Do you need cash? Here’s a mortgage for you. If you are not in a good position to take an equity line of credit on your home, because you have not built enough equity or a poor credit situation is making bankers steer clear of you, altogether, there is another option — the cashout refinance.
This loan does what the equity line does in most cases, but it is not an interest-only loan, and it has conventional mortgage terms. The advantage for people without enough equity and less than perfect credit is you can get at what little equity you do have by refinancing to a new conventional mortgage, taking cash out at the close of the loan.
Here’s how it works.
Let’s assume you have a home valued at $110,000. You owe $86,000, and you would like to get $8,000 in cash to pay off two small credit cards with high interest and to do some minor rehab work on you home. With your B credit rating, banks won’t give you 100 percent of your equity or even 95 percent, so an equity line won’t work.
However, you will qualify for a 90 percent cashout refinance loan. In order to keep your costs down, you combine this strategy with another one, an adjustable rate mortgage, and this helps you maintain a low monthly payment.
You need about $4,000 to close the loan (remember it’s a conventional mortgage with all the closing costs — equity loans can be closed with no costs at all). The closing costs, though, will be financed into your new loan, so you don’t have to come out of pocket with any money.
So, you get a new mortgage for $99,000, which pays off your old fixed rate mortgage loan, covers the closing costs and, best of all, leaves you with $9,000 in cash — $1,000 more than you actually need.
The ARM rate is probably one percent less than your old fixed rate, so your payment will stay close to what it was. Plus, you eliminate monthly credit debt, so you have created even more cash! This is just an overview of a very powerful loan.
By: Mark Barnes
Posts Tagged ‘Conventional Mortgage’
FHA Refinance Loans and Credit Scores
December 22nd, 2009
One of the current major headline topics concerning mortgage refinance is revolving around the continued tightening by lenders. In fact, underwriting guidelines have become more restrictive by the month in 2008, including credit score qualification standards. The change to tougher lender guidelines is stemming from our national credit liquidity crisis and the continued decline in housing prices. With increased risk on the lender’s part, they are requiring a much cleaner loan application to fund loans.
What many people refinancing do not know, is that the squeeze in home loan qualifications are related to prime conventional home loans. FHA refinancing on the other hand, is a bit different, and guidelines are aimed to help as many homeowners refinance as possible. In years past, one could refinance into a decent interest rate with a 600 credit score and possibly finance 95 percent to 100 percent of their home’s appraised value. Those days are unfortunately gone for homeowners that can really benefit by a current refinance, if they choose to go the prime conventional route for their new mortgage. Fortunately, for many not qualified under a conventional mortgage, FHA refinance loans are filling the void.
An FHA refinance is not credit score driven, but there is a proverbial catch. Most lenders that underwrite and fund FHA refinance loans will require a 580 mid FICO score for eligibility purposes. Now, let’s be honest here, a 580 credit score is a pretty low score for the benefits of FHA refinancing. One of the many FHA loan benefits relate to the low refinance rates qualified for those with low credit scores. FHA interest rates are pretty much in line with equivalent mortgage rates offered to those with excellent credit scores. This is a huge advantage for those with poor credit. Another big benefit relates to how much a homeowner can finance, relative to the value of their home. Most FHA lenders will allow up to a 97 percent loan-to-value ratio. That means if your home is valued at $150,000, you can refinance up to $145,500 and still get low competitive refinance rates. In fact, many borrowers with great credit scores are going the FHA refinance route, as they are finding that interest rates are lower with an FHA loan as compared to the equivalent high loan-to-value conventional loan.
What’s more is that an FHA underwriter will listen to a borrower’s story relating to blips on their credit report. They will accept letters of explanation and supporting documentation aimed toward issuing a loan approval. In a day when is seems that numbers alone dictate a home loan approval or denial, it’s refreshing to see a refinance program that is more directed toward people and their needs.
By: Jim Bisnett