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How to Refinance 80/20 Loans


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TERMINOLOGY

Many people turn to 80/20 loans to get 100 percent financing for their homes and avoid private mortgage insurance (PMI). PMI is required for mortgages that are more than 80 percent of the home's value. With an 80/20 loan, the loan is split into two loans and the first mortgage is 80 percent of the home’s value, therefore eliminating PMI.

At some point after the 80/20 loans are secured, the borrowers may want to refinance one or both of the loans to get a lower interest rate and save money. However, refinancing an 80/20 loan can be tricky because it is based on the new interest rates and whether or not the new loan will cause private mortgage insurance to become an additional expense. 

Loan to Value Ratio

If the LTV is more than 80 percent when you refinance, private mortgage insurance will be required. Therefore you should make sure the difference in interest is worth having to pay this insurance policy. Keep in mind that both the interest and private mortgage insurance are tax deductible.

Also, if the home has lost value, the result may be a negative loan. Refinancing the loan will be difficult because most lenders will not refinance a home that is worth less than the amount due on the loan. 

Look Closely at the Terms

The 20 percent loan usually has a higher interest rate, and in some cases may provide fees or penalties if it is refinanced. It is important to look at the terms to understand the conditions that must be met for the loan to be refinanced. Expect it to cost more to refinance and be prepared to pay those costs up front. If it's too much to refinance, you may be better off keeping the loan as it is.

Look at Lenders

Even though starting with the current lender may not be a bad idea, remember the choice between lenders does exist. Shop around to see who provides the best deal, and who is the most willing to work with the refinance. Explain the situation and why you want to refinance. Be prepared to show good payment records on both loans. Go with the lender that can provide you the best deal and save you the most money in the long run. 

Choose a Loan Type

Since you already have an 80/20 loan, you may want to go to a 30-year fixed rate. There are also many other types of loans to choose from. Talk to the lender regarding the benefits of each loan type and closely analyze your financial situation to make the choice that is right for you. The fixed interest rate will keep payments steady, but ARMs, or adjustable rate mortgages, will have lower payments initially. ARMs may also cause payments to fluctuate and skyrocket if interest rates rise, causing another refinance to be necessary at a later point in time. If you need help choosing a loan type, consider how long you will be in the home, the current value of your home, and how much you may save with the refinance.

Whichever lender you choose, be sure to request a net savings benefit statement. This statement will offer you the most important details of your refinance. It will compare your loan amounts, rates, payments and loan terms. For example, it will show if you are increasing your loan amount and your term from 20 years to 30 years.