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Refinance Guide

Our step-by-step guide will help you understand the refinance process so you know if refinancing your mortgage is right for you.

Getting Ready to Refinance and Reasons to Refinance

The first step in deciding whether you should refinance is to establish your goals. The most common reasons for refinancing a mortgage are to get a lower payment, take cash out or shorten your mortgage term.

Get a Lower Payment

A lower mortgage payment means more room in your budget for other things. There are a few ways you can lower your payment by refinancing.

First, you may be able to refinance with a lower rate. If rates now are lower than they were when you bought your home, it’s worth talking to your lender to see what your interest rate could be. Getting a lower rate means lowering the interest portion of your monthly payment – and big interest savings in the long run.

Second, you could refinance to get rid of mortgage insurance – a monthly fee you pay to protect your lender in the event that you default on the loan. Mortgage insurance is usually only required when you put down less than 20%. You could save hundreds of dollars a month by refinancing to stop paying monthly mortgage insurance.

Third, you can get a lower payment by changing your mortgage term. Lengthening your term stretches out your payments over more years, which makes each payment smaller.

There may be other ways you can get a lower payment, so it’s always worth checking with your lender to see how they can help you get a payment that fits your current budget.

Take Cash Out

Refinancing your mortgage is a great way to use the equity you have in your home. With a cash-out refinance, you refinance for a higher loan amount than what you owe and pocket the difference. Any proceeds you receive are tax-free.

Many homeowners use cash from their home to pay off high-interest credit card debt and student loan debt. You can also take cash out to finance home improvements, education or whatever you need. Since mortgage interest rates are typically lower than interest rates on other debts, a cash-out refinance can be a great way to consolidate or pay off debt. Additionally, mortgage interest is tax-deductible, but the interest on other debts usually isn’t.

You may be able to take cash from your home if you’ve been paying on the loan long enough to build equity. Additionally, you may be able to do a cash-out refinance if your property value has increased; a higher value on your home means your lender can give you more money to finance it.

Shorten Your Mortgage Term

Shortening your mortgage term is a great way to save money on interest. Often, shortening your term means you’ll receive a better interest rate. A better interest rate and fewer years of payments mean big interest savings in the long run.

So how does this work? Let’s look at an example. Say your loan amount is $200,000. If you got a 30-year loan with a 3.5% interest rate, you would pay approximately $123,000 in interest over the life of the loan. However, if you cut your term in half, you would pay about $57,000 in interest over the life of the loan. That’s a difference of $66,000 – and it doesn’t even account for the fact that the shorter term would provide you with a lower interest rate (and more savings).

An important thing to know about shortening your term is that it may increase your monthly mortgage payment. However, less of your payment will go toward interest, and more of it will go toward paying down your loan balance. This allows you to build equity and pay off your home faster.

How long should I own my home before refinancing?
In most cases, you’ll need to be in your current home for at least a year before getting a significant financial benefit from refinancing.
Things You Need to Evaluate Before Refinancing

Once you have a clear goal in mind, you’ll want to evaluate your financial situation. There are four keys things to look at: your credit score, your monthly mortgage payment, the value of your home and your debt-to-income ratio (DTI).

Your Credit Score

There are many online resources that make it easy for you to find out your credit score for free. Knowing your credit score will help you understand what mortgage refinance options you could be eligible for.

Your Monthly Mortgage Payment

Knowing how your monthly mortgage payment fits into your budget will help you evaluate your options. If you’re taking cash out or shortening your term, for instance, it’s a good idea to know how much wiggle room you have in your budget for a higher monthly payment. If your goal is to get a lower monthly payment, it’s important to decide how much you need to lower your payment for the refinance to be worthwhile.

The Value of Your Home

Before you refinance, you’ll want to do a bit of research to estimate how much your house is worth. Your lender can’t lend you more than the home is worth, so an appraisal value that comes back lower than expected can impact your ability to refinance – especially if you’re looking to take cash out or remove mortgage insurance.

The best way to estimate your home value is to check the sale prices of similar homes near you. The more recent the sale, the better.

Knowing the value of your home can tell you how much equity you have. To figure this out, just subtract your current mortgage balance from the estimated value of your home.

Your Debt-to-Income Ratio

Another factor to take into consideration is your DTI. DTI is all your monthly debt payments divided by your gross monthly income. DTI is one way lenders measure your ability to repay the money you’re borrowing.

If you were paying $1,000 a month for your mortgage and another $500 for the rest of your debts (such as credit card debt, auto loans and student loans), your monthly debts would equal $1,500. If your gross monthly income was $4,500, then your DTI ratio would be 33%.

Most lenders require a DTI of 50% or lower, and the maximum DTI varies by the type of loan you get. A DTI that’s too high could impact your ability to refinance or limit your refinance options.

How much does it cost to refinance?
The cost of refinancing is typically between 2% and 3% of the loan amount. So if you refinance with a $200,000 loan amount, getting the loan will likely cost between $4,000 and $6,000.

However, you won’t necessarily have to pay these costs out of pocket. Often, lenders can roll these fees into your mortgage so you can pay them over the life of your loan.

 

Exploring your Refinance Options

Once you’ve identified your refinance goal, it’s time to figure out which kind of loan can help you get there. Let’s talk about which loan features are best for helping you lower your payment, take cash out or shorten your mortgage term.

Lower Payment

Looking to get more flexibility in your monthly budget? Here are a few different ways to lower your mortgage payment.

Lower Your Interest Rate

If you’re interested in getting the lowest rates available, you might want to consider an adjustable rate mortgage (ARM). ARM rates are typically lower than fixed rates because of the risk that your rate could increase after the initial fixed-rate period is over. However, if you’re planning to move or refinance in the next 5 to 10 years, an ARM could be a good option for you.

Keep in mind that refinancing with a lower interest rate doesn’t guarantee that your payment will be lower. A lower rate will shrink the interest portion of your monthly payment, but many factors – such as your term, taxes and insurance – affect how much you’re required to pay each month.

Change Your Mortgage Term

If having a lower payment is more important to you than paying off your loan quickly, then changing your mortgage term could be right for you. Lengthening your mortgage term allows you to stretch your payments out, which makes each payment smaller. Going from a 15-year term to a 30-year term, for instance, is a great way to lower your payment.

Eliminate Mortgage Insurance

Eliminating mortgage insurance can save you hundreds of dollars a month, but to get rid of it, you first have to know which kind you have:

Conventional loans have private mortgage insurance (PMI). PMI is usually paid as part of your monthly mortgage payment. In most cases, you’ll stop paying PMI when you have about 20% equity in the home.
FHA loans have mortgage insurance premiums (MIP). Client with FHA loans pay a premium upfront at closing and as part of their monthly payment. When you stop paying MIP depends on how much you put down when you bought your home and when you closed. However, if you put less than 10% down on an FHA loan after June 3, 2013, the only way to get rid of MIP is to refinance.
If you have a conventional loan or an FHA loan that is eligible for MIP removal, it might make sense to make extra payments or just keep paying on your loan to raise your equity and drop your mortgage insurance. If you want to get rid of it immediately, however, you could look into refinancing with lender-paid mortgage insurance – a type of mortgage insurance that’s rolled into your loan instead of your monthly payments. Lender-paid mortgage insurance could work in your favor if you’re planning to stay in the home for a while.

Want to Eliminate PMI?

See how Eliminating PMI can help you lower your monthly payment.

Take Cash Out

There are a lot of loan options to choose from if you’re looking to get cash out. It all depends on your situation and goals.

If you’re simply looking to take out as much cash as possible, a 30-year loan is probably your best bet. Since you’re upping your loan amount by taking cash out, the 30-year term will give you the lowest monthly payment.

If you’re taking cash out with a goal of becoming debt-free, a shorter term could be a better choice. You could use your cash to pay off credit cards and other debt while paying off your home and saving on interest.

Whether you go with a conventional or an FHA loan depends on your personal situation. For many homeowners, an FHA loan is less expensive than a conventional loan. However, if you already have a conventional loan, refinancing into another conventional loan could be the right choice. Your lender can help you determine which loan option is the most affordable way for you to take cash out.

Shorten Your Term

Shortening your term is a smart way to pay off your home quickly and cheaply. A shorter term usually has a lower interest rate, and since there are fewer payments, you’ll pay significantly less interest overall.

There are a variety of loan options that make a shorter term possible, and the right one for you will depend on your situation. A conventional loan is a great choice for those with good credit. If you’re a service member or veteran, a VA loan is almost always your best choice. Talk with your lender to see which loan option makes shortening your term the most affordable.

Options for Refinancing if You’ve Been Denied Before

Have you been denied when you’ve tried to refinance in the past?

Recent changes in the mortgage industry have made it easier for homeowners to qualify. Less restrictive guidelines mean that homeowners who were previously denied for an FHA, conventional or VA loan may have a better shot now.

If you haven’t been able to refinance because you have little or no equity, the U.S. government’s Home Affordable Refinance Program (HARP) is one option you should consider.

Applying to Refinance and Choosing a Lender

Refinancing your mortgage is a big financial decision. Preparing yourself with the right knowledge, proper documents and right lender can make your mortgage refinance go as smoothly as possible.

Here are some questions you should ask when picking a lender to handle your refinance:

Will you service my loan after closing, or will you sell my loan to another company? Not every lender services their loans after closing. Quicken Loans services 98% of their loans to make sure you’re satisfied from the day you apply to the day your loan is paid off.
What’s your availability? It’s important to have someone on hand to answer your questions – even outside of typical business hours.
What are your rates and fees? Rates and fees can vary quite a bit from lender to lender. You can shop around to determine which rates and fees fit your situation best, but keep in mind that the lowest rate doesn’t always make for the best mortgage experience.
What is your client satisfaction rating? Thirty years is a long time to deal with any company; looking at feedback from other clients can help you determine whether you’ve found a company you can work with for a long time.
Can I complete the process online, or will I have to drive to a branch? The ability to submit documents online can make all the difference if you’re short on time. Make sure to pick a lender who makes your mortgage experience as effortless as possible.
How much time will the process take? If it’s important for you to close fast, you’ll need to find a lender who makes your loan a priority.
Documents Your Lender Will Probably Ask For

It’s important to prepare your financial documents before applying so you can close your mortgage quickly. Here are some of the things your mortgage lender will probably request:

Your two most recent pay stubs
Your two most recent W-2s
The most recent two months of bank statements
If your spouse or someone else will be on the loan with you, they’ll need to provide these documents too so your lender can get the whole picture of your financial situation.

If you’re self-employed, you’ll have to provide a few more documents to demonstrate your income. Some lenders will ask to see your entire tax return so they can see the exact amount of cash in and cash out.

The Costs of a Refinance

These are some common fees you might have to pay for:

Application fee: This fee will be due even if your loan is denied.
Appraisal fee: You’ll likely have to get an appraisal so your lender has an accurate and updated value for your property. In some cases, such as with a streamline refinance, your lender may be able to waive the appraisal.
Inspection fee: Certain inspections may be required based on the type of loan you’re getting.
Attorney review and closing fee: This fee covers the costs of the lawyer who conducts the closing for the lender.
Title search and insurance: A title search is often required to make sure your home has no liens and that you are the rightful owner. You’ll also pay for title insurance, a one-time cost that protects you and your lender against any problems with the title that were caused by a previous property owner.
When you apply to refinance, you’ll receive a Loan Estimate that provides an estimate of the fees and costs of your loan. Prior to closing, your lender will send you a Closing Disclosure, which details your final numbers and lets you see exactly what you’re paying for.

How much will it cost to refinance my mortgage?
Typically, your refinance will cost about 2–3% of the total amount of the loan. Depending on your mortgage, you might be able to roll these costs into the loan, reducing your upfront costs.
The Length of the Refinance Process

A typical refinance will take anywhere from 30 to 45 days, but there are many variables that can lengthen the process. Any third parties that are involved in the mortgage transaction can create a potential delay. Your lender works with a variety of third parties – such as appraisers, inspectors and title companies – to get your loan closed, so keep in mind that delays may occur as your lender works to get information from these third parties.

Your refinance process could also be longer or shorter depending on how complicated your situation is. Mistakes on your credit report, for instance, can hold up the process. And any financial or other life changes on your part can also lengthen the process. For example, changing jobs or opening new lines of credit while undergoing a refinance could pose problems for your closing date. However, keeping your lender in the loop can help keep the process on track.

Locking Your Rate

Once you’ve completed your mortgage application, you’ll have the option to lock your mortgage rate. Mortgage rates change daily, and locking your rate protects you against the rate going up significantly before you close.

Most lenders allow you to lock your rate for 30, 45 or 60 days, but keep in mind that you may have to pay a fee if you need to extend the timeframe beyond what was originally agreed upon.

Refinance with Home Central Financial

With Home Central Financial, you can refinance your mortgage completely online.

Start Your Refinance Online

Appraisals and Underwriting The Underwriting Process

After all your documents are submitted, your lender will work on underwriting your loan. This is where the underwriter checks all the details on your mortgage application and supporting documentation to make sure everything’s accurate and fulfills the necessary guidelines. Your application not only has to meet the criteria set by your lender, but also the investor of your loan – the institution that gives your lender the funds for your mortgage.

Who is the investor of my loan?
The investor of your loan is usually determined by the type of loan you’re getting. For FHA loans, the investor is the Federal Housing Administration. For VA loans, it’s the U.S. Department of Veterans Affairs. The investors for conventional loans are usually either Fannie Mae or Freddie Mac – two government-sponsored enterprises that were created to stimulate the housing market.
Underwriting your loan typically takes a week or two, but any third parties involved in the underwriting process – such as the appraiser – can slow this down.

How the Appraisal Can Impact Your Refinance

Just like when you bought your home, you’ll need an appraisal to confirm the value of your property. The appraiser will inspect your home and compare it to similar, recently sold homes in your area to determine an opinion of value.

In some cases, your lender won’t require an appraisal for your refinance. For instance, if your home has been appraised in the last 120 days, you may be able to have the appraisal waived.

How much does an appraisal cost?
Most appraisals cost between $200 and $600, but keep in mind that the cost can exceed that range. Your appraisal may cost more if you have a multiunit property instead of a single-family home, for example, or if you live in a remote area.

Just like the other refinance costs, the appraisal fee can be rolled into your loan depending on the type of mortgage.
Low Home Appraisal

Lenders usually can’t finance more than the appraised value of your home, so a low appraisal can be quite problematic for a refinance. These are some options you might have if your appraisal comes back low:

Decrease the amount of the refinance: In some cases, you might have to bring cash to the table to cover the difference between the loan amount and property value. In other cases, such as with a cash-out refinance, you might be able to just lower the loan amount.
Cancel the refinance: A low home value might mean that refinancing isn’t right for you at this time.
The best-case scenario is that your appraisal comes back higher than or on par with what you expected. If you cancel the refinance as a result of a low appraisal value, you may still have to pay the appraisal fees and any other required lender fees. That’s why doing your research upfront to estimate your property value is so important.

Once the underwriter approves all the required paperwork, your refinance is nearly complete. Your lender will then get in touch with you to schedule your closing and review your final mortgage numbers.

Closing Your Refinance

Closing your refinance will be very similar to the closing you experienced when you bought your home. Since you already own the home, you won’t be dealing with a real estate agent or seller.

What to Bring to Closing

Here are some of the items you’ll need to bring to closing:

Identification such as a driver’s license, government-issued photo ID or passport
A cashier’s check to cover your closing costs (if applicable)
Your Closing Disclosure, which you can use to double-check the final paperwork
A list of key contacts, like your agent or lawyer, in case any questions come up
If I’m getting cash out with my refinance, will I receive the funds at closing?
No. You won’t receive the funds until three to five days after closing. The Truth in Lending Act requires your lender to give you three business days after closing to cancel the refinance. Since the loan isn’t technically closed until after that time passes, you won’t receive your funds until then.
Who Should Attend Closing

Anyone who’s going to be on the loan will need to attend closing. It’s possible to close on your mortgage if you aren’t able to make it in person, but you’ll need to grant someone power of attorney. You can also expect a representative from the title company to be at closing, and some states require a witness to be present as well.

Refinance Closing Costs

Whether you pay closing costs and how much you pay depends on your loan. For example, closing costs can often be rolled into conventional loans, while FHA loans will require you to pay those costs upfront.

Before you close, your lender will provide you with a Closing Disclosure that will give you a line-by-line breakdown of any fees you’ll have to pay at closing, as well as your loan and payment details. You’ll have at least three days to review the Closing Disclosure before closing. This gives you the opportunity to back out if you’re not comfortable with the final numbers. However, you should keep in mind that you’ll likely still have to pay for services you’ve already received (such as an appraisal or credit report).

How long will it take to close my refinance?
Since there are fewer parties involved, closing may be substantially shorter than when you bought your home. Of course, you can always take your time if you have questions about what you’re signing. Plan to set aside about 30 minutes to sign and finalize all the paperwork.

 

Managing your Mortgage Payments

Now that all the paperwork is complete, you can start benefiting from your refinanced mortgage. Whether you’re getting a lower payment, a shorter term or cash out, here’s what you can expect after closing.

What Happens to Your Escrow Account

If you had an escrow account on your old loan, that money could come back to you in one of these ways:

You could receive a check for your escrow funds from the lender of your old loan. If you’re receiving these funds by check, you can expect to get them within 30 days.
Your escrow funds will be used as part of the payoff for your old loan. This means a couple of things. First, it will reduce the total amount that needs to be paid off. Second, if you’re getting an escrow account on your new loan, your old escrow funds can be transferred to your new loan.
Your lender will ask which of these options you prefer; however, we recommend that you allow your escrow funds to be used as part of the payoff for your old loan. This will speed up your loan process and minimize the amount of money that you’ll be required to bring to closing.

Making Additional Payments

You can save on interest and reduce the length of your loan by making additional payments or paying extra on your monthly payment. Making just one extra payment a year allows you to save a significant amount on interest over the life of your loan.

How much can one extra mortgage payment really save me?
Say you have a $200,000 30-year mortgage with a 5% interest rate. This gives you a monthly payment of about $1,074 a month, not including taxes and insurance.

If you made only your regular monthly payments, you would pay about $186,511 in interest over the life of this loan. However, if you made an additional payment of $1,074 once a year, you could cut your mortgage term by 58 months – which is almost 5 years! This would save you $35,164 in interest over the life of your loan.

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