What Is Mortgage Refinancing
Refinancing a mortgage means you get a new home loan to replace your existing one. If you can refinance into a loan that has a lower interest rate than youre currently paying, you could save money on your monthly payment and interest you pay over the term of the loan. You might also be able to take advantage of a cash-out refinance, which allows you to tap into your home equity essentially as a lower-interest loan.
Keep Tabs On Your Loan
Store copies of your closing paperwork in a safe location and set up automatic payments to make sure you stay current on your mortgage. Some banks will also give you a lower rate if you sign up for autopay.
What to consider: Your lender or servicer might resell your loan on the secondary market either immediately after closing or years later. That means youll owe mortgage payments to a different company, so keep an eye out for mail notifying you of any such changes.
Get Your Paperwork In Order
Gather recent pay stubs, federal tax returns, bank statements and anything else your mortgage lender requests. Your lender will also look at your credit and net worth, so disclose your assets and liabilities upfront.
What to consider: Having your documentation ready before starting the refinancing process can make it go more smoothly.
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How Much Does It Cost To Refinance
While in most cases putting money down isnt necessary, refinancing does come with closing costs. The average closing costs to refinance total $5,000, according to Freddie Mac, and can include:
- Discount points
- Title search and insurance
Its possible to have some of these costs waived or have them rolled into your loan in a no-closing-cost refinance in order to avoid paying the costs upfront. The disadvantage to a no-closing-cost refinance is that youll pay interest on a higher loan amount and can end up paying much more over time as a result. If you wont be in the home very long, however, a no-closing-cost refinance can be a good choice.
You can also try negotiating your closing costs. If youve had a loan with the lender in the past or are otherwise a customer in good standing, you might be able to persuade the lender to waive some of the costs. Additionally, there are some costs, like the appraisal or survey, that may not need to be performed if youve had them completed recently.
However you choose to pay for closing costs, be sure to consider the point when youll break-even to determine whether the cost is worth the savings youll realize. You can use Bankrates refinance calculator to see how many months itll take to recoup the closing costs. If you dont plan to stay in your home for a long time, paying to refinance might not be worth it.
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Know Your Homes Equity
The first piece of information that you will need to review is to work out how much equity is in your home. If your house is now worth less than it was when you began your mortgageknown as being in negative equitythen it doesnt make sense to refinance your mortgage.
At the end of the second quarter of 2021, consumer confidence had risen to its highest level since the beginning of the COVID-19 pandemic. This means that, according to property information provider CoreLogic, many homeowners have seen large increases in their equity. A recent report shows that U.S. homeowners with mortgages have seen their equity increase by 29.3% year over year , representing a collective equity gain of more than $2.9 trillion, and an average gain of $51,500 per borrower, since the second quarter of 2020.
This means that the number of homeowners in negative equity has decreased significantly in the last year. In the second quarter of 2020, 1.8 million homesor 3.3% of all mortgaged propertieswere in negative equity. This number decreased by 30%, or 520,000 properties, in the second quarter of 2021.
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Requirements To Refinance A Mortgage For Cash
Youll typically need more equity to do a cash-out refinance. Mortgage guidelines require a home appraisal in most cases. Theres one exception: You might get an appraisal waiver if you leave 30% equity in your home after taking cash out. Be prepared for interest-rate sticker shock, though, because cash-out refinance loans typically have higher fees and rates.
Refinancing your home with government-backed, cash-out refinance loans gives you more qualifying flexibility. In the case of VA loans, that translates to more borrowing power.
Home Equity Refinance Requirements
Your home equity is the amount by which your homes value exceeds your mortgage balance. When you refinance, you need the minimum equity required by your mortgage program or lender.
Those minimums are typically the same as the minimum down payment for buying a home: at least 3% for conforming loans, 3.5% for FHA loans, and nothing for the VA loans and USDA loans.
Another way to look at minimum equity is maximum loan-to-value ratio .
For instance, if your lender has a maximum LTV allowance of 97%, then you need at least 3% home equity to refinance.
Homeowners who have at least 20% equity can often cancel private mortgage insurance or refinance to remove FHA mortgage insurance.
Equity requirements are different if you want a Streamline Refinance or a cash-out one.
Streamline refinances are great. They often dont require an appraisal. So nobody knows how much home equity you have.
That means you could potentially refinance if you have no equity or if your home is underwater meaning you owe more on your mortgage loan than the house is worth.
Cash-out refinances are a little more difficult from a home equity standpoint.
Although you may occasionally find a more sympathetic lender, the general rule is that you must retain at least 20% of your equity after the cash-out.
Look at it another way, and your loan-to-value ratio must be 80% or lower.
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Wait The Minimum Amount Of Time To Refinance Your Home
Depending on the type of mortgage you want and the lender you go through, you might have to wait a certain amount of time after you close on your original mortgage to refinance.
Here are some typical wait times you might experience:
- Cash-out refinance: If youre planning on a cash-out refinance, you typically have to wait six months after your original mortgage closes.
- FHA loan: To refinance an FHA loan with an FHA Streamline Refinance loan, you have to wait 210 days.
- Loan modification: If you modified your original loan to make your loan payments more affordable, you might have to wait as long as 24 months to refinance.
Keep in mind:
How Can I Fund A Down Payment
A down payment is a major expense. You can fund it by building up savings in a savings or checking account. If you are selling an existing home, you could use the proceeds from that sale as a down payment on your new place. Other options include down payment assistance programs, gifts from family, or borrowing from your retirement accounts.
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Waiting Period To Refinance
Some mortgage programs impose a waiting period between your last closing and your new loan. In industry jargon, this is called seasoning.
If your lender does impose a seasoning requirement, it would dictate how long you must wait to refinance after buying the home or after a previous refi.
For instance, youll likely have to wait 180 days or so if you want a cash-out refinance or a Streamline one.
But many home refinance loans have no such requirement.
That means with a conforming loan and some other programs, you could potentially start the refi process right after closing your existing loan.
If you want a conventional loan that doesnt conform to Fannie Mae and Freddie Mac standards, your lender might impose its own seasoning period. But, if thats a problem, just shop around until you find a more amenable lender.
Proof Of Debts And Credit Information
To prove your trustworthiness as a borrower, youll need to provide your credit score and recent credit reports. However, youll also need to provide some information about the debt that you hold even though it shows up on your credit report.
This means youll need to provide information about current student loans, mortgages, credit cards, auto loans, personal loans, and any other sources of debt.
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Reasons To Refinance Your Mortgage
Though it isn’t right for everyone, there are many great reasons you might consider refinancing an existing mortgage loan. Here are a few:
Consider The Cost To Refinance
Before you decide on refinancing your TD Mortgage or a TD Home Equity FlexLine, be sure to look at all potential costs. Prepayment charges may apply if the agreement is ended before the term is done. There may also be associated fees for mortgage registration and property valuation.
But if youre able to take advantage of lower interest rates, your overall savings may make it worthwhile.
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What Is An Origination Charge
The origination charge is the amount charged for services performed on the initial loan application and loan processing. This includes all charges that lenders and brokers involved in the transaction will receive for originating the loan. It includes any fees for application, processing, underwriting services, and payments from the lender for origination. Learn more about closing costs.
What Does It Mean To Refinance Your Mortgage
Refinancing your mortgage means you will be obtaining a new loan to replace the loan you currently have on your home. There are many reasons people decide to refinance, including lower interest rates, debt consolidation, home improvements, decreasing monthly housing costs, removing an individual from a property title or accelerating the payoff of your mortgage.
Faqs About Refinance Requirements
Once youve crunched the numbers and confirmed your eligibility, it’s time to get down to the business of mortgage refinancing. Its important to note that your lender will require you to offer up financial details and account information.Your credit report lays out how much money you owe, but your lender also needs this information from you. Youll need to provide account statements for your mortgage, any home equity lines of credit, car loans and student loans you may have.
Are You In Need Of More Room For Monthly Cash Flow
Refinancing can change your monthly payment and make it either higher or lower, depending on the terms you choose. If youre in desperate need of some breathing room in your monthly budget, it could make sense to refinance and pay a lower monthly rate, so long as you use that freed up cash towards your goals.
A huge mistake would be to refinance, lower your payment, and not have a clear plan of what youll be doing with those new freed up dollars each month.
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Tap Equity To Pay Off High
Home equity is the difference between your homes value and your current loan balance, and you can access it with a cash-out refinance. By borrowing more than you currently owe, you can pocket the difference to consolidate maxed-out credit cards or make upgrades to increase your homes value even more.
The Costs Of Refinancing
Refinancing a home usually costs 3% to 6% of the total loan amount, but borrowers can find several ways to reduce the costs . If you have enough equity, you can roll the costs into your new loan . Some lenders offer a no-cost refinance, which usually means that you will pay a slightly higher interest rate to cover the closing costs. Dont forget to negotiate and shop around, because some refinancing fees can be paid by the lender or even reduced.
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Mortgage In Good Standing Refinance Requirements
This requirement is nearly universal. Youre highly unlikely to get approved for mortgage refinancing if you still owe late payments on your original mortgage.
Rules vary by mortgage program and lender. But just about everyone has a requirement that your existing mortgage is current. And some may block mortgage applications from homeowners who have recent late payments .
The Streamline Refinance program is available to homeowners with existing government-backed home loans including FHA, VA, and USDA loans.
Streamline Refinances are relatively quick, easy, and inexpensive compared to mainstream ones. And they usually have easier requirements for example, the lender might not check your credit or verify employment.
But you must be current on your monthly mortgage payments to qualify for a Streamline Refi.
Heres what two of the government agencies backing these mortgages say:
- The mortgage to be refinanced must be current . Federal Housing Administration
- Lenders must verify the mortgage was paid as agreed for 12 months prior to the refinance application. U.S. Department of Agriculture
VA Streamline exception?
The VA doesnt explicitly have a mortgage-in-good-standing requirement in its rules for streamline refinances . But, even with one of these, youd be lucky to find a lender willing to ignore a delinquent mortgage statement.
What Do I Need To Refinance My Home
There are a variety of requirements that need to be met depending on the type of refinance option you choose. For cash-out refinance options, your name must be on the title of your home for a minimum of 6 months if you have a conventional mortgage, jumbo loan or VA loan. Youll likely need to wait 6 months to a year for a FHA cash-out refinance. There are limited exceptions to these rules including if youre taking advantage of delayed financing or youve inherited the home.
There are also a few other refinance requirements you will need to consider before applying to your mortgage lender.
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Monthly Principal And Interest On 30
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Keep in mind that in some cases, a lender might be willing to waive certain fees , so be sure to ask if any of your closing costs are negotiable or if any discounts are available.
There are also several lenders that offer no-closing-cost refinance options, which allow you to roll your closing costs into your loan amount. However, this often results in a higher interest rate and higher monthly payments. If you plan to stay in your home for a long period of time, its generally better to cover your closing costs upfront to avoid paying more over time.
Additionally, getting your financial profile in the best shape possible with a good credit score, stable income and low amount of debt can help you qualify for a competitive rate on your mortgage, which will reduce your costs over the life of your loan.
When Is A Cash
A cash-out refinance is a great option for homeowners who need on-hand cash, meet the requirements of the refinance loan and generally need no more than 80% of their homes equity. Because of their lower interest rates, cash-out refinances can be a better option than financing with a credit card.
If youre not sure whether a cash-out refinance is right for you, our refinance calculator may be able to help.
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Your Mortgage Refinancing Checklist: Ready To Refi
With some mortgage experts projecting rates to remain near historically low numbers, itâs no surprise that refinancing continues to be a popular home loan option. Before you start comparing lenders, however, itâs important to take a 360-degree view of your options.
Before mortgage refinancing, you should run through the checklist below and answer each of the questions.
1. What are your goals?
- Are you trying to lower your monthly payments?
- Do you want to shorten or extend the life of your loan?
- Would you like to use equity to pay off debt or fund home upgrades?
- Do you qualify for a government-backed conventional refinance program?
2. Does refinancing make financial sense?
- Is the interest rate lower than your existing rate?
- Will the new rate increase your monthly payments?
- Will you pay more money over the entire length of the loan?
3. Can you afford closing costs and fees?
- Are you prepared to pay the application fee?
- Have you determined title insurance, attorney and closing costs?
- Do you have these funds to pay upfront?
4. Have you determined what the payoff amount will be ?
- Calculate the payoff amount
- Determine any payoff penalty fees
- Request a copy of the payoff statement
5. Do you know what mortgage refinancing documents are needed to apply? Can you obtain them?
- Tax Returns, W-2s, and/or 1099s
- Statement of Assets