Homeowners who have high rate mortgage loans may be considering their options for refinancing. While there is a great deal of information available about helping those homeowners who have problems paying their mortgages, there is not as much information available about standard government refinancing programs. Homeowners who are not currently having problems paying their mortgage still may want to consider refinancing their home. Here are some of the reasons that refinancing may make sense.

Lowering interest rates

Home interest rates for borrowers with excellent credit are currently in the area of 5% for a 30 year mortgage. Mortgages for shorter terms such as 15 years are slightly lower than that. For a homeowner who is currently paying 7%, this can save a great deal of money on a monthly basis, meaning they can save more for retirement.

Converting to a fixed rate

In spite of the volatility of adjustable rate mortgages, there are still numerous homeowners to have them. Many homeowners can avoid later spikes in interest rates by refinancing at today's lower rates. Not only can this save money immediately on monthly payments, it can also mean that there is a considerable amount of money saved over time.

Thinking about remodeling

Homeowners who are considering remodeling their home or undertaking a major renovation project may prefer to refinance with cash out versus taking a home equity loan. While a refinancing may cost slightly more, there may be benefits to cash out refinancing.

What options are available?

Homeowners may be surprised to find out the number of programs that are available for them to refinance their home. Government backed mortgages such as Fannie Mae (FNMA), Federal Housing Administration (FHA) and Veteran's Administration (VA) loans all can be refinanced. In some cases, the closing costs may be rolled into the loan, the loan term may be shortened and the net result can be lower monthly payments.

Things you may not know

Many homeowners believe that if they have had credit problems they may suffer through extraordinarily high interest rates due to those problems. In many cases, government refinance options allow homeowners with less than perfect credit refinance but still keep rates low. Homeowners should be prepared to provide a clear explanation of the problem and what steps were done to correct the problem. Homeowners should also explain how they plan to avoid this type of issue in the future. While this may still result in a slightly higher interest rate, it will not prevent the homeowner from refinancing.

Fannie Mae Refinancing Options

Fannie Mae is currently under receivership through the US Government. However, they are still backing home loans as they have been for more than 60 years. Fannie Mae provides loans for homes of up to four units and the loan limits are substantial. Refinancing for a single family home may be in amounts up to $417,000. the Fannie Mae program Refi Plus allows borrowers who have not had a delinquency of more than sixty days in three years may be eligible for cash out refinancing. Up to 80% of the value of the property may be borrowed under this program. Borrowers with credit scores of as low as 620 may be eligible for these programs.

Other options include Energy Improvement refinance loans, High Balance refinance loans and Homestyle Renovation loans. The Homestyle Renovation loan is designed to allow a borrower to make renovations and repairs and may provide a more cost effective method of securing funds for renovations or repair. This program allows the homeowner to use the projected value of the home after renovations.

Veteran's Administration Refinancing Options

The Veterans Administration offers a streamlined loan package for those who are interested in refinancing their homes. However, there are some restrictions that must be noted. If a borrower is taking money out of their home for the purposes of paying down other debt or for remodeling, the streamlined mortgage is not the appropriate one to undertake. The streamlined loan is offered by any lender who accepts VA backing on a loan. The interest rates must be lower unless the borrower is changing from an adjustable rate mortgage to a fixed rate mortgage. If a second mortgage exists, the lender on the second must agree to subordinate to the primary mortgage. Borrowers who already have a VA loan are the only ones who are eligible to take advantage of these programs.

FHA Refinancing Options

Homeowners who currently have a mortgage in good standing may be eligible for an FHA streamlined government refinance. This program is designed for homeowners who are not interested in removing cash from the equity in their home instead; it is designed for the homeowner who is interested in lowering their interest payments. This program is for a borrower who is currently in good standing with their mortgage and has not had problems paying their mortgage in the last twenty-four months.

The more traditional refinancing option is to allow the borrower to take equity out of their property. The FHA allows homeowners who are current on their mortgage to refinance their home and borrow up to 85% of the value of their home. This program is designed to allow homeowners to remove equity from their home and use it for any purpose that they wish to. In addition to the potential drop in current interest rates, homeowners may be able to use cash to pay for college expenses, home remodeling expenses or any other purpose they deem appropriate.

The income verification process for FHA loans is much more flexible than several other government refinance products. FHA loan applicants who are seasonal workers are still able to show their income as steady income. They also are more flexible as they also include income from freelancing and self employment provided the borrower has properly filed their tax returns and claims their income.

It is important to understand that the FHA does not make loans. Instead, the FHA provides insurance backing for the loan. There are certain fees that are mandated by the FHA for all loans that are passed to the borrower by the lender. The good news is that the FHA does restrict the level of fees that the loan originator can charge to the homeowner.

Steps borrowers should take

A homeowner who is considering government refinancing options should first gather all of their financial documents. Preparation is helpful if you visit with a lender who is participating in government refinancing programs. Gather three recent pay stubs, copies of all credit card statements, automobile payments and other financial payments including insurance.

Borrowers should also have their last two (and in some cases three) federal income tax filings. Once a borrower has gathered this information, they should review their current mortgage and evaluate the following:

• Current interest rate - unless a borrower is going to take cash out of their home, the primary purpose of refinancing is to lower the current interest rate;
• Current amount owed - for a borrower who has lived in a home for a long period of time, they should review the balance that is owed on their current mortgage;
• Current term of loan - borrowers should determine how many months are left on their current mortgage. This will help them determine which government refinance program is most appropriate
• Copy of most recent property tax bill - this will provide the borrower with an estimate of how much the property is worth. It may be helpful to check the local papers to see what homes in the area are selling for.

Analyzing the benefits of refinancing

Borrowers should review all of the information they have collected and determine if taking advantage of a government refinance program will be beneficial. Here are some of the things that can help make the decision easier:

To Lower Interest rates - When calculating how much a drop in interest rate is saving a homeowner, the calculations are complicated. For example:

• Original Amount of Loan $100,000
• Original Term of Loan 30 years
• Original Interest Rate 8.75%
• Number of months paid in 60 (5 years)
• Monthly payment would be approximately 786.70

If a borrower can reduce their rate to 6.75%, they can save approximately $160 per month. However, this is based on the borrower paying 1 point plus $300 in closing costs. The borrower would completely recapture the expenses of the loan in 8 months. The additional monthly savings would be considerable over the life of the loan.

Using exactly the same data as listed above, a homeowner who has only been in their home for 6 months would save approximately $130 a month and would have to remain in their home for 10 months. Finding an online mortgage refinance calculator can help determine the wisdom of this type of refinancing.

Cash Out Refinancing - using the same data above, a homeowner who was able to do a cash out refinancing option of $25,000 over 30 years would see a modest increase of their mortgage of approximately $35. The borrower would pay approximately $811 per month after the refinancing of the home. This assumes that the new loan amount is $125,000 and that the interest rate is 6.75%. For some, this is a great way to handle large expenses like paying off credit cards, paying for college or doing a home renovation. The low additional monthly payment may be worth the expenses over the longer term, especially for a homeowner who has credit cards with high interest rates.

Summary

Homeowners who have equity built up in their home or who are interested in lowering their monthly interest rate should carefully review their options. For a homeowner who currently has a government loan, getting a government refinance loan may be an excellent way to save money on their monthly payments. With interest rates at low levels, homeowners who are searching for refinancing options can generally find competitive rates.

For a homeowner who is in an adjustable rate mortgage, refinancing now using one of the government refinance programs may be an ideal way to secure their financial future. Before a homeowner decides to refinance their home they should carefully evaluate all of the factors involved. For example, a homeowner who currently owes less on their mortgage than their home is worth may not wish to wind up adding Personal Mortgage Insurance (PMI) to their monthly payment. PMI is typically required by lenders if the value of the property is less than 80% of the loan value. While this may not result in a significant increase in monthly payments, it is still something that should be considered.

Homeowners who are considering refinancing should also take into consideration how long they plan to be in their home. For a homeowner who is going to consider selling their home in the next 12-24 months, refinancing may not be the best move.

Talk to your bank or mortgage company about your current loan. Those who have a FNNA, FHA or VA loan and are considering refinancing may find that they can take advantage of streamlined government refinance options. These options may result in less paperwork, lower monthly payments and more financial security for homeowners.