Pay Your Home Off Faster
You could refinance into a loan with a lower interest rate and a shorter term. The savings in interest payments could be substantial, for example, if youre able to refinance into a 15-year mortgage from a 30-year loan. Still, if youre putting more cash into paying off your mortgage each month, you could have less money on hand for expenses like saving for retirement, college or an emergency fund.
What Does It Mean To Refinance A House
When you refinance the mortgage on your house, youre essentially trading in your current mortgage for a newer one, often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so youre left with just one loan and one monthly payment.
There are a few reasons people refinance their homes. You can use a cash-out refinance to make use of your homes equity or a rate-and-term refinance to get a better interest rate.
A refinance could also be used to remove another person from the mortgage, which often happens in the case of divorce. Finally, you can add someone to the mortgage.
Speed Up Your Refinance
There are a few steps you can take to speed up your refinance process:
Attend your refinance appraisal. A low home appraisal can throw a serious kink in your refinance plans. As a homeowner, youre free to attend your refinance appraisal and help your appraiser get an accurate picture of your home.
Begin by ensuring that your home is clean before your appraiser arrives. Though the cleanliness of your home wont play into your appraisal value, a clean home makes it easier for your appraiser to see that your home has been well-maintained.
If youve made any permanent improvements to your property like a new dishwasher or a paver patio, be sure to call your appraisers attention to them.
Understand your closing costs. Though you dont need a down payment when you refinance your home loan, youll need to pay for things like your appraisal and loan processing fees. Save up for closing costs before you apply for a refinance to avoid delays. As a general rule, you can expect to pay between 2% and 3% of your total loan balance.
Acknowledge your Closing Disclosure. Your lender is legally required to give you at least 3 days to look over your Closing Disclosure before they schedule your closing meeting. If you forget to acknowledge that youve received your disclosure, your lender cant schedule your meeting. Be sure to contact your lender and confirm that youve received your disclosure as soon as you get it.
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Prepare Your Documents Ahead Of Time
Your lender will ask you for a number of documents when you apply for a refinance. These documents help your lender verify your income, assets and financial history. Get your documents ready ahead of time to ensure a smoother process.
Some of the documents your lender might ask you for include:
- Your two most recent W-2s or 1099s
- Your two most recent pay stubs
- Your two most recent bank statements from each of your accounts
- Your two most recent tax returns
Is anyone else applying for a refinance on your loan ? Your lender will also ask to see their documentation.
Are you self-employed? Your lender may want to see more documentation to prove that your income is what you say it is. Prepare by keeping a copy of your most recent tax return somewhere accessible.
Your lender may ask for any other documentation during the underwriting process of your refinance, so respond quickly to keep everything moving along on schedule.
Refinancing To Shorten The Loan’s Term
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term.
For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817. However, if you’re already at 5.5% for 30 years , getting, a 3.5% mortgage for 15 years would raise your payment to $715. So do the math and see what works.
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Tight Mortgage Secondary Market
The mortgage-back security market is still thawing as demand for such products is nowhere near as high as in 2007. As a result, banks cannot offload their risk in the secondary market, which makes banks more hesitant to lend in the primary market.
Its all about credit risk for banks. For example, there is no condotel mortgage market anymore. As a result, condotel property volume has shriveled to a halt and only cash buyers are able to buy those wonderful Ritz Carlton properties up in Lake Tahoe. Soon, this mortgage type will open up, and you will make some returns, but you need the cash first!
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.
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Start The Loan Process And Appraise Your Home
Its now time to begin the loan process and appraise the value of your home. Once youre approved for your loan, its time to get your home inspected, appraised, and conduct a title search. To ensure youre on track with your timeline, prepare all your documents ahead of time. Skip to our section below for more ways to speed up this process.
The Refinance Clock Is Ticking
Mortgage rates fell to all-time lows in late 2020 and early 2021, but trended upward for much of the year, and experts expect them to continue rising in 2022. While they should still remain low by historical standards, the days of record lows are probably behind us.
In other words, the window to refinance is closing gradually, rather than slamming shut.
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Should You Refinance Your Home
Is refinancing your home a good idea? That depends. Refinancing isnt free there are costs associated with the process that youll want to consider before choosing to do so.
Depending on how much youre saving each month, it may take a while for you to break even on your new loan.
You can calculate the break-even point by dividing the monthly amount youre saving by the total cost of the refinance. For example, if your new mortgage payment saves you $100 per month, and your refinance costs $2,500 in fees, it will take 25 months for you to break even .
Final Approval & Closing
Before closing, the lender will go over everything one last time and check that even the smallest details are in order. Once they give the final approval, the underwriting process is officially complete, and youll be ready to close. This should only take a few days.
With the loan finalized, youll need to show up to your closing appointment to review and sign all the necessary documents while they fund the loan. After that, youre good to go with your new, lower interest rate!
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Check Your Credit Score And History
Youll need to qualify for a refinance just as you needed to get approval for your original home loan. The higher your credit score, the better refinance rates lenders will offer you and the better your chances of underwriters approving your loan.
What to consider: Lenders became stricter about extending credit due to the uncertainty of the pandemic, so the typical mortgage borrowers credit score is higher now than it has been in previous years, though the average has crept down slightly in recent months. While there are ways to refinance your mortgage with bad credit, it can make sense to spend a few months boosting your score before you start the process.
The Refinance Process: Faq
How does the refinancing process work?
Refinancing involves replacing your current loan with a new one. When you refinance, youll apply for a new mortgage just like when you bought your home. Once approved, the funds from your new loan will be used to pay off your existing mortgage. This effectively replaces your old home loan with a fresh one typically with a lower interest rate, lower monthly payment, or some other benefit.
How long does the refinance process take?
Some lenders take longer than others to complete a refinance. Typically, banks and credit unions may take a bit longer than online lenders. Most lenders average anywhere from 30-45 days for a mortgage refinance.
How do I qualify for a home refinance?
Youll have to meet certain criteria for mortgage refinancing. Steady income, a decent credit score, acceptable debt-to-income ratios, and at least some home equity will be necessary to refinance.
Does refinancing hurt my credit score? How much does it cost to refinance?
The closing costs for refinancing a mortgage are similar to the costs associated with buying a home. Closing costs in the U.S. generally average between 2 and 5 percent of the loan amount. Thats $2,000 to $5,000 for every $100,000 you borrow. However, there are certain costs, such as owners title insurance, that you wont incur when you refinance, making refi fees slightly lower than home buying fees.
Do I need an appraisal to refinance? Do you get money back when you refinance?
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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.
Rate Shop With Multiple Lenders
The best way to spot a good deal is to comparison shop with a few refinance lenders. Theres no way to know what loan terms youll be offered unless you apply. For a true apples-to-apples comparison, its best to make all of your loan applications on the same day, because interest rates can and do change often.
Youll need to provide mortgage application documentation. This usually includes proof of employment, recent pay stubs, bank account and asset account statements, your homeowners insurance policy details, and recent tax returns.
It wont hurt your to apply with several lenders. Even though every application for new credit has the potential to ding your credit score, most scoring models recognize rate shopping. As a result, all mortgage lender inquiries made within 14 to 45 days will be counted as just one inquiry .
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Refinancing To Tap Equity Or Consolidate Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt.
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.
Another justification is that the interest on mortgages is tax-deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision nor is spending a dollar on interest to get a 30-cent tax deduction. Also note that since the Tax Cut and Jobs Act went into effect, the size of the loan on which you can deduct interest has dropped from $1 million to $750,000 if you bought your house after Dec. 15, 2017.
Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring automatic financial prudence. Take this step only if you are convinced you can resist the temptation to spend once the refinancing relieves you from debt.
It takes years to recoup the 3% to 6% of principal that refinancing costs, so don’t do it unless you plan to stay in your current home for more than a few years.
Compare Lenders And Find The Right Refinance Program
You will probably save money if you refinance your mortgage but it usually isnt free. Lender closing costs and thirdparty origination fees could cut into your bottom line. Thats why its so important to compare lenders.
The average closing costs on a refinance can range from 25 percent or more of the loan amount. So, if you want to quickly recoup the money you spend on closing costs, you should compare what lenders are charging to refinance mortgages.
For example, some lenders today now offer zeroclosing cost mortgages. For a slightly higher interest rate, lenders will credit all the costs to originate the mortgage at the closing table. Youll need to shop around to find a noclosing cost lender.
Its just as important to find the right refinance program as it is to find the right lender. Fortunately, you have several refinance options to choose from:
- Conventional Mortgage Refinance
- USDA Streamline Refinance
- Home Equity Loans / Home Equity Lines of Credit
Knowing what kind of refinance you need will make it easier to find a good lender and low rate when the time comes.
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Research Lenders And Their Products
Rates only tell part of the story. You should also investigate the types of loans lenders offer, their terms, and their fees. Credible provides transparency into lender fees that other comparison sites dont.
Common fees associated with refinancing your home include:
- Appraisal fee
- Most recent two years tax returns
- Bank and investment account statements
- Proof of homeowners insurance
- Divorce decree, if paying or receiving alimony and/or child support
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Super: TD presents Asking for a FriendWhy Would You Refinance?
Welcome to Asking for a Friend. Lets see who could use some financial advice today.
Dear Asking for a Friend,My neighbour was talking about refinancing her home so she can borrow more money to build an extension, and it got me wonderingwhat exactly IS refinancing and why do people refinance?Sincerely,Next Door Nancy
I hear you, Nancy. First, what is refinancing?
Refinancing means renegotiating your existing mortgage loan agreement, usually to use any available equity in your home.
So what does that mean in real terms? Lets say the value of your home is $500,000.
Super: $500,000
80% of home value 0.8 x $500,000 $400,000Outstanding balance of your mortgage $300,000How much you can borrow $100,000
Subject to the banks approval, you could borrow up to 80% of the value of your home less the outstanding balance of your mortgage.
That means if your home is worth $500,000 and you have an outstanding balance of $300,000 on your mortgage, you may be able to borrow an additional $100,000 .
So WHY do people refinance?
Super: To consolidate debts.
Super: Provide flexibility to pay for big ticket items.
Book an appointment and get financial advice for what you feel is most essential, through TD Ready Advice
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Your Refinancing Fees Are Too Expensive
A mortgage refinance can be expensive. Here are some typical fees you may have to pay.
- A mortgage application fee
- Origination fee
- Appraisal fee
Make sure you know what costs to expect and whether you can afford them. If youre unable to pay the fees at this time, you may need to wait before refinancing.
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Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
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