About Refinancing
How do I get refinancing?
Is refinancing right for me?
A definition of “refinancing” is a misleading term, because it suggests to many homeowners a process of changing or altering their mortgage. Refinancing is in fact, taking out a new mortgage and using the money to close out, or pay-off your current mortgage. Refinancing involves many of the same steps as applying for and getting your first mortgage – and can also involve some of the same expenses. Refinancing can save you a significant amount of money depending on how the terms of currently available mortgages compare with the terms of your present mortgage.
With all the options available today, there’s no substitute for gathering information, working the numbers and talking with experts to see if refinancing makes sense for you. Many lenders are offering no-cost and low-cost refinancing, which involve little or no out-of-pocket costs. These loans compensate for no up-front expenses by a somewhat higher interest rate, or by including the costs of refinancing in the amount of the loan.
No resource could cover every good reason to refinance a home, but here are a few common reasons homeowners choose to get a new mortgage:
1. Convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. – You may have chosen an ARM for its lower initial interest rate. Converting your ARM to a conventional fixed-rate mortgage can make sense if rates are low.
2. I can save money on interest rates. – If you obtained your current mortgage when interest rates were considerably higher, refinancing could make sense for you. Refinancing at a lower rate will reduce your monthly payments, (if you plan to stay in your home for a reasonably long time) these lower payments will more than make up for the costs of refinancing.
How much lower should interest rates be? That depends on the refinancing costs. Lenders general rule-of-thumb was a difference of 2 percent or more, before refinancing made sense. But with the newer low-cost and no-cost refinancing options, refinancing can make financial sense even with a smaller difference in interest rates – be sure to consult a mortgage lender for a more accurate and detailed analysis before you make your decision.3. Convert an adjustable-rate mortgage (ARM) to an ARM with lower rates or better features. – Most ARMs have caps, that limit the amount the interest rate or monthly payments can increase.
ARMs interest rates fluctuate with prevailing market rates, you may currently have one that’s tagged to higher indices – and carries a higher interest rate – than other ARMs currently available.
You may want to look for an ARM that offers you better protections than your current loan – by delivering significant savings as well as making you feel more financially secure.4. Build your equity faster. – Your finances have probably improved since you obtained your mortgage, consider converting to a mortgage with a shorter term – perhaps a 15-year mortgage instead of a 30-year mortgage. The monthly payments will be higher, but your overall interest costs will be substantially lower. If current interest rates are below the rates of your existing mortgage, your monthly payments may not increase. This can be very beneficial as you near retirement, a shorter loan term may enable you to own your home before you retire.
5. Convert some equity to cash. – If you’ve had your mortgage for some time, you’ve substantially reduced the outstanding principal on your loan. You’ll be able to finance a considerably larger amount than you owe on your current mortgage, use the difference for major purchases, or to finance college costs.
If you’re seriously considering refinancing, call the lender who holds your current mortgage, he or she may be willing to waive some fees for items such as, title search, surveys, inspections and other certifications.
10 Steps to get Refinanced
1. Consider the source
It is a misconception that refinancing with your current mortgage company is easier because of the history you have with them. Your current mortgage company will require the same documentation as any other mortgage company and they will still need to verify assets, liabilities, employment, etc. Consider many refinancing sources to get the best rates and programs available to you.
2. Run the numbers
When refinancing you want to calculate when the total costs of the transaction will be recouped. Determine how much you will save every month and then divide the total cost by the monthly savings to find the number of months it will take you have to break even. Example (this is a simplified calculation for break-even analysis, the calculation is more complex if you are changing from an adjustable rate to a fixed mortgage, or lowering your loan term, and it is advisable to get a professional to assist you): if your new loan saves you $100/ month, and the transaction costs $2500, then 2500/100 = 25 months, this new loan would be beneficial if you planned on staying in your home for at least 25 months.
3. Consider your overall situation
There are many routes and programs to choose from when refinancing, pick a program that fits your financial situation and your needs.
4. Look at refinancing your first mortgage before getting a second
It is always advisable to refinance your first before getting a second mortgage (unless your first mortgage has certain benefits). Carrying a second mortgage will increase your monthly mortgage payment and have a high interest rate.
5. Ask about points and origination fees
Points and/or origination fees are used to lower (buy down) the interest rate. Look at the points, rate, and origination fees. An origination fee is basically the same fee as points, but some lenders separate the two costs to make the fees seem smaller.
6. Get everything in writing
Do not expect verbal agreements to be enforceable, a written contract will override the verbal contract. More importantly, your state may require written contracts for the sale of real property.
7. Don’t sign anything without reading it
Review any documents you’ll be signing in advance. Many of the documents you’ll sign are standard forms and are usually available for review. You won’t have time to read all the documents during the closing appointment.
8. Provide documents to the lender quickly
Get everything your mortgage company asks for, delays in providing documents can result in costly delays. If your mortgage company asks you for additional documents, provide them immediately, there are ways around not showing documents, but it will increase your costs and rate.
9. Know when to pay for an appraisal
When you think your home value is uncertain or low, ask your mortgage company to prepare a desk review before an appraisal is provided. A desk review will give you a range of the estimated value of your home property. Paying for a full appraisal, when it’s doubtful that you’ll get the needed value to qualify for a loan, will be money poorly spent.
10. Know your rights
The Equal Credit Opportunity Act (ECOA) provides for equal access to credit regardless of:
- Race
- Religion
- Age
- Color
- National origin
- Sex
- Marital status
- Income from public assistance programs
There are additional protections if you have a physical or mental disability.
The ECOA also requires that you are notified within 30 days of the completed loan application that your application has been approved as requested, modified, or rejected. Specific reasons for rejection must be given, in writing, to you at the time of rejection or upon your written request for the reasons.
Real Estate Settlement Procedures Act (RESPA) requires lenders to give you advance notice of estimated closing costs in purchase and refinance transactions.
Truth-in-Lending Act
The Truth-in-Lending Act requires all lenders to fully disclose, within three business days after receiving your loan application, a written statement of fees, terms and conditions associated with a loan including the Annual Percentage Rate (APR), which reflects the cost of obtaining credit.