Know Where Your Credit Stands
Since your credit can affect your interest rate, you should know what kind of shape its in. If its not in great standing, you may want to take steps to improve it before you refinance.
About the author:
Process Of Refinancing A Mortgage
The process of refinancing has multiple steps. You will need to prepare yourself for the process, so you dont feel surprised or unprepared by anything. Researching the process and your options will make you better prepared for choosing the right lender and finding the best interest rates.
First, get an idea of your homes worth and determine how much equity you have. Generally, lenders wont refinance if you have less than 5% equity in your home. Ideally, you want 20% equity or more in your home for the best chances at qualifying for a refinance.
A lot of the refinancing process requires research. Not all lenders offer the same interest rates, and your credit score and other personal factors will affect how much you pay. You need to compare rates from several lenders and find out what fees they charge. Check with the mortgage companies to see what paperwork they need hard copies of. Many can connect electronically to various financial institutes, so you dont require printouts of financial documents.
Once youve done your research, apply for a loan to get an estimate for refinancing. You should get an estimate within three days. If you approve of the terms, the loan process continues with the lender carefully reviewing your application documents.
The lender will have an underwriter comb over the paperwork and your homes appraisal. You may need to answer questions about your refinancing application. Address these quickly to keep the process moving forward.
Why Does It Take So Long To Refinance A Mortgage
Updated: by Financial Samurai
Are you wondering why does it take so long to refinance a mortgage? The simple answer is because lending standards have tightened tremendously since the financial crisis. Underwriters are asking for more documentation to prove your income and net worth.
The banking sector lent too loosely before the crisis. As a result, regulators locked down. Now the banking sector has increased their lending standards tremendous.
In 2021 so far, the average credit score for an approved mortgage applicant was 760. And in order to get the lowest mortgage rate possible with the lowest amount of fees, you need a credit score of 800+.
Further, many banks are requiring at least 20% down, especially if you are going to take out a jumbo loan. The mortgage lending industry has really tightened, especially during the pandemic. The lending industry doesnt want to go back to the 2008-2009 financial crisis days where they experienced a wave of defaults from borrowers who couldnt afford their mortgages.
Recommended Reading: How To Transfer A Mortgage To Someone Else
When Is A Refinance Worth It
Whats most important to focus on is, what are the monthly and lifetime savings of the loan? What are the costs? And how long will it take you to recover those costs with the savings youll earn? says Ralph DiBugnara, president of Home Qualified.
Gay Cororaton, Senior Economist for the National Association of Realtors, says best candidates for refinancing are:
- Those with high mortgage rates relative to a new lower rate
- Those who intend to stay for a long time in their home
- Those who have the cash ready to pay for closing costs
Alternatively, many lenders can roll the closing costs into your mortgage principal or cover them in the form of a higher interest rate so you dont have to pay upfront.
That higher interest rate may still be far below your current rate, and it comes with no closing costs from your pocket or added to the loan balance.
Dropping your rate with no associated costs makesthe decision to refinance an easy one.
You Wont Get Cash Immediately
Similar to when you buy a home, you must submit to underwriting and appraisal processes before your lender approves your refinance. Even after you close, the Truth in Lending Act requires your lender to offer you 3 days to cancel the loan if you have a change of heart, and you wont get your cash until 3 5 days after closing. If you need money immediately, a cash-out refinance may not be the right solution.
Also Check: How Many Times Annual Salary For Mortgage
How Often Can You Refinance A Mortgage
There is no limit to how many times youre allowed to refinance a mortgage, though a lender may enforce a waiting period between when you close on a loan and refinance to a new one. Often, lenders have whats called a seasoning requirement a period of time you need to wait before refinancing, generally at least six months.
However, that may only apply if youre refinancing with your current lender you could find a lender that is willing to do the refinance sooner and skirt the six-month rule altogether.
For government-insured mortgages, there are different requirements. Homeowners who have an FHA loan and are looking to do an FHA streamline refinance are required to wait 210 days from the closing date of the first mortgage, and six months from the due date of their first mortgage payment, before being able to refinance. For an FHA cash-out refinance, there is only a six-month payment requirement.
Similarly, homeowners with a VA loan considering a VA streamline refinance are required to wait either 210 days from the date of their first mortgage payment or the date the sixth mortgage payment is made, whichever is later. For a VA cash-out refinance, the required waiting period is also at least 210 days from the closing date of the first mortgage.
Slow Mortgage Refinancing Is Here To Stay
Gone are the days of 30-day mortgage refinances. I expect the new normal to be 60-80 days on average for the typical approved applicant. Mine took 20 days longer than the new average because of my credit score screw up. Once we set our expectations, our frustrations about the process should improve.
Im very bullish on housing over the coming years and so should you. The mortgages that are taken out or refinanced today will be of lower risk of default in the future.
Eventually, banks will get loose again, and when you start hearing about the return of NINJA , negative amortization loans, and HELOC parties, then you know its time to consider cashing out on your gains.
You May Like: What Were Mortgage Interest Rates In 2006
Appraisal Process For Refinancing
Your home will need reappraising as a part of the refinancing process. The appraisal process protects the lender by ensuring the value of the house is close to the mortgage value. Since so much of your mortgage payment comes from the homes value, having an accurate appraisal will help you, too. You wont overpay for your home.
You must schedule the appraisal and pay for it yourself. These inspections can cost between $300 and $400. If you have a large property or multiple units, the cost and time to conduct the appraisal will rise. Standard times for the assessment can take between three and ten business days.
Should I Refinance My Home Before Selling It
Whether you should refinance your home before selling it depends on your financial situation and your motives for wanting to refinance.
Refinancing to take advantage of lower interest rates before selling might seem like a good idea if youâre waiting for the market to bounce back to get more for your home and you want to take advantage of lower interest rates. Maybe youârethinking about doing some renovations to try to get more for your house when you sell it and are considering a cash-out refinance to fund them.
But look at the bigger picture first. Depending upon how old your original mortgage is, it may not make financial sense to pay the closing costs of a refinance and reset the amount of money that is being allocated to the principal balanceeach time you make a payment.
When you refinance with a new mortgage, the first few years of your payments primarily go toward interest. So while at first glance, a refinance might seem like a way to save money with a lower interest rate or lower monthly payments, you may end up payingthousands more in interest in the long run. If you stay with the older mortgage, your payments are being allocated more towards the principal which is lowering the total amount you owe in interest.
Consult with an expert agent about refinancing before selling!
Get in touch, sell your home, save thousands.
You May Like: How Much Would A Million Dollar Mortgage Cost
How Long After You Buy A Home Can You Sell It
If you bought a house with cash, you can sell it any time you want, though there will be tax implications. However, if you financed the house, your lender may have clauses in your mortgage note that require you to live in the house for a certain time before you sell it or rent it out. This can be expressed in your mortgage documents as an owner-occupancy requirement clause. You may also be on the hook for a prepayment penaltyif you sell the house too soon after taking out a mortgage to buy it.
Will Refinancing Affect My Credit Score
Virtually every time you apply for a loan, the lender will run a hard inquiry on your credit report. This inquiry can knock a few points off your credit score. If you’re applying for multiple mortgage loans, each additional inquiry can have a compounding effect on your score, dropping it further.
As a result, it’s best to do all your rate shopping in a short period , during which all your inquiries will be counted as one for credit scoring purposes.
Also, closing out your old mortgage loan and replacing it with a new one can negatively affect your credit score because it lowers the average age of your credit accounts.
Because refinancing can have an impact on your credit, it’s important to make sure your credit is in good shape before you start the process.
Also Check: How To Get A 15 Year Fixed Mortgage
How Do You Know If You Have A Prepayment Penalty
By law, your lender is required to disclose any prepayment penalty fee on your monthly mortgage bill, your mortgage payment coupon book if you have one, and any communication you receive from your lender about your loan, including information about payments and interest rates. Your mortgage note should also clearly disclose the prepayment penalty fee in your contract.
If you refinanced after 2014 and you have a prepayment penalty listed on your mortgage correspondence, check to make sure it hasnât expired already. It shouldnât last more than three years from the time of refinancing. If itâs stillon your correspondence and itâs been more than three years since you refinanced, contact your lender and ask them to remove it. It shouldnât be there anymore.
Equity And Your Refinance
Remember: You need to have equity built up to take cash out against it. You might have less equity in your home than you think if youve taken a cash-out refinance in the past.
Every time you dip into your equity, you reduce the percentage of your home loan that you can use. Most lenders wont allow you to take out 100%. Youll need to do some math and figure out exactly how much equity you have before you refinance.
Also Check: How To Determine Ltv Mortgage
How Long After Refinancing Can You Sell Your House
Selling your house after a mortgage refinance is possible, but there are some rules you should know about. Find out what clauses in your mortgage contract to look out for and whether selling after refinancing is a smart financial move.
If youâve recently refinanced your mortgage and now want to sell or youâre thinking about refinancing before selling, there are few things that might affect how soon you can sell after a refinance.
Some clauses in mortgage contracts can keep you from selling or force you to pay a penalty if you pay off your mortgage too soon.
Before you decide to sell after a refinance, get the advice of an expert realtor to make sure you donât have problems when closing the sale, pay any unnecessary fees, and get top dollar for your house.
In the meantime, letâs explore what could keep you from selling your house right away after a refinance.
How long after refinancing can you sell your house?
You can sell your house right after refinancing â unless you have an owner-occupancy clause in your new mortgage contract. An owner-occupancy clause can require you to live in your house for 6-12 months before you sell it or rent itout. Sometimes the owner-occupancy clause is open ended with no expiration date.
Factors To Consider Before Refinancing
Even if you fit into one of the scenarios above, watch out for these issues before refinancing your home loan:
- Will you have room in your budget for the upfront costs? A mortgage refinance has many of the same upfront costs as a standard mortgage. As mentioned earlier, these costs can fall somewhere in the range of 2% to 6% of the loan amount. That means even if youre able to secure a lower mortgage rate, you need to be sure your long-term savings offset the upfront expense.
- Will you have a prepayment penalty? Your mortgage may also come with a prepayment penalty, in which case youd be charged a fee for paying off your mortgage early. Some mortgages also come with recapture rules, which require you to reimburse the lender for any money theyve paid on your behalf, particularly for no-cost loans, if you pay the loan off ahead of schedule.
- Will you save or spend more over time? Its crucial to consider the overall cost of your new mortgage. For example, if you extend your loan term by refinancing from a 15-year into a 30-year mortgage, youll lower your monthly payments but will likely pay thousands more in interest over the life of the loan. Its also possible that refinancing could make your home equity grow more slowly, which may net you less money when you sell your home or limit how much home equity you can borrow later.
Recommended Reading: Can I Roll My Down Payment Into My Mortgage
Refinancing Your Mortgage Can Be A Smart Financial Move Potentially Saving You Money On Your Monthly Mortgage Payment Or On Total Interest Over The Life Of Your Home Loan
Before you apply, youll want to think carefully about when to refinance your mortgage. Youll also want to decide if refinancing makes sense financially by weighing any money youll save against the cost of refinancing the loan.
Well review some common scenarios to think through.
You Want To Convert From An Adjustable Rate To Fixed
If mortgage rates are increasing and you currently have an ARM or adjustable rate mortgage you may want to consider refinancing and converting to a fixed-rate mortgage. Thats because with an ARM, your rate may increase beyond what youd pay with a fixed-rate mortgage. If youre concerned over future interest rate hikes, a fixed-rate mortgage could provide some peace of mind.
Read Also: What Does The Bank Need For A Mortgage
Can You Refinance With Your Current Lender
You can refinance through your current lender provided you qualify because financial institutions generally want to keep their customers.
The latest Mortgage Monitor Report from Black Knight, a leading provider of public property data, shows that just 18% of homeowners in the first quarter of 2019 stayed with their current mortgage company after refinancing. The data cites a refinance market in which competition for your business is rising.
Does Your Mortgage Have A Prepayment Penalty
A prepayment penalty is a fee your lender can charge you if you pay your loan off early. A prepayment penalty can be expressed as a percentage of the principal balance or a specified number of months interest. This can result in an additional fee of thousands.For example, if you have a 3% prepayment penalty and a principal balance of $200,000, the prepayment penalty would be $6,000.
Prepayment penalties are limited for mortgages that donât meet certain standards by a new law effective January 2014 in accordance with the Dodd-Frank Act of 2010. But the law is not retroactive. If you refinanced before 2014, you may still havea prepayment penalty.
Also, the new law doesnât apply to all mortgage types. If you have excellent terms on your mortgage, you may still be subject to a prepayment penalty if you financed after 2014 and your new mortgage meets all the following requirements:
- The loan rate is not higher than The Average Prime Offer Rate . The Average Prime Offer Rate changes constantly and is basedon average interest rates, fees and length of loan terms offered to highly qualified borrowers.
- The loan is a Qualified Mortgage. A Qualified Mortgage has better terms such as a loan period of no more than 30 years and no risky features such as interest-only payments.
- The loan rate will not increase such as a fixed-rate loan.
How Much It Costs For Multiple Refinances
It doesnt always make sense to keep refinancing your home if interest rates go down or your credit score goes up. Just like your first mortgage, a refinance has closing costs. Each time you refinance, youll have to pay fees, such as for the application, appraisal, credit check, attorney and title search. These can vary depending on your area and the lender, though its common to pay anywhere from 2 percent to 5 percent of the loan principal.
The key to realizing savings is to take into account how much youre lowering your interest rate, and how long you intend to stay in the home. If you plan to live there long-term, refinancing more than once may make sense, but you have to factor in your closing costs carefully.
Lets say you have a 30-year fixed mortgage for $240,000 with 5.71 percent interest. Your monthly mortgage payment is $1,394, excluding insurance and taxes.
Fifteen years into your term, your balance is now $168,498. Rates have fallen, so you decide to refinance to 3.7 percent and a 15-year loan, cutting your monthly mortgage payment to $1,221 and dropping $31,108 in interest. If the closing costs equal 3 percent of the principal, or $5,055, youd break even in roughly two years. However, if youre charged 5 percent of the principal , itd be four years before you recouped them.