If you want a lower mortgage rate but the upfront costs or other requirements have made you hesitant, new refinance options from Fannie Mae and Freddie Mac might entice you to take the plunge.
Fannie Mae's RefiNow and Freddie Mac's Refi Possible were developed specifically to help lower-income homeowners save money on their mortgages.
RefiNow launched June 5, while Refi Possible starts rolling out Aug. 30.
Basic requirements for RefiNow and Refi Possible:
Your current mortgage must be owned by Fannie Mae or Freddie Mac.
You must satisfy credit score, income, payment history and other borrower requirements.
Refinancing must lower your mortgage interest rate and your monthly mortgage payment.
Do you have a home loan with Freddie Mac or Fannie Mae?
In order to use these refinance loans, you must already have a mortgage that's owned by Fannie Mae (for RefiNow) or Freddie Mac (for Refi Possible).
If your current home loan is backed by the Federal Housing Administration or the Department of Veterans Affairs, you can't use RefiNow or Refi Possible, but there are other types of refinances available to you.
There are several FHA refinance choices, including the FHA streamline refinance, which has a similar cost reduction requirement. There aren’t as many VA refinance choices, but a VA IRRRL refinance likewise can help lower your monthly or overall mortgage costs.
To find out if you have an FHA or VA home loan, reach out to your mortgage servicer or look at your Closing Disclosure. In the upper right-hand corner of the disclosure's first page, you should see a checkbox that indicates your loan type. If it says you have a conventional loan, chances are your mortgage is backed by Freddie Mac or Fannie Mae.
How to qualify for Freddie Mac Refi Possible or Fannie Mae RefiNow
In addition to having a mortgage that's owned by Freddie Mac or Fannie Mae, you'll need to satisfy numerous criteria to qualify for Refi Possible or RefiNow, including the following:
Income: Your income can’t be more than 80% of the area median income, with the area based on the location of the home.
Credit score: You must have a credit score of at least 620.
Seasoning: You need to have had your current mortgage for at least one year, but not more than 10 years.
Debt-to-income: Your debt-to-income ratio, or DTI, must be 65% or less. That means that less than 65% of your monthly total income (pre-tax, not your take-home pay) goes toward existing debts, including your current mortgage.
Payment history: You'll need a solid track record of mortgage payments. With Fannie Mae, you need to have made all payments on time in the past six months and no more than one 30-day late payment within the past year. Freddie Mac asks for all of that and that you have not had a 60-day or longer delinquency in the past 12 months.
Be aware that neither RefiNow nor Refi Possible are cash-out refinances. If either refinance results in excess funds, you won't get more than $250 back. The rest will be used to cover closing costs or to pay down your original mortgage. But both should help you reduce your monthly mortgage payments, hopefully putting more money back in your wallet in the long run.
Benefits of the new Freddie Mac and Fannie Mae refinance options
Both Fannie Mae RefiNow and Freddie Mac Refi Possible offer a few major benefits that are intended to help you save money.
Smaller monthly mortgage payments: With both of these refinancing options, your lender must be able to lower your monthly mortgage payment by at least $50 and reduce your mortgage interest rate by at least 0.5%.
An appraisal credit: If you aren't eligible for an appraisal waiver, your lender will give you a credit of up to $500 to cover the cost of the home appraisal.
Reduced closing costs: If your mortgage balance is $300,000 or less, you won't be required to pay the adverse market refinance fee. That fee is 0.5% of your total loan amount, so if you owe $300,000 on your home, this would save you $1,500.
In all, the Federal Housing Finance Agency (which oversees Fannie Mae and Freddie Mac) estimates that homeowners who use these refinance options could save up to $250 per month, on average.