What Is A Mortgage Refinancing
Refinancing is when you take out a new mortgage and use the money to pay off your old one. The new loan may have different terms or a new interest rate. It could even be an entirely different type of mortgage.
Cash-out refinancing is also an option. This involves taking out a new mortgage that’s larger than your current one. The new loan pays off the old one, and you get the difference between the two balances back in cash. Many homeowners use cash-out refinancing to cover the costs of home repairs or renovations.
As Mike Tassone, co-founder of mortgage marketplace Own Up, explains: “The purpose of this type of refinancing is to take additional cash out at closing by borrowing against the equity in your home and increasing the principal balance.”
How Is The Value Of Your Home Changing If At All
Consider how the value of your house has changed and what the projected direction of your home’s value is for the future. If your home’s value is increasing or staying the same, a lower interest rate can help you increase your equity faster. If your home’s value is decreasing, it might not be worth it to refinance and pay closing costs when your equity is decreasing.
Will The Savings Be Enough To Make Refinancing Worthwhile
Youll spend an average of 2% to 5% of the loan amount in closing costs, so you want to figure out how long it will take for monthly savings to recoup those costs. This is often called the break-even point of a mortgage refinance. For instance, it would take 30 months to break even on $3,000 in closing costs if your monthly payment drops by $100. If you move during those 30 months, youll lose money in a refinance.
» MORE:Calculate your refinance savings
Think about whether your current home will fit your lifestyle in the future. If youre close to starting a family or having an empty nest, and you refinance now, theres a chance you wont stay in your home long enough to break even on the costs.
Homeowners who have already paid off a significant amount of principal should also think carefully before jumping into a refinance.
You might reduce your mortgage rate, lower your payment and save a great deal of interest by not extending your loan term.
If youre already 10 or more years into your loan, refinancing to a new 30-year or even 20-year loan even if it lowers your rate considerably tacks on interest costs. Thats because interest payments are front-loaded the longer youve been paying your mortgage, the more of each payment goes toward the principal instead of interest.
» MORE:When to refinance into a shorter mortgage
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How To Apply For A Mortgage Refinance
The application procedure is relatively simple, and you only need to follow a few steps. However, you will need to prepare some documents like proof of identity and citizenship, income, and checking account information. Financial institutions also ask for assets, employment history, credit score report, refinance fee estimation, income tax return, and the latest financial statement.
You Have An Adjustable
With an adjustable-rate mortgage, your interest rate can rise over time meaning your monthly payment can increase. To avoid this, you could refinance into a fixed-rate mortgage, which offers a consistent interest rate and payment for the life of the loan.
Quick tip: If you have an adjustable-rate mortgage, talk to your loan servicer about when your rate may adjust next and by how much. This can help you determine the best time to refinance your mortgage.
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In Closing Plan Ahead
Just as with a new mortgage application, its best to plan weeks or months ahead for a refinance to make sure everything you need is set, from the condition of your house to the state of your credit report. Get everything prepared ahead of time and know what to expect so the refinancing process can move quicker than closing a mortgage for a home purchase.
Get Refinance Rates From Several Lenders
Now that youve decided it makes sense to consider refinancing, its time to get your mortgage quotes. Youll want to apply for pre-approval with a few different lenders to make sure youre getting the best deal on your new loan.
Refinance rates can vary significantly from lender to lender. And a lower interest rate can mean significant savings especially over the long haul.
But remember, theres more to it than just the lowest rate.
Refinance closing costs are typically a few thousand dollars just like when you bought your home. And the higher your upfront fees, the more they eat into your savings. So look for the lowest closing costs as well as the lowest interest rate.
Also keep in mind that different loan programs have different refinance rates. For example, VA rates, conventional rates, and FHA loan rates can all vary a lot.
Rates can change from day to day, too, so it helps to get your refinance quotes on the same day.
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How Hard Is It To Refinance A Home Loan
Although many homeowners put off refinancing out of concern its time consuming or requires a lot of work, its not a hard process and the benefits could be substantial. In fact, once youve found a home loan that appeals to you, it can be as simple as meeting with the lender, providing some documentation and making a decision.
How Long Does A Cash
The process of getting a cash-out refinance or any other type of refinance is similar to applying for a traditional mortgage. Once you choose a lender, you will need to apply and get preapproved. Then the lender will require an appraisal, compile the necessary paperwork, and finalize the loan documents.
A cash-out closing timeline is similar to any mortgage timeline. Factors that could impact timing include: market conditions, how backed up the lender is, the complexity of your financial situation, and documentation required, says Arevalo. Since cash-out refinances have grown in popularity, lender capacity has been impacted. Borrowers should plan on a time frame to refinance running 45 to 60 days, or more, he says.
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How Long Does Underwriting Take
Mortgage lenders have different turn times the time it takes from your loan being submitted for underwriting review to the final decision.
The full mortgage loan process often takes between 30 and 45 days from underwriting to closing. But turn times can be impacted by a number of different factors, like:
- Internal staffing policies
- Loan application volume
- The complexity of your loan profile
Depending on these factors, mortgage underwriting can take a day or two, or it can take weeks.
Under normal circumstances, initial underwriting approval happens within 72 hours of submitting your full loan file.
In extreme scenarios, this process could take as long as a month. However, its unlikely to take so long unless you have an exceptionally complicated loan file.
When youre shopping for a mortgage, ask lenders how long its currently taking them to close on a home purchase or refinance .
In addition to shopping interest rates and closing costs, turn times should be one of the final factors in your ultimate choice of a lender.
The Refinancing Process Can Be Summarised In Five Simple Steps:
End-to-end, the entire refinancing process can take anywhere from a couple of days to just over a month, depending on the complexity of your loan. In most cases, youll have your new loan within two months of beginning the process.
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What’s Changed From Your Last Loan Closing
Has your credit score and payment history improved since you got your mortgage? If so, you might qualify for a better interest rate on a refinance, which will help you save more per month and break even sooner.
On the other hand, hitting a rough financial patch can do a number on your credit, and that affects your ability to qualify for a refinance loan and get a good rate. If youve been late on a credit card payment, bought a new car or taken on student loans, your credit score might be lower than it was when you took out your original mortgage. Before refinancing, you might want to do some credit repair.
Does Underwriting Take Longer For Refinance Loans
Currently, most lenders are taking longer to process refinance applications than home purchase loans.
Home buyers have hard deadlines they must meet, so they typically get first priority in the underwriting queue.
The average turn time for purchases, from underwriting to closing, is approximately 30 days. Refinances are averaging 45 days.
But keep in mind, closing times vary by lender. The underwriting process could move much faster if a lenders underwriting team has lots of bandwidth, or slow to a crawl if theyre swamped with loan applications.
When youre applying for loans, you can ask lenders about their current closing times to help evaluate which ones will be able to approve your home loan more quickly.
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Valuing Your Property When Refinancing
When youre looking to refinance, your new lender may want to value your home. Valuing the property will determine the amount of money theyre willing to lend you. Some lenders may charge you a fee for this valuation. Your broker will factor this into the numbers to be sure that refinancing is right for you.
If refinancing is on your to do list, or its been over 12 months since you got your home loan, book a free appointment with an Aussie Broker to review your loan.
Refinancing isnt as difficult as it may seem, especially when you dont have to do it alone. An Aussie Broker can manage the process for you and could end up saving you thousands now or in the long run.
So Am I Ready To Refinance
Refinancing can be a winding road, but were here to simplify the process. If you think youre ready for refinance, it only takes a few minutes to get pre-approved with Better Mortgage. Theres no hard credit check, and were here to answer all your questions along the way. Get started with just a couple clicks.
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Set A Clear Financial Goal
There should be a good reason why youre refinancing, whether its to reduce your monthly payment, shorten the term of your loan or pull out equity for home repairs or debt repayment.
Every situation is unique, says Ann Thompson, a specialty lending executive at Bank of America. Everyone has different priorities.
What to consider: If youre reducing your interest rate but restarting the clock on a 30-year mortgage, you may end up paying less every month, but more over the life of your loan. Thats because the bulk of your interest charges are in the early years of a mortgage.
Set Your Refinance Goals
The first step in the refinance process is to set a clear goal. Figure out what benefits you want from a mortgage refinance, and what type of loan will help you get there.
There are a number of reasons homeowners choose to refinance. For example:
- Are you trying to save money immediately by lowering your monthly payment?
- Are you looking to save money long-term by taking your 30-year loan down to 15-years?
- Do you want to remove private mortgage insurance or FHA mortgage insurance?
- Do you want to cash out your home equity?
Taking out a new home loan can help you achieve any of these goals. But you have to choose the right refinance strategy for what you hope to accomplish.
There are three main types of refinance loans:
- Rate and term: Lower your interest rate, shorten your loan term, or perhaps both. You can reduce your monthly mortgage payment and save on interest over the life of the loan
- Cash-out: Tap into your homes equity and use the cash for home improvements, debt consolidation, emergency funds, or any other purpose
- Rate conversion: Convert your adjustable-rate mortgage to a fixed-rate mortgage to avoid any future increases in your rate or mortgage payment
You also have to choose which loan product youll use: conventional, jumbo, FHA, VA, or USDA.
Many homeowners stick with the same type of loan they currently have. But switching to a different loan type could have added benefits.
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Sign Documents And Close On Your Loan
Your lender will send you a closing disclosure at least three days before your scheduled closing date. The disclosure details the fees associated with your loan, including closing costs. Then, youll sign the disclosure and other loan documents on closing day.
Keep Reading: No Closing Cost Refinance: Will It Save You Money?
Choosing Your Loan: As Little As 1 Hour
Once youve been pre-approved, youll be able to see different rate and loan options that are available to you. Compare mortgage options until you find a few that are best tailored to your goals: whether thats getting a cash-out refi, swapping from an adjustable to fixed rate mortgage, or just nabbing a lower interest rate. Comparing different loans will help you decide which rate to lock by giving you a sense of how different terms will impact your monthly payments and how many payments it will take before you offset the cost of the refi. Having a pre-approval helps you wade into the refinancing journey with confidence and start exploring mortgages that are compatible with your financial goals.
Action Items
Whats Next? Narrow your search by comparing Loan Estimates and lock your rate.
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Refinancing Vs Buying: Comparing Time To Close
At first glance, you might think that a refi would go quicker than a new purchase since youre dealing with the same piece of property, especially if youre using the same lender. Thats not always the case, though. In fact, according to a March 2021 report published by ICE Mortgage Technology, the average time to close on refis was actually a full day longer than home purchases: 52 vs. 51.
Looking further back, however, we can see that there are periods when lenders closed refis in a much shorter amount of time. A year earlier, in March 2020, for instance, the average time to close for refis was 10 days fewer than purchases: 35 vs. 45.
How can we explain that discrepancy? Time to close will always be affected to some degree by consumer demand. When more people are submitting refi applications, loan officers have less time to devote to each loan. That can lead to longer refinance timelines when demand is high even for dedicated lenders with significant resources.
Back in March 2020, mortgage rates temporarily spiked, reaching 3.65%.** Interest rates then steadily dropped throughout the year, and refinancing activity grew in response. Looking at ICE Mortgage Technologys report, you can see the average time to close for refis increase each month starting in April 2020 and topping out at 59 days in December 2020. That just so happens to coincide with the historical low for mortgage rates.
Refinancing To Secure A Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Using a mortgage calculator is a good resource to budget some of the costs.
Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 5.5% on a $100,000 home has a principal and interest payment of $568. That same loan at 4.1% reduces your payment to $477.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development .
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