Refinancing? Here Are 8 Things You Need to Know
Rates are still low if you’re considering refinancing, and you may have some options now that you might not have had a few years ago. Let’s go over some of the details so you know what to expect.
1. What is refinancing?
The simplest explanation is that you are financing your property again. You are repeating the mortgage process you completed when you bought your home, only instead of buying a new home, you get a new loan. This new loan may have a shorter or longer term than you originally had. Your interest rate may be lowered. Your payment may be lowered. You may have access to equity you have in your home.
Equity is the value of a home that equals the current market value of the house minus what is currently owed on the home.
2. Why refinance?
The very first thing you should do is decide why you want to refinance. Do you want a longer or shorter mortgage term (repayment period)? Do you want a lower payment? Do need cash for other bills? Do you just want to take advantage of lowered interest rate to reduce the amount of interest you’re paying? This reason will help you start your conversation with a mortgage banker about the kind of refinance you can do and what kind of structure your refinance can have.
3. Is it worth it?
Because it’s pretty much the same process as getting a mortgage, you may have some closing costs and fees. How much you have to pay for these closing costs and fees may help you decide if doing a refinance now is worth it. For example, let’s say someone didn’t want money back but wanted a lower payment. Let’s say that someone from the bank told them that they could approve a refinance that would lower their monthly payment by $100 a month, but the closing costs and fees would cost about $6,000. If the homeowner took the $100 savings and put it aside to recoup their $6,000, it would take them 60 months (five years) to get that money back. That may seem like a long time. However, if after that five years, they plan on staying in the house for a long, long time without doing another refinance or selling it, the $100 a month goes straight into their pockets and could amount to quite a bit over the life of the loan. This is key if they’ve reduced their interest rate along with lowering their payment. This means not only are they saving $100 each month, they may end up paying less in interest overall than what they were originally going to pay. In this case, the $6,000 is definitely worth it. If you’re thinking of refinancing, do some math first to see if it’s worth it in the long run. If you’re going to be selling or refinancing your home again in a few years, you may end up paying more than you’re saving. Talk to your mortgage banker about all of the cost associated with the refinance and divide that by the amount you save each month to get the number of months to recoup the cost. You can also ask your mortgage banker if there’s a way to include your closing costs in your new loan or if you can access equity to cover the closing costs.
4. What is the process like, how long does it take?
Imagine your home buying process, then remove a real estate agent and a down payment, and you’ll pretty much have your refinance process. Between the two, refinance is probably the easiest because you don’t have to find a home or involve as many people as you did with the home buying process. Your application is the same as the purchase and the information you need is the same as with your purchase. Some refinances, such as the USDA Streamline Refinance, makes the process even easier by reducing the amount of paperwork needed and removing the requirement for an appraisal. A streamline finance simplifies the refinance process by waiving some of the documentation requirements including income and employment verification, credit score verification, and/or appraisal requirements. Other streamlined refinances may be available, depending on your current loan type and financial situation. Ask your lender about that possibility. The closing on your refinance will take about 30 days. It depends on if the lender needs additional paperwork from you along the way or to order an appraisal.
5. Do I have to use the same lender I used to buy my home?
No. Just be careful of companies who reach out to you offering you special deals or refinance products. Research them to make sure that they offer the best rates and products for your services.
6. Which is better for me - a 15-year term or a 30-year term?
This depends on your budget. What do you feel comfortable spending each month for a mortgage payment? If you want to pay off your mortgage sooner and think that the combination of a lower interest and shorter term will help you, run the numbers with your mortgage banker to see if it can work out to your advantage. If you find that your budget is tight with the higher payment that may come with the 15-year term, ask your mortgage banker about the possibility of doing a 30-year mortgage with a payment accelerator program.
Many lenders offer you the ability to pay extra principal on your mortgage without incurring any prepayment penalties.
You could pay your loan off sooner by simply adding extra to your payment each month or when you have a little extra in your budget.
7. Is there any other reason why i'd want to refinance other than a lower rate or payment?
Absolutely. If you have an adjustable rate mortgage, refinancing may get you a fixed rate. If you currently pay for private mortgage insurance, you may be able to remove it by refinancing into a loan type that doesn’t require private mortgage insurance. As I mentioned with the example homeowner, you may want to refinance simply to access the equity in your home without getting a home equity line of credit or second mortgage. Some people even refinance so that they can pay their real estate taxes and homeowners insurance on their own instead of as part of their monthly mortgage payment.
Another reason to do a refinance is to remove someone’s name from the loan.
If you and another person got the loan together and now, for whatever reason, the other person doesn’t want to be financially obligated anymore, you can try to refinance using only your information to remove them from the loan. This is typically seen in divorce situations where one person is awarded the property and the court writes an order stating that the other person is to be removed from financial obligation through selling or refinancing of the property.
8. What if I owe more than what my home is worth? Is refinance out of the question?
Depending on your situation and the type of loan you have, you may qualify for a refinance under the Home Affordable Refinance Program (HARP). Ask your lender if you’re a candidate for that type of refinance. So, the ultimate benefit of refinancing is that it can make a home even more affordable. See for yourself how refinancing on a VA loan affected the Green family.