There are many good reasons to refinance: to lower your monthly payment, take advantage of low-interest rates, or get some breathing room in difficult financial situations. But a refinance may not be possible for everyone, with things like stricter lender requirements or financial instability holding some people back. And even if you are able to refinance, it may not be the best way to accomplish your financial goals.
Even if you think you’d be approved for a mortgage refi loan, it pays to explore other options. And if you wanted to refinance but were unable to, here are some things you can do to improve your chances to try again. Whether you’re looking to save money in the long term or short term, tap into your home equity for immediate cash, or need help to keep your mortgage afloat, here are some options for every financial goal.
Alternatives to Refinance: Increase Liquidity
Cash-Out Refinance Mortgage
If you need some extra cash, now is a great time to consider a cash-out refinance due to relatively low interest rates. A cash-out refi is where you finance an amount in excess of what you owe on your mortgage, thus giving you additional capital to work with. Cash-out refi rates may be the same as regular refinancing, or they may be a bit higher — your lender can give you more information on what they’re charging.
For example, if you owe $100,000 on your mortgage, and you have enough equity in your home to do so, you might do a cash-out refinance for $140,000 and use the extra $40,000 to pay down debt that’s costing you higher rates of interest. Some people also use a cash-out refinance to fund home renovations.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) or home equity loan can give you a source of ready money as needed if circumstances have you strapped or you have large expenses on the horizon. It may be difficult to get a HELOC right now, especially if you have less-than-stellar credit or you don’t have a lot of equity in your house, but it’s an option worth looking into if you want to tap into your home equity for immediate cash.
Alternatives to Refinance: If You Don’t Qualify
Apply With Another Lender
Mortgage refinancing is rigorous, and your chosen lender’s response is based on numerous factors, including your debt-to-income ratio, credit rating, income, your home’s assessment, and more. Just one issue may be enough to result in a negative response.
If that happens, the lender is required by law to tell you why they turned you down. If it’s something you can fix, then do so. But even if not, remember every lender has its own proprietary formula for determining when to make a loan. Another bank may weigh your credit rating differently and come back with a yes.
Take Action to Improve Your Situation and Apply Later
If your circumstances don’t allow you to refinance right now, or you know you won’t qualify for a refinance, there’s no reason you can’t take steps to improve your odds and try again in, say, three or six months. Market rates may change, but improving your credit can help make sure that you get the best rates available at any point in time.
Take Steps to Improve Your Credit Score
Your credit score is one of the most heavily weighted factors when banks determine if they will approve your application. But it’s also one you can improve by paying down debt when possible and checking your credit reports to ensure there are no errors. Asking the credit bureaus for your annual free credit reports is your first step. If refinancing is your goal, but your credit situation needs improvement, we recommend taking important steps to rebuild your credit. When you see your score improve, go ahead and try again.
If you don’t qualify for a good refinance rate, take action to improve your credit score. Improving your score will allow you to potentially refinance later on and also open doors in other areas such as approval for car loans, credit cards, auto insurance premiums, and even employment.
Improve Your Debt-to-Income Ratio
This number indicates your debt compared to your total overall gross income. You want it to be roughly lower than 36%, which is the cutoff many bankers use when determining who will get a mortgage. You can easily find this number with an online calculator. If you carry too much debt to qualify, experts recommend doing your best to pay off high-interest debt, decrease your debt-to-income ratio closer to the 36% mark, and try again with refinancing.
Find Stable Income If You Don’t Have It
Finding a stable income source can be an essential element in finding a mortgage at a low rate. Your banker will look at your tax documents for the preceding year to see if there’s a steady, stable income. “This is really a hard time to get a loan approved if you don’t have income,” says Jill Schlesinger, CBS news analyst and author of “The Dumb Things Smart People Do With Their Money. Even temporary work, she says, is better than nothing, but a preferably full-time, paying job is important.
Alternatives to Refinance: Saving Money
Reducing Home-Related Costs
Tasha Cochran, a real estate lawyer who blogs at One Big Happy Life, suggests you look for untapped resources related to your home if you aren’t successful with a refinance but want to lower your expenses. “You can appeal your property tax assessment by contacting your county tax assessor and providing them with information to support your appeal,” she says. She also recommends taking a hard look at your homeowners insurance policy. It’s possible a switch to a new insurer could save you money on your premium. You can also consider raising your deductible or cutting optional riders such as computer insurance.
If you have some extra money on hand and want to save on your mortgage, you can put it towards a mortgage recast. A mortgage recast is where you put a large, lump-sum payment towards your principal, and your lender reamortizes your loan. You’ll keep the same interest rate and loan term, but by reducing your principal balance, you’ll reduce both the amount of interest you need to pay monthly and the total amount of interest you’ll pay over the life of the loan. A mortgage recast could save you thousands of dollars but can come with a hefty upfront cost — lenders typically require a payment of $5,000 or more for a mortgage recast, along with recasting fees that run around $250. It’s important to note that certain government-backed loans, including FHA, USDA, and VA loans, cannot benefit from mortgage recasting.
Mortgage Recast vs. Refinance
While both a mortgage refinance and a mortgage recast can help you save on your monthly payments and interest over the life of the loan, they work in different ways. With a mortgage refinance, you take out a new loan to replace your existing one, changing the interest rate, loan term, or both. If you can get a lower interest rate than your current rate, you’ll save money on interest because the interest rate is lower, although the principal remains the same. With a mortgage recast, you keep your original loan term and interest rate but pay a lump sum towards the loan principal and change the amortization schedule. Since your principal balance is smaller, less interest will accrue over time even though the interest rate stays the same.
A mortgage recast requires an upfront payment as well as a recasting fee, while a mortgage refinance requires you to pay closing costs on the new loan. (Unless you choose a no-closing-cost refinance.) The upfront payment required by a mortgage recast generally ranges from $5,000 to however much you want to pay. Closing costs for a refinance typically range from 2%-5% of the loan’s value.
Alternative to Refinance: If You Need Financial Assistance
Find a Housing Counselor
Housing counselors can help you with buying a home or advise you about financial difficulties, such as a default, foreclosure, or credit issues. The government’s Consumer Financial Protection Bureau maintains an extensive listing of counseling agencies to get you started. Working with a counselor can be the first step in getting back on firm financial footing.
Consider Special Government Assistance Programs
If you are hoping to refinance due to a disruption in your financial life, there may be assistance from the government and other agencies to help you get back on your feet. Here is a list of some alternative relief resources:
National Mortgage Assistance Center: The NMAC assists troubled homeowners to avoid foreclosure through a national network of attorneys who are specialized in helping you to avoid losing your house. These lawyers will work with you and your bank to develop a plan of monthly payments you can handle.
Foreclosure Assistance Programs: This website, Making Home Affordable, is a creation of the U.S. Department of the Treasury and Housing and Urban Development. It’s a clearinghouse for government programs to help homeowners in trouble, whether their financial situation is short-term or long.
Enhanced Relief Refinance: If you have a Freddie Mac mortgage and your loan-to-value ratio (how much you owe compared to your home’s value) exceeds the maximum allowed for a regular refinance, you may be eligible for an Enhanced Relief Refinance. Your loan must be dated after October 1, 2017, to be eligible, and you must be current with your payments.
High Loan-to-Value Refinance Program: Similar to the Enhanced Relief Refinance, but for owners of a Fannie Mae mortgage, this loan allow borrowers to reduce monthly payments, lower their interest rate, shorten the loan’s term, or move to a more stable mortgage, i.e., from an adjustable-rate to a fixed rate.
Hardest Hit Fund Programs (HHF): The HHF is a government program that exists in 18 states and the District of Columbia for struggling homeowners. It may help you if you are underemployed and can aid with principal reduction and elimination of second lien loans. It is also available for those who are transitioning out of their homes and into more affordable living situations.
Affordable Unemployment (UP): The Home Affordable Unemployment Program can help you if you are unemployed and eligible for unemployment benefits. Depending on your situation, UP may help you reduce or suspend your monthly mortgage payments for up to one year.
Principal Reduction Alternative (PRA): If your mortgage is not Fannie Mae or Freddie Mac, and it originated before 2009, and your home is worth less than you owe, this federal program can help by encouraging mortgage lenders to reduce the amount you owe.
Loan Modification: A loan modification is, simply put, making a change to your mortgage so it’s easier to pay. Lenders generally don’t want to go through the foreclosure process, and thus they may provide ways to enable you to pay for your mortgage with lower payments during times of financial stress. To explore this option, contact your loan holder.