Are You Eligible To Refinance
Determining your eligibility for refinancing is similar to the approval process that you went through with your first mortgage. Your lender will consider your income and assets, credit score, other debts, the current value of the property, and the amount you want to borrow. If your credit score has improved, you may be able to get a loan at a lower rate. On the other hand, if your credit score is lower now than when you got your current mortgage, you may have to pay a higher interest rate on a new loan.Lenders will look at the amount of the loan you request and the value of your home, determined from an appraisal. If the loan-to-value ratio does not fall within their lending guidelines, they may not be willing to make a loan, or may offer you a loan with less-favorable terms than you already have.If housing prices fall, your home may not be worth as much as you owe on the mortgage. Even if home prices stay the same, if you have a loan that includes negative amortization , you may owe more on your mortgage than you originally borrowed. If this is the case, it could be difficult for you to refinance.
Get The Lowest Interest Rate Possible
Locking in a low interest rate won’t lower your closing costs. But it will bring down your monthly payments, which will help you earn back the money you spent more quickly.
Choosing the right lender is one way to lower your rate. You can also improve your credit score by paying all your bills on time or paying down your credit card debt. Paying down debts also helps you lower your debt-to-income ratio, which is another tool lenders use to determine your interest rate.
Know Your Credit Score
Knowing your allows you to begin repairing it when necessary. To refinance your mortgage, your credit score will need to be good to excellent, generally 700 or better. Requesting a credit report from one of the major credit bureaus or through Chase Credit Journey, which is free for Chase customers, will show you your credit score, along with the information that creditors are reporting to it.
The steps to repairing your credit score arenât tricky, but they do take time, commitment and often require you to reevaluate how you are using your credit and your spending habits.
Focusing on these five factors can help put you in a good position for refinancing.
Occasionally, it is better to wait and apply for a loan once your credit score is higher, as this can make you eligible for lower interest rates and put you in an overall better position financially.
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How Does Refinancing Work
The first step is to see if you qualify for a refinance. You must already have a significant amount of equity in your home if you want to take a cash-out refinance. Most lenders wont refinance 100% of your equity, so make sure you have enough equity built to cover your expenses.
You also need to consider closing costs. Just like when you bought your home, you pay closing costs to your lender when you sign on your new mortgage. You can expect your closing costs to equal about 2% 3% of the total value of your loan. As a general rule, you need to live in your home for at least a year to gain a financial advantage through a refinance.
Next, find a lender to service your loan. You dont need to refinance with the same company that services your current loan. Compare lenders current interest rates and fees and ask about availability and how long the process usually takes.
Once you choose a lender, submit an application. Applying for a mortgage refinance is very similar to applying for your first mortgage. Your lender will ask you for a few documents, including your two most recent pay stubs, W-2s and bank statements. You may need to provide additional documentation if youre self-employed.
You may have the option to lock in your interest rate once youve completed your application. Locking your interest rate protects you against rising rates while you finish closing on your loan.
Mortgage Refinance: Weighing The Pros & Cons
In simple terms, mortgage refinance means replacing your existing mortgage loan with a new mortgage loan. Homeowners choose to refinance a mortgage for many different reasons. Some want to secure a lower interest rate. Others want to extend the term for a lower monthly payment. Still, others may want a mortgage refinance to get some extra cash for a large expense. As with just about everything, there are both advantages and disadvantages to mortgage refinance.
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Why Refinance Your Mortgage
There are several reasons to refinance a mortgage. The most common are to reduce the interest rate , to shorten the duration of the loan and to switch between a fixed-rate and adjustable-rate mortgage . These are all ways to save money because your home loan payments will either be lower or end sooner.
Here are some of the primary benefits to look for when refinancing.
Can You Negotiate Closing Costs On A Refinance
As mentioned above, there’s no way of getting around certain mortgage refinance fees such as appraisal fees and credit report charges. But it is possible to negotiate closing costs on such a loan. In fact, many borrowers who don’t have a large down payment saved choose to waive their closing costs.
You’ll still be responsible for these costs just not at the time of closing. So if you opt for a no-closing cost refinance, know that you’re probably looking at a slightly higher interest rate. Ask your lender how much it would cost you in the long run to roll these funds into your loan.
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Make Sure Your Credit Is Mortgage
Long before you apply for a mortgage refinance, check your credit score and review your credit report to get an idea of where you stand. Even if you can get a lower interest rate with your current credit and financial situation, you could save even more if you can improve your credit before you apply.
Costs Involved In Mortgage Refinance
Refinancing enables you to pay off your current mortgage and obtain a new one. The new mortgage has terms that determine the long-term cost of home ownership. Minimizing the long-term costs is a key factor in refinancing, but it costs something to establish a new mortgage.
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You Want To Get Rid Of Pmi
Private mortgage insurance protects your lender in the event that you default on your loan. Most lenders require PMI if you have less than 20% down on your loan at closing. You may refinance and cancel your PMI if you now own more than 20% equity in your home.
Its a little different with FHA loans, which are backed by the Federal Housing Administration and protect your lender if you happen to default on your loan. You must pay for mortgage insurance throughout the life of your FHA loan if you had a down payment of less than 10%. Many people who buy a home with an FHA loan refinance to a conventional loan after they reach 20% equity and remove their monthly insurance requirement.
How Much Can You Refinance A Mortgage
Refinancing your mortgage can be an excellent source of funds to consolidate debt, complete a home renovation, or to send your children to post-secondary education. In Canada, you can refinance your mortgage up to a loan-to-value ratio of 90%. Loan-to-value ratio is the total mortgage amount divided by the home value.
For example, lets say you own a home worth $200,000 and have $150,000 left to pay on it.
Current mortgage: $150,000Home value: $200,000
If we take the mortgage amount and divide it by the current home value we get a loan-to-value ratio of 75%. If you want to borrow money from your home, you can borrow up to 90% of the home value as stated above.
Using the above example, lets first figure out how much you could potentially borrow in a refinance.
Maximum mortgage: $200,000 * 90% = $180,000
Then, well take that amount and subtract the amount remaining on your mortgage to figure out how much you can borrow.
How much can you borrow?: $180,000 $150,000 = $30,000
Though refinancing may be cost-effective, its important to consider and understand all of the costs involved. To determine if refinancing is the most financially viable option, you must consider the best mortgage rates and other costs involved and compare this to other financing options such as a line of credit.
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Average Cost Of A Mortgage Refinance: Closing Costs And Interest Charges
See Mortgage Rate Quotes for Your Home
The average closing cost for refinancing a mortgage in America is $4,345. These costs may vary depending on the lender and location of the mortgaged property. Additionally, the amount you borrow will impact the cost of the refinance. Refinances advertised with “no closing costs” or “no fees” often fold those charges into the interest rate, amount borrowed, or monthly payments of the new mortgage.
Typical Fees Associated In Refinancing A Mortgage
Many homeowners have been refinancing their mortgage to take advantageof the historically low interest rates. Aside from getting a low-interest rate,it makes sense to refinance your mortgage if you want to adjust the length ofyour mortgage term, change from an adjustable-rate mortgage to a fixed-ratemortgage, or if you want to cash out your home equity. However, if this is yourfirst time to do refinancing, you need to be aware of the typical feesassociated with it. Refinancing fees could go between 3 to 6 percent of youroutstanding principal in addition to any prepayment penalties or other costsfor paying off any mortgages you might have.
Below is a list of the upfront typical refinancing fees and theirrespective average costs:
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How Does Refinancing Affect Your Tax Situation
With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That, of course, may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.
Interest paid up front for refinancing must be deducted over the life of the loan, not in the year you refinance unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. If, however, the refinancing is for home improvements you may be able to deduct the points under certain circumstances.
If you are thinking about refinancing your mortgage, you might want to consider other types of mortgages. For example, you might want to look into a 15-year, fixed-rate mortgage. In this plan, your mortgage payments are somewhat higher than a longer-term loan, but you pay substantially less interest over the life of the loan and build equity more quickly. Of course, this also means you have less interest to deduct on your income tax return.
Types Of Cost Of Refinancing
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#1 Refinance Through Cash-Out
In cash-out refinance, the borrower can use the equity built up to get cash. It is a new loan for the amount of mortgage. Apart from this, it also includes cash received that would be up to 80% of the loan-to-value ratio Loan-to-value RatioThe loan to value ratio is the value of loan to the total value of a particular asset. Banks or lenders commonly use it to determine the amount of loan already given on a specific asset or the maintained margin before issuing money to safeguard from flexibility in value.read more.
#2 Refinance Through Home Equity Loan
A home equity loan is also known as the second mortgage. It is a separate mortgage. With home equity loans, the borrower can take up to 80% of the loan-to-value ratio.
#3 Rate and Term Refinance
Its a typical mortgage refinance. The main purpose is to take benefits of the revised low-interest rates and new loan term based on new criteria.
#4 Refinance Through Streamline
Government-backed home loans are available for streamline to refinance. The processes of such refinance are usually very quick and easy.
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What Are The Cons Of Refinancing
Here are some of the cons of refinancing:
1. It Can Be Time-Consuming
Refinancing can be a slow process. For many borrowers, they may feel like all the work is not worth it. Discharging and transferring your loan to your new lending institution can chew up time, and the speed of the process usually depends on the lenders involved.
Typically, refinancing comes with a few different fees that can stack up to thousands of dollars. In some cases, it will be much lower, but you will need to check first with any potential lenders to weigh up the benefits of switching your loan. These include:
- Discharge fees
- Application fees
3. Lenders Mortgage Insurance
Your new lender may require you to take out LMI when you switch your home loan if you have less than 20% equity in your home. This protects them if you default on your mortgage, but it could cost you a lot of money.
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4. Resetting the Loan Term
Refinancing resets your loan term. Say you have already paid off four years of a 25-year loan term, when you refinance your home loan with a new lender youll be paying off 29 years worth of interest instead.
How To Lower Your Mortgage Refinancing Costs
If youre planning to refinance your mortgage, getting the best possible deal will maximize your savings. Heres how to reduce the cost of your refinance:
- Shop around: Compare rates with at least three of the best refinance lenders, including your current lender. See where you can get the lowest interest rate, monthly payment, and closing costs.
- Build your credit: Your credit score plays a key role in your loans interest rate. Borrowers with a FICO® Score of 760 and above typically qualify for the lowest rates. If youre not there yet, take steps to increase your credit score. Make sure to always pay your bills on time.
- Consider buying points: Mortgage points allow you to pay cash upfront in exchange for a lower interest rate. It may be worth buying points if you have the money for it and you plan to own the home for a long time. By locking in a lower interest rate, youll save money over the life of the loan.
- Ask for fee waivers: You may be able to get certain refinance fees waived. For example, many borrowers were able to get appraisal fee waivers in 2020. It doesnt hurt to ask, and it could help you trim the cost of your refinance.
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Know The Difference Between Important Disclosures
Three of the most important disclosures youll see during the refinance process are:
- Locked Loan Estimate
- Closing Disclosure
Now for those that lock upfront, youll only receive a Locked Loan Estimate and a Closing Disclosure. A Locked Loan Estimate specifically says that in the top right corner and if you think your rate is locked make sure you see the proper lockbox checked.
Now if you followed my rule on asking what are the total costs for everything you can now go through the loan estimate and add up all the fees. And it only takes 2-3 minutes. This step alone could save you hundreds if not thousands of dollars and it only takes a few minutes.
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How Can I Lower My Cost To Refinance
If youre looking to save some money on closing costs, there are several things you can take a look at:
- Shop around for title insurance: There are many things you cant actively choose during the lending process, but one of them is the title insurance provider. You have the option of going with one thats most affordable in your area.
- Skip the home inspection: If youre refinancing, you likely know about the major problems that exist within your home. You dont need a home inspection. The only exception is that you might have to get one if the appraiser brings up an issue.
- Consider a no-closing-cost refinance: A no-closing-cost refinance involves taking a higher interest rate in exchange for lender credits to cover your closing costs. Earlier we talked about negative point values associated with higher mortgage rates so that the money you get back can go toward costs. These are lender credits. One thing to be aware of is that youre trading lower closing costs for a higher monthly payment and more interest paid over the life of the loan.