If you are looking at a possible interest rate adjustment that will affect your monthly payment, you will want to look at possible ways to refinance mortgage terms to a fixed rate mortgage. There are a number of new issues in the housing market that may interfere with your ability to refinance mortgage terms to a more reasonable monthly payment. The lending market, for one, has gotten a whole lot pickier about mortgages on the whole. If your situation has changed for the worst with the loss of employment or new debt, you may also be staring at an uphill climb. Take a look at some of the issues that might determine how easily it will be to actually refinance mortgage terms soon enough to avoid the hike in your monthly payment.
Your Local Realty Market
The drop in housing prices in some areas is all over the news. States like California and Florida have been severely affected. Even if you are making your mortgage payments on time, but want to refinance mortgage terms instead of selling, the drop in prices can affect your ability to do so. The loss of equity with a slash in home prices will be reflected on any new mortgage loan you want to take out. You can no longer have zero equity to buy a home and most lenders are expected between 10 and 20% of the home’s value as an equity cushion. If you don’t have that there, you might even be asked to pay down the loan in order to refinance mortgage terms. That might be preferable, however, to not being able to refinance mortgage terms at all.
You may actually be blocked from refinancing if your house’s value has dropped so much that you find you owe more on the house than it is actually worth. That is the condition of being “upside-down” on your loan. When that happens, you won’t be able to refinance at all without making up the difference and then some, which most people can’t do. Even if you have a great income, and stellar credit, if you are upside-down on your mortgage, it will be near impossible to refinance your home loan.
Change In Circumstances
Along with depressed housing markets, many people tied to previously lucrative areas that rode the mortgage boom are now facing unemployment or a loss of income. If you are a realtor, a mortgage broker, a construction worker, or anyone involved in this area, you have probably had a tough time lately economically. This drop in income can affect your chances of getting your home refinanced, especially if you’ve missed bill payments and your FICO score has dropped significantly. The best time to refinance mortgage terms is when your credit score is high, your house is worth more than you owe, and you have stable and profitable employment you can verify.
The term “second mortgage” is easier to understand than home equity loan, but they are essentially the same. A second mortgage is any new loan, beyond the primary mortgage, taken out holding the home as the collateral for the loan. While, you can use a home equity loan to get money out of your home while still living in it, there are also other uses for second mortgages that are not tied to a home equity loan. There are different situations and times when people may try to get a second mortgage to save money or to tap money in equity.
Two Mortgages at Closing
Some people took out second mortgages during the closing of their first mortgage as a piggyback mortgage. This allowed them to put down the needed 20% as a down payment and avoid private mortgage insurance (PMI) costs. This works out well for buyers who have this type of access to credit but are low on down payment funds. If they only had 5 or 10% to put down, the PMI would automatically be triggered and added to their monthly payment. However, if they took out two loans and used the second to bring down the primary mortgage’s loan-to-value ratio then they wouldn’t have to pay PMI.
The difference in monthly payment is not that significant using this strategy, but there are other paybacks – including the ability to deduct the second mortgage’s payments from your taxes, in some cases. PMI, on the other hand, gives you no such tax benefits. Equity also accrues faster by taking out two mortgages upon closing to satisfy the PMI requirements.
The problem with this approach is that lenders are becoming wary of allowing someone to immediately take out a piggyback mortgage to bring up the loan-to-value ration of the first mortgage. If the home approaches foreclosure, the second mortgagee holder finds themselves in the position of absorbing a loss or having to buy the primary mortgage to get something out of the foreclosure on the piggyback mortgage. So, this type of financial two-step may end up being harder and harder to get approved by lenders.
Home Equity Loan
The other type of second mortgage strategy is to get a home equity loan after closing. This can be done any time, as long as the value of your home and your equity in it is enough to support the loan. There are risks for the borrower as the home is being used as collateral. If the home equity loan terms are not satisfied or payments are not made, the lender can foreclose even though it is not the primary mortgage. So, this type of financial tool should be taken on only after carefully reviewing the risks and benefits of a home equity loan.
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