Learn what home refinance is and how it can impact your mortgage interest rate. Discover the main benefits you can obtain by refinancing your home mortgage. Understand how and when to refinance. Learn the right way to do it.
Refinancing is the means of obtaining a new mortgage. Most home buyers do this to take advantage of lower interest rates, pay off their loans faster, be able to fund a large purchase, change mortgage terms, and for many other reasons.
Refinancing is possible when the home buyer has equity in their home. This means they have already paid off some percentage of their mortgage.
An unstable economy and high-interest rates can make monthly mortgage payments tougher than expected. If you find yourself in this situation, it might be time to consider refinancing.
Is refinancing your current mortgage right for you? Most mortgagors are looking to reduce their monthly payments. Others will take cash out of their home's equity to pay off debts or for large purchases. Some refinance to change mortgage companies or lower the mortgage rate or term. Whatever your reason, we are here to evaluate your current situation and advise you on your best available options.
Refinancing your mortgage is usually less complicated compared to your first home buying process. However, the refinance process still consists of multiple steps. And just like the home buying process, it can be difficult to predict exactly how long the refinance will take—although typically, it will take 30 to 45 days. To help you understand what to expect, here are some of the steps you’ll need to take during the refinance process.
The first step in the refinance process is the application. In this step, you’ll need to find out what refinance option works best for you. You can either shop with multiple lenders, or you can work with the mortgage lender you chose when you first bought your home.
Once you choose a lender to work with, they’ll ask for the same information you gave during the home-buying process. This includes your financial details such as income, assets, debt, and credit score. All this information will be used to determine whether you meet the requirements for refinancing and have the capability to pay back the mortgage.
Once you receive your initial loan approval, you'll often be given the option to lock in your mortgage rates. This is to ensure that your refinance rates don't change before the loan closes.
Locking your mortgage refinance rates means you won't be able to change them from between 15 to 60 days. The length of the lock-in period will depend on your mortgage lender, loan type, and location.
You can opt to lock in for a shorter period if you think you'll get a better rate. However, make sure to close your refinance before the lock-in period ends. Otherwise, you might have to pay money to extend the rate lock.
If you're not interested in locking in, you may be given the option to float your rate instead. This option may allow you to get a lower interest rate. However, you might also end up getting a higher refinance rate.
There's also a float-down option, where you lock in a rate but if ever the interest rate dips, you might be able to choose the lower one. However, this option is not available with all mortgage lenders and it can also cost between 0.5% to 1% of the loan amount.
Once your application is submitted for final approval, the underwriting process will then begin. In this step, your mortgage lender will verify your financial information and ensure that the details you've submitted are accurate.
This includes ordering an appraisal to determine your home's current value. The appraisal is an important part of this step because it determines what refinance options are available to you.
For example, if you're making a cash-out refinance, the value of your home is a deciding factor in how much money you can get. If you're aiming to lower your mortgage monthly payment, the value of your home lets lenders know if you have enough equity to get rid of the private mortgage insurance (PMI) or if you qualify for a specific loan option.
An appraisal is required before you can refinance, the same as when you first bought your home. Your mortgage lender will order the appraisal, a third-party appraiser will visit your home, and then you will receive an estimate of how much your home is worth.
Before the appraiser visits your home, make sure that you set it up to look its best. You might also want to put together a list of the upgrades you've made to the home and show it to the appraiser.
How you proceed with the refinancing might depend on the result of the appraisal. If your appraisal is equal to or higher than the loan amount you want to refinance, then the underwriting has been completed. And your lender will then contact you with the information about closing your refinance.
However, if the appraisal is lower than the loan amount you want, then that means your loan-to-value ratio (LTV) is too high to meet the requirements. You can opt to reduce the amount you want to refinance or you can cancel the application. You may also choose to cash-in refinance instead, wherein you add cash to your application to get the terms you have on your current deal.
Once the home appraisal and underwriting are complete, then the next step is to close your mortgage refinance. Before the closing day comes, your lender will send you the Closing Disclosure to read and verify. The Closing Disclosure is the document that shows the final numbers for your refinance.
Closing for a refinance might be faster than closing when you're buying a home. On closing day, you'll go over the details of your mortgage refinance with the representative from the title company and the mortgage lender. This is also when you pay for any closing costs. If you're doing a cash-out refinance, then you'll receive the amount after closing.
If ever you do want to get out of your refinance, you have 3 days after closing to cancel.
With a mortgage refinance, you're getting a new mortgage. Your lender pays off your current mortgage and replaces it with a new one with a new rate and terms.
On the other hand, a loan modification applies changes to your current terms so you can catch up on missed payments. The usual goal of modifying your mortgage is to help you stay in your home. It should only be considered if you can't qualify for a mortgage refinance but need long-term payment relief. Loan modification often has a major negative impact on your credit score.
There are multiple options when it comes to refinancing your mortgage loan. So you would want to evaluate which ones are good for your goal and your unique financial situation. Here are some of the options available depending on what you need the refinance for:
This is the usual form of refinancing. If your goal is to lower your monthly payment or save money on your interest, then rate-and-term refinance is what you need. This type of refinancing is where you can change your mortgage rate, the term of the loan, or both.
With cash-out refinance loans, you can take out part of your home's equity as money you can spend. This might increase your mortgage debt, but it can give you cash to use on things such as home improvements, investing in a business, or funding certain goals. You can even get a new term and rate with cash-out refinancing.
A cash-in refinance allows you to reduce your loan-to-value ratio by making a lump sum payment. Doing so can lessen your overall debt burden, qualify you for a lower mortgage rate, and might even lower your monthly payment. However, before making a cash-in refinance, make sure that you evaluate your finances properly as it might drain your savings or restrain you from other lucrative opportunities.
As the name implies, a no-closing-cost refinance allows you to refinance your mortgage without having to pay the closing costs upfront. Instead, the closing cost will be rolled into your loan. However, this might mean a higher interest rate and a higher monthly payment. A no-closing-cost refinance will only make sense if you plan to stay in your home for a short term.
Short refinance might be offered by your mortgage lender if you're struggling to make your monthly payments and are at risk of getting your home foreclosed. For this refinance option, your mortgage lender will give you a new loan with a lower amount than your current loan. The difference between these two mortgages will be forgiven. However, getting a short refinance will have a big hit on your credit score.
You will only be eligible for a reverse mortgage if you're aged 62 or older. With a reverse mortgage, you will be allowed to withdraw your home equity and receive it as monthly payments from your lender. You can then use this money to pay your medical bills, as a retirement income, or for any other goal. With a reverse mortgage, you won't have to repay the lender unless you leave your home. And although the funds you get from a reverse mortgage are tax-free, they will accrue interest.
Debt consolidation refinance is just like cash-out refinance wherein you'll be able to take out part of your home equity. However, you'll only be able to use this cash to repay non-mortgage debt such as credit card balances. Although your mortgage debt might increase, you'll be able to pay off all or part of your other debts. Moreover, you might be able to benefit from the mortgage interest deduction.
If you want a faster refinance process, streamline refinance might be for you. This option eliminates some of the requirements needed to refinance such as the home appraisal or credit check. This refinance option, however, is only available with Fannie Mae and Freddie Mac, USDA, FHA, and VA loans.
Just like any other thing that involves money, refinancing your mortgage has both its advantages and disadvantages.
Some lenders give you the option to change the initial 30-year term to a 15-year term. With shorter loan terms, your overall interest rates would decrease and you would end up paying less before owning the home.
When you refinance your home, you get a new interest rate. If today's mortgage rate is lower than what you currently have, you may save money each month.
Adjustable-rate loans can be tricky for some borrowers, so they opt for the more predictable fixed-rate mortgage. Changing your adjustable-rate mortgage to a fixed-rate will protect your loan from unexpected cost increases in the future. Each month you will know exactly what you owe.
A cash-out refinance would allow you to get money from the equity of the home already owned. This cash is used for important expenses like debt payments or consolidation, tuition, medical expenses, and more. Besides, a refinance mortgage interest rate of around 4% is much better than the average credit card interest rate of nearly 20%!
If your current mortgage has a final balloon payment (when the entire balance amount is due at the end of the current loan's term), you can avoid the large sum payment by considering refinancing to a new fixed-rate mortgage.
If you purchased a home with less than 20% down, you are most likely paying for private mortgage insurance that protects the lender from borrowers with a loan default risk. As the balance on your home decreases and the value of the home increases, you may be able to cancel the PMI by refinancing.
Most banks and lenders will require borrowers to keep their original mortgage for a minimum of 12 months before they refinance. Each lender's terms are different. Therefore, it would be best for the borrower to check all restrictions and details with the lender.
In some situations, it is better to refinance with the original lender, although it is not required. This is so that you and the lender do not need a new title search, property appraisal, etc. Most original lenders will offer a competitive rate to borrowers looking to refinance their mortgage. So it is possible that a better rate can be obtained by staying with the original lender. An experienced and trusted mortgage broker can help you determine whether staying with your original lender is better than going with a different lender.
The first thing you should do when considering refinancing is to figure out exactly how you will repay the loan. If you are refinancing for home renovations to increase the value of your house, you may use the increased revenue upon selling to repay the loan.
However, if the credit is going to be used for something that would not give monetary returns—like buying a new car, funding an education, or paying down credit card debt—you would have to write on paper how you will repay the loan.
You can talk to your lender to analyze possible options for you. A mortgage broker can help you see even more options that may be available from other lenders. Even if there is no current refinancing deal that would benefit you at the moment, you would at least know what step you need to take next. There might be complicated paperwork from time to time, and an experienced attorney or mortgage broker can help you understand the process better.
To know more about refinancing your mortgage, here are some frequently asked questions that homeowners have about the process.
How much cash you need to refinance your mortgage will depend on certain factors such as your mortgage lender and the value of your home. Generally, you can expect to pay about 2% to 6% of your total loan value. But the good thing about refinancing is that the adverse market refinance fee was already eliminated, which means that you might not have to pay most of these costs out of pocket.
There's also the no-closing-cost refinance, where you don't have to pay the closing cost upfront. However, this expense will still be paid over the life of the loan and usually in the form of a higher rate.
Due diligence is needed when thinking about refinancing your mortgage. You have to consider your credit score, debt-to-income ratio (DTI), as well as current market trends, and mortgage rates. Using a mortgage refinance calculator might help you determine your break-even point. It can also help to know more about other options such as second mortgages and loan modification.
No. A mortgage refinance means replacing your existing loan with a new one. Whereas a second mortgage would mean that you're getting another loan to add to your existing mortgage.
With a mortgage refinance, you only need to make one monthly mortgage payment. With a second mortgage, you'll have to pay two monthly payments—the original mortgage and your second one.
Second mortgages, such as home equity loans and home equity lines of credit (HELOCs), often have lower closing costs than refinancing. However, these mortgages usually have higher interest rates. It pays to always consider your options well before deciding.
If your goal is to lower your monthly mortgage payment without having to go through the whole refinance process, a mortgage recast might be an option to consider. With a mortgage recast, your lender can re-amortize the balance of your loan. But to do so, you would have to make a significant lump-sum payment against your principal.
How soon you can refinance after closing will usually depend on the equity you have built up on your home and your current mortgage balance. But in some cases, it can be as short as 30 days or as long as 6 months up to a year, depending on the mortgage investor you have in your loan and the type of mortgage you're refinancing into.