessing Your Refinance Goals and Priorities
The first step in refinancing is to examine your current mortgage. You should then assess your financial goals to determine what type of refinance is best suited for your needs. Consider the following factors.
Reducing Monthly Mortgage Payment
Perhaps you are hoping for a lower monthly payment than your current one. Maybe a new expense has come up that is difficult to afford alongside your current mortgage. Refinancing can lower your mortgage payment to make your debts more manageable.
Shortening Your Loan Term
Alternatively, maybe you can afford to pay a little more on your home loan each month. Now, your goal is to pay off the house sooner. Refinancing to shorten the loan term and increase your payments could be the right decision for your long-term financial goals, helping you build home equity at a faster rate.
Getting Cash Out for Other Needs
Homes are valuable assets because you can use equity to get cash quickly. Maybe your emergency fund is running low, and you would like to build it back up. If consolidating debt is a priority, especially with high interest, a refinance could provide much-needed funds.
Switching from an Adjustable-Rate to Fixed-Rate Mortgage
If you are tired of inconsistent payments because of your adjustable-rate mortgage, you are in luck. Adjustable-rate mortgages can be refinanced into fixed-rate mortgages, resulting in more consistent payments that are not dependent upon market trends.
Removing Private Mortgage Insurance (PMI)
Mortgage insurance premiums add to your monthly costs when you own a home in California. Mortgage insurance is usually waived once a home’s LTV gets to 80% or below, so if refinancing gets you to that number, you won’t have to worry about paying those premiums anymore. This could save hundreds or thousands of dollars each year.
Steps to Take Before Refinancing
If refinancing sounds like the right financial strategy to take advantage of your home equity, following the proper steps is essential. Before you take the leap to acquire a new mortgage on your California home, here are some steps to take.
- Review your current mortgage – Look into the terms and conditions of your current loan to see what refinancing options are available. This could vary from lender to lender.
- Obtain quotes from multiple lenders – Shop around and take advantage of free quotes from lenders to obtain an accurate picture of the best options.
- Compare interest rates, closing costs, and terms – Evaluate each quote to see what interest rates you qualify for, what the terms of the loan would be, and how much it would cost upfront to refinance.
- Understand your break-even point – In general, the point of refinancing is to save money. Run the numbers to find out how you could break even and ensure that refinancing is actually beneficial.
- Consider the long-term impact – If you are strapped for cash or want lower monthly premiums, refinancing is a great solution. However, you should always consider the long-term effects of refinancing to ensure your future goals are still prioritized.
Making the Right Refinancing Decision
If you want to take advantage of the significant financial benefits of refinancing, then working with the right lender is crucial. District Lending has experience with many California homeowners who were seeking refinance options. We can answer all your questions about the various refinancing products, including streamline, rate reduction, no closing cost, and even a cash-in refinance. Plus, our streamlined process can get you that new mortgage faster.
Contact the District Lending team today or complete our online form to get a free quote. A loan officer will contact you to discuss your needs.
