Refinance
In this guide on refinance, we will cover and discuss the steps to refinance your mortgage. In this guide, we will be covering the mortgage refinancing process. A home purchase is likely one of the largest you will ever make. The chances are that when you purchased your home, you researched and educated yourself on the best lender and best finance option. However, after some time, perhaps the interest rates have changed and your needs have changed.
What Is Refinancing Your Mortgage And Why Do It?
In this section, we will cover what is refinancing your mortgage and why homeowners do it. When a homeowner decides to refinance their mortgage, it is basically taking your home loan and turning it in for a new one with better terms. People may do this for a number of reasons. The major reasons are rate and term, cash out, or rate conversion.
Rate and Term Refinance Mortgage
Rate and Term: If you are refinancing for rate and term you are looking for a better loan. This means that you have better interest rates available to you and may be able to lower your monthly payment. You can also change the term of the loan, perhaps changing the length of the loan from 30 years to 15 years.
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Cash-Out Refinance Mortgage
Cash Out: If you are refinancing for cash out, you are basically cashing in on the equity you have after paying on your current loan. You take out more than you owe on the house and get cash out. People generally choose this option if they need a larger sum of cash. Do you want to pull equity from your loan to finally update those kitchen cabinets and bathrooms from the 1960s? Have a new high school graduate and are looking to help with college costs? There are numerous reasons a person may choose to use this option.
What Is a Rate Conversion Mortgage
Rate Conversion: A rate conversion mortgage would be a refinancing option to change rates, from perhaps a fixed rate loan to an adjustable rate loan. This would depend on the current trends and if the borrower could reduce their interest rate by at least 2%, it’s enough to motivate them to do so.
You may also be able to get rid of your private mortgage insurance (PMI) through refinancing. This would be an option if you have at least 20% equity in your home.
Whatever the reason, it is similar to when you shopped around to find a lender for your original home purchase. The new financer will often pay off the existing loan and you are left with just one monthly payment. When a potential borrower has decided to refinance, the same time and energy need to go into shopping around for the right lender that you did with your first mortgage.
How Credit Scores Impact Rates on Refinance
As with your original home purchase, you will need to consider your financial situation. Has your credit remained stable and in good standing? When a lender looks at your credit score, they are looking to see a high score, which reflects your payment history, types of credit you have used, and the overall amount of money you owe to debtors. A lender will want to see a credit score of at least 620 or higher, depending on the type of loan you apply for.
What Are The Rules For Refinancing a Home
If your credit has taken a nosedive, you will need to spend some time getting it in order. Carefully check the details to ensure they are correct and dispute any charges. It is also advisable not to close accounts. Length of credit history can help your score. Along these same lines, don’t open any new accounts. You do not want additional debt and added credit checks can hurt your score. It can take months to raise your credit score, but will pay off in the long run when you apply for refinancing.
Will Refinancing Lower My Credit Scores
On the other side of this, when applying for a loan, when the lenders will check your credit score it may change. This may impact your score negatively, however it is temporary and your credit score will bounce back after 3-4 months.
How Much Cash-Out Can I Get From Refinance?
If you are refinancing, you need to determine your home equity (home equity is the amount of money you would get after selling your home and paying off your mortgage. ) Your home equity is the difference between how much you have left on your mortgage balance and the estimated value of your home. If you have at least 20 % equity, it would be easier to get a loan with fewer fees and better rates.
Depending on your credit score, you still may be able to get a refinancing loan with less equity. Lenders will oftentimes look at your loan-to-value ratio (LTV). This is more favorable if it is low as it is a lower risk rate. One way to calculate this by yourself is to divide the mortgage by your home’s value.
Finding a Lender
When it’s time to find a lender, you will want to educate yourself on multiple lenders, paying special attention to fees in order to get the best overall loan. Many people think that they need to stick with their original mortgage company, but this is not the case. A potential borrower needs to ensure that they have picked the right lender to get the most out of this loan. There are specialized lending firms, loan and savings institutions, and other options besides banks and credit unions.
How To Start The Home Refinance Process
Once you have decided on a lender, you must apply. This is very similar to the application process you completed originally. Complete the application itself and supply the supporting documents they need. They will want to see proof of income-pay stubs, W-2s, and bank statements. You will need to supply insurance information, statements of debt, and statements of assets. Again, they will check your credit score, which should not be a problem since you have proactively checked and worked on your credit score.
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Debt-To-Income Ratio Guidelines on Refinance
The lender will check your financials as a way to ensure that you make enough money to cover the loan each month with your income and debt that you pay each month. This is your debt-to-income ratio (DTI). They are also checking to see if you have had any employment gaps. If you have gaps, this is not necessarily detrimental to the approval process. You can supply a letter of explanation to share the situation as there are many valid reasons why a person might have employment gaps. They will want to see that you have “righted the ship” and are back on track.
Are Home Appraisals Required on Refinance?
Do you need to have a home appraisal in every case of refinancing? Not necessarily. This decision is up to the lending institution. A lender might require one In order to ensure that the home is worth the amount you are asking for. This new appraisal will help determine approval if you need to pay for private mortgage insurance (PMI), or how much money you are able to take out for cash-out financing. Remember the equity you have in your home needs to be determined!
Comparable Home Sales In Area Determine Value
While the appraiser (A neutral and unbiased professional) is at your home, the area and location are taken into consideration. Surrounding homes, businesses, etc can all impact the value. The appraiser can also see how you have maintained the home. Once the appraisal is complete, the loan-to-value (LTV) ratio is reviewed to ensure all is in line for the lender.
How Can Appraisals Be Exempt on Refinance Mortgage?
There are a few ways to refinance without an appraisal. FHA Streamline Refinancing is only available if you have an FHA-insured mortgage. The issue with this type of refinancing is that the cash takeout is limited to $500. This would not work for someone hoping to take out large amounts of cash for refinancing.
VA Streamline Refinance
The second is VA Streamline financing. This is available if you have a VA loan. This financing must provide the individual with a lower monthly payment or lower interest rate.
Conventional Loan Appraisal Waiver
A Conventional Loan Appraisal Waiver is available if you already have a conventional loan and you have recently already had it appraised. However, this is entirely up to the lender and Fannie Mae or Freddie Mac financing.
USDA Refinance Mortgage Loans
USDA Streamline Finance is for individuals who have a loan backed by the USDA. This financing has two options. The Streamline Assist and the Standard Streamline. Streamline Assist does not require an appraisal unless you have received a subsidy during the term of the loan. This option does not require a credit check, however, they will ensure that you have paid your mortgage payments as scheduled, on time, for the past 12 months. The Standard Streamline does require a credit check and will look at your debt to income (DTI) ratio.
Home Appraisal Requirements on Refinance Loans
Although there are a few ways to get refinanced without an appraisal, it does not work for everyone. Getting an appraisal can actually help you- during the time you have lived in your home and paid on your original loan, the home value may have actually increased. This is especially true if the neighborhood has had improvements, other homeowners have corrected eyesores, or you have made improvements to your own home.
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Shopping For Rates And Locking Loan
Once you are approved for your refinancing loan, you will want to decide if you should rate-lock. This means that for the length of the underwriting process and however long it takes to close on the loan, the lender agrees to keep your interest rate the same as when you were approved. This is because mortgage rates can fluctuate- sometimes daily or even by the hour. If you have done all this work to get approved for a refinance, you want to secure the amount of your interest rate.
Can You Refinance Today When Rates Are High?
It is worth noting that interest rates could possibly decrease as well during this time, which would mean that you wouldn’t be able to take advantage of this lower rate. There are sometimes charges to ensure a rate lock, so you should ensure that you ask about this. There is an option for a float-down mortgage rate lock. There is a fee associated with this, however, if rates go down, you will be able to get this rate. A rate lock is usually effective for between 15-60 days. If you are to go over the end date, you would need to ask for an extension. This can also have a fee associated with it.
Closing Refinance Mortgage
Because the mortgage refinancing is actually a new loan, you will have a closing date just like you did when you closed on your original mortgage. The lender will send a Closing Disclosure no later than 3 days before closing. There are closing fees which generally figure between 2 and 5 %. These costs are based on a few factors such as if you are getting cash out, where you live, home value, and the balance on your mortgage.
Many buyers choose to include the closing costs into the loan so that they do not need to pay upfront. The downside to this is that you will be paying interest on these fees. The good news is that the closing meeting for refinancing is quicker than the original purchase closing and you will be well on your way to an improved loan term or replacing that avocado green kitchen appliance and outdated cupboards!
Frequently Asked Questions (FAQs)
- What is home refinancing? Home refinancing is substituting your existing mortgage with a fresh one, usually to obtain a reduced interest rate, modify the loan duration, or tap into home equity.
- Why should I consider refinancing my home? Homeowners refinance to lower monthly payments, reduce interest costs over time, access cash for home improvements or debt consolidation, or change from an adjustable-rate to a fixed-rate mortgage.
- When is the right time to refinance my home? The ideal time to refinance depends on factors like interest rates, credit scores, and financial goals. It’s often beneficial when rates are lower than your existing mortgage rate.
- What types of home loans can be refinanced? Most types of home loans, including conventional, FHA, VA, and USDA loans, can be refinanced.
- How does the home refinancing process work? It involves applying for a new loan, getting approved, closing on it, and using the funds to pay off the old mortgage.
- What is a cash-out refinance? With a cash-out refinance, you have the opportunity to secure a loan that goes beyond your existing mortgage amount, enabling you to receive the excess amount in cash, which can be used for various purposes.
- What are the costs associated with refinancing a home? Refinancing costs typically include application fees, appraisal fees, title search fees, and closing costs, which can vary by lender and location.
- Can I refinance with bad credit? It’s possible, but individuals with lower credit scores might encounter elevated interest rates or be required to fulfill more stringent eligibility criteria.
- What is the break-even point in a refinance? The break-even point is the time to recoup refinancing costs through lower monthly payments. It’s essential to calculate this to determine if refinancing is worthwhile.
- Q: Should I work with my current lender or shop around for a refinance? It is recommended to explore various options and obtain quotes from multiple lenders to discover the most favorable refinance offer, as different lenders may offer varying terms and rates.
Start your Refinance journey with us. You can contact us at Gustan Cho Associates by calling us at 800-900-8569 or text us for a faster response. You can also email us at alex@gustancho.com. Our expert Loan Officers are available even during weekends and holidays!
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