Refinancing Basics
Refinance your mortgage can be done for many reasons. Many homeowners refinance their mortgages because rates are always changing and home improvements are imminent. It's also a great way to save money.
What Is Refinancing?
When you replace an existing loan with a new one, it is called refinancing. A homeowner can borrow funds at a lower interest rate, repay it over a longer period, or withdraw from your home or increase it.
Refinancing involves obtaining a new mortgage loan that is used to repay and close the original loan. The terms of the new refinance loan will determine your new monthly payments, loan length, and interest rate.
If you refinance to 30-year mortgages, it doesn't matter how long you owe on your original loan. Your payment cycle for the new loan will begin over and continue for thirty years. If you owe $400 per month in PMI premiums for your original loan, but your refinance doesn't include PMI, the PMI amounts you previously paid each month would not be included.
Refinancing may be an option depending on your financial situation and current interest rates.
These Are Some Of The Most Common Reasons To Refinance:
Lower monthly payment
Reduce total interest paid
Reduce the term of the loan
Type of change rate (e.g., from an adjustable rate to a fixed rate).
To pay other bills or expenses, draw cash
Cancel your mortgage insurance premiums
Refinance Timing
Your personal circumstances will determine the best time to refinance. Refinance is a good idea if you are able to qualify for a low enough rate to help you save money over the loan's life, even after paying the refinance cost. If your interest rate can be reduced by half of one percent, it is likely to save you significant money if your goal is to keep your house. Refinance is also a good idea if you have enough equity to drop PMI. This will save you money each month.
Refinance Mortgage Loans: Types
Homeowners have a variety of options when it comes to refinancing. They can choose from rate-and-term, cash out, cash in, or streamline products. In addition, refinancing of almost any loan is possible as long as the lender meets all qualification requirements.
Refinance At Both The Rate And The Term
You can refinance your rate-and-term loan to get a loan at a lower interest rate and for a longer-term but with the same loan amount.
Reasons to Refinance:
Your monthly payments can be reduced
You can save on your overall interest
If you choose a shorter-term loan than the one remaining on your existing loan, you can pay off your loan quicker
Change from an adjustable-rate program to a fixed-rate one
Reduce PMI from your monthly payment
Refinance With Cash-Out
Cash-out refinances allow you to draw cash from your home's equity by increasing your loan amount. A cash-out refinance will typically result in monthly payments that are higher.
Reasons To Refinance Your Cash-Out:
Use your equity to make home improvements and other purposes
Equity can be used to pay off higher-interest debt
Refinance With Cash-In
Cash-in refinances allow you to pay a lump amount towards your home equity and reduce the loan amount. To lower their loan amount, cash-in refinances can often require borrowers to contribute tens of thousands of dollars.
Reasons to get a Cash-in Refinance:
If your mortgage balance is greater than your home's market value,
Cancel your PMI (Private Mortgage Insurance)
Your monthly payments can be reduced
Qualify to receive a lower interest rate
Streamline Refinance
You can reduce your mortgage interest rate by refinancing with a loan of the same type. This streamlined refinance process is quick and easy. This is not a cash-out alternative and is not available for everyone. Remember that lenders have their own processes, so you will need to go through some qualification steps.
Why A Streamline Refinance:
Your interest rate can be lowered
You can save money throughout the term of your loan
The typical mortgage refinances closing cost can be anywhere from 2% to 66% of the loan's principal. For example, a $250,000 loan might have refinance costs of $5,000 to $15,000,000. These costs can be added to your monthly payment if you choose to roll them into your new refinanced mortgage.
Refinance your mortgage
These Six Steps Are The Basis Of Refinancing Your Mortgage:
Refinance
Calculate a target interest rate
Apply for refinancing loans
Lock your refinance rate
Complete a home appraisal
Close
Refinance is possible
Each lender has its own criteria, but you can expect to be asked about your financial situation. This will include pulling your credit report, reviewing your income, property value, and reviewing your payment history.
Credit:
Your credit score will impact the interest rate offered by lenders.
Employment:
Loan Lenders would like to see your employment history and verify your position. Check your home equity balance. Refinance loans must not exceed 80% of the home's value to save PMI.
Home condition:
Mortgage lenders may request an appraisal to determine the value of your home. This helps them decide how much money to lend you. Homes in good condition will be appraised more than homes in poor. This helps you to finish any home repairs that are not complete. In addition, the appraisal can impact the interest rate you are offered, depending on how much you intend to borrow.
Calculate The Target Refinance Rate
You will need to find interest rates that are lower than your current loan's interest rate to lower your monthly principal and interest payments. Refinance interest rates have ranged between 3% and 5% for a 30-year fixed mortgage in the past decade.
Mortgage loans are likely to be amortized. This means that initial costs will gradually be paid off over time. The principal and the majority of the interest payments are applied early in the loan term. As time goes by, a greater percentage of principal is applied. As a result, you may require a lower refinance rate depending on the stage of your mortgage loan term. This will allow you to realize the savings you expected.
Current mortgage rates:
If you keep an eye on rate trends, you will know when rates are low enough that you can get a favorable refinance loan.
Use a Mortgage Refinance Calculator:
To calculate your total savings, you'll need to know the amount of your current loan, your loan interest rate, term, and your origination year.
Refinance Loans Available
Ask multiple lenders about their rates, fees, and eligibility criteria. Each lender will provide a Loan Estimate if requested. This includes the terms of your loan, projected monthly payments, and a summary detailing the fees and costs of the loan. To compare the costs of borrowing a loan, you can get a Loan Estimate from several lenders and make the best decision for yourself.
Common Refinance Fees For A Mortgage:
Origination Fees
Lending fees
Title fees and Escrow
Charges for credit
Insurance fees
Property taxes
Appraisal fees
Interest rate discount fees
Request all quotes within the same timeframe:
Hard inquiries to your credit within the same period might be considered one inquiry. This should generally only affect your credit score by a few points. However, multiple inquiries in a shorter time frame can cause credit damage.
Compile common application documents:
Pay stubs from the last two to three month
Returns of tax for the last two years
Statements from banks for the last two months
A list of assets
A list of liabilities
Lock-In Your Refinance Rate
After you have chosen your lender, the chance to lock your interest rates is available. The lender will lock the rate to ensure that you pay a fixed interest rate for closing your loan within a set period. This usually takes between 30-60 days, but it can sometimes be extended up to 120.
The lender will continue to work during this time on your refinance application. Your rate will not rise if rates go up during the lock period. You may be able to "float down" your locked rate to the current lower rate if rates drop during the lock period. This is usually a one-time fee.
Do A Home Appraisal
To determine the property's value, the lender will likely need a home appraisal. A certified third-party home appraiser does appraisals. They can cost between $300 and $500 for a suburban home but may run up to $650 in urban areas.
What Happens In A Home Appraisal To Refinance?
The appraiser will visit your home to assess and photograph the exterior and interior conditions. Appraisers look at the layout of your home, bathroom functionality, and plumbing systems such as HVAC and plumbing. Appraisers consider safety features such as fire alarms and carbon monoxide alarms. They will compare the witnessed conditions and location to homes nearby that recently sold.
Close And Pay
You'll be required to pay closing costs. Your lender will wire funds to repay your old mortgage. Refinance paperwork can take up to an hour and may be signed by the title or escrow agent.
