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cash back refinance

Cash out and rate-and-term will save you money

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How can a cash out refinance save me money?

There are 2 categories of refinance

1.“rate-and-term” 

2.“cash out”

Both will save you money

rate-and-term

The First type, rate-and-term, replaces your existing loan with one that has a better rate and/or terms. You might replace an ARM or balloon loan with a fixed-rate loan, for example. Or you may decide to lower your rate AND shorten your term. Some borrowers have been able to refinance from a 30-year loan into a 15 or 20-year loan, reducing the term, without appreciably raising their payments.

A borrower does not receive any significant amount of cash in a rate-and-term refinance; lenders generally consider that any cash proceeds above $2,000 pushes the loan into a cash out category.

There are always certain costs involved in any mortgage transaction; there will always be fees for title, escrow, underwriting and document preparation, for example. Borrowers can add these fees to their new loan to avoid having to pay them in cash. Financing these items is not considered cash out.

When you are deciding whether to do a rate-and-term refinance, you should evaluate it in two primary ways: first, how long will it take to recover the cost of doing the loan? For example, if the closing costs amount to $3,000 and the reduction in rate gives a saving of $1,500 per year in the first year.” For most people, this time frame is more than satisfactory, but you should make your own decision. The second criterion is net savings over some time, say five years, ten years or more. 

Homeowners with adjustable rate mortgages (ARMs) may decide to refinance into a fixed rate loan, even though their rate may initially be higher, they might feel more secure knowing that their rate will never change. This is more of a defensive strategy to guard against the possibility of a higher rate in the future, but it may not “save money.”

cash out

The other type of refinance, a “cash out,” the borrower receives cash of more than $2,000 at closing. This is accomplished by getting a new loan that is larger than the balance of the old one plus closing costs. Borrowers can use that money for anything. Homeowners have used cash out refinances to pay off consumer debt, like car loans, student loans, and credit cards. Using home equity to pay off credit cards can drop the payment dramatically! But paying down installment loans can create a false economy. A $30,000 car loan with an interest rate of 6% will have a payment of $500. Paying off that loan with the proceeds of a home refinance will effectively drop the payment to $150. It does NOT make sense to finance a car for 30 years. 

Contact Us. We can help you get pre-approved for a mortgage and determine how much house you can buy this next time around.  Rainbow Mortgage, Inc. is a broker so we have access to many different lenders and their loan programs which translates into more options for you!

 

Three Credit Mistakes to Avoid When Going Through Divorce

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Is your divorce affecting your credit score? Divorce is a challenging time. Between parenting plans, splitting of assets, who gets the dog. Many divorcing couples overlook is the effects of their divorce on their credit score. Simple things can reduce your score overnight by over 100 points or more if you are not careful.

3 Mistakes to avoid while going through divorce

  1. Stop paying your bills

    The number one category for credit scoring is how well you pay your bills. Payment history makes up 30% of the credit score. Many times when couples split up before the divorce is final or they ever meet with an attorney, they will stop making payments on their credit accounts. If you stop paying credit cards, car loans or mortgages it will adversely affect your credit score and can prevent you from refinancing your home, purchasing a new one, renting or even buying a new car.

    A better plan is to freeze all revolving accounts so additional debt cannot be added to the family budget. You must continue to make the minimum monthly payments on the credit cards. Make your payments as usual on your auto loans and home loans.

    These simple steps will protect your credit score for future use and limit the amount of debt the family will have post decree.

  2. Over Charging/Going over the Limit on your credit cards

    Another large part of the credit score is your available credit.  If you go over the limit, I have seen scores drop over 125 points in one day by just adding $200.00 of debt.  The $200.00 in debt put two credit cards over the limit causing the client to go from a 667 credit score to a 542 credit score, that changed their loan from approved to denied.

    Over charging or going over the limit can happen when one of the spouses moves out and uses joint accounts to furnish the new residence or it can occur if you are using your credit card to pay your attorney fees with credit cards.

    Yes, $200.00 severly impacted the Credit Score from 667 to ↓ 542 

  3. A better plan is for each spouse to get their own credit upon one or the other moving out so that all expenses are traceable to each party.  As mentioned, it’s advised to freeze the account so that no additional debt can be incurred.

    Finally, if you cannot get a new card and you are getting close to a limit, call the credit card company to increase your credit limit.  Credit card companies are more likely to increase credit lines if you are abiding by your contract limits, once you go over the limit they are less likely to assist you. 

  4. Closing Accounts

    When couples are faced with divorce, they want to protect themselves from further loss.  Couples either on their own or at the advice of their attorney close all the credit accounts. If it’s due to circumstances surrounding the divorce, closing the accounts may be advisable.  However, if we can do this collaborativelyContinue reading→