Why Would A Bank Want To Refinance My Mortgage

Rate And Term Refinance

Mortgage Refinance Explained – When Should You REFINANCE?

In a rate and term refinance, you would typically be getting a new mortgage with a smaller interest rate, as well as possibly a shorter payment term .

With the recent record-low interest rates, refinancing your 30 year mortgage into a 15 year mortgage may end up getting you similar monthly payments as your original loan. This is because of the lower amount of interest you would be paying on your new mortgage, even though 15 year mortgage payments are usually higher than the 30 year loans.

The Truth about Mortgage states that it’s important to be sure you find your break-even point before deciding to refinance your current mortgage rate. This is essentially when the refinancing costs are recouped via the lower monthly mortgage payment .

How To Find The Best Refinance Rate

Shopping for a competitive refinance rate can save you money both upfront in closing costs and over time in monthly payments. Comparing rates and exploring the different options available to you are wise steps, as your refinanced mortgage will replace your existing loan.

Given how interest rates have spiked over the last year , you may also wish to explore a rate lock on your next mortgage. A rate lock is a guarantee that a mortgage lender will honor a specific interest rate at a specific cost for a set period. This protection can help to stabilize your monthly payment during volatile interest-rate times.

Get Your Mortgage Paperwork In Order

You need a lot of documentation that proves your financial readiness to refinance.

The documents you should have handy include your latest pay stubs, the last two years of W-2s, information about your current home loan, as well as information on property taxes and home insurance.

If youre self-employed or have a non-traditional job, have two years of bank statements available. You may also need a profit and loss statement from your bank, the last two years of 1099 forms and client invoices as proof of income.

A lender may have additional documentation requirements depending on their initial assessment of your finances. Once you have decided on a lender, find out about any other requirements so you can get it together ahead of time. Doing so will make the application process a lot smoother.

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Mortgage Interest Rates & Covid

The economic fallout from COVID-19 has impacted the mortgage market in the form of stricter requirements from many lenders. Perhaps having learned from the financial crisis of 2008, many lenders have tightened their lending standards.

These more stringent requirements vary by lender, but some examples are:

Some lenders have raised their minimum credit scores in general, or at least require to qualify for more preferential interest rates and mortgage terms.
Some lenders have increased the down payment amount required to qualify for a loan.

In some cases, mortgages that had previously been pre-approved are subject to a re-verification process prior to the finalization of the loan.
Even government-backed loans through the FHA and VA have been impacted by some lenders stricter minimum requirements to obtain these loans.

The bottom line for home buyers is that these tougher requirements may require more shopping to obtain an affordable mortgage.

Pay Off Your Home Loan Early

Some borrowers are able to reduce the term of their loan by refinancing. If you are a borrower who has had your loan for a number of years, a reduction in interest rates can allow you to move from a 30-year loan to a 20-year loan without a significant change in monthly mortgage payments. Because the loan is paid off in a shorter period of time, you may benefit from a reduced interest expense.

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What Do Lenders Look For On Bank Statements

When you apply for a mortgage, lenders look at your bank statements to verify where the money comes from, and that you can be trusted with the loan amount. Lenders need to ensure that borrowers have enough money in their accounts to meet the loan obligations.

Here are a few factors that lenders look for:

Cash reserves and money in your account
No bounced checks or overdrafts

No direct debits

Consider How Long You Plan To Stay In Your Home

In deciding whether or not to refinance, youll want to calculate what your monthly savings will be when the refinance is complete. Lets say, for example, that you have a 30-year mortgage loan for $200,000. When you first assumed the loan, your interest rate was fixed at 6.5%, and your monthly payment was $1,257. If interest rates fall to 5.5% fixed, this could reduce your monthly payment to $1,130a savings of $127 per month, or $1,524 annually.

Your lender can calculate your total closing costs for the refinance should you decide to proceed. If your costs amount to approximately $2,300, you can divide that figure by your savings to determine your break-even pointin this case, the home for two years or longer, refinancing would make sense one-and-a-half years in the home . If you plan to stay in the home for two years or longer, refinancing would make sense.

If you want to refinance with less than a 1% reduction, say 0.5%, the picture changes. Using the same example, your monthly payment would be reduced to $1,194, a savings of $63 per month, or $756 annually , so you would have to stay in the home for three years. If your closing costs were higher, say $4,000, that period would jump to nearly five-and-a-half years.

If the equity in your home is less than 20%, you could be required to pay PMI, which could reduce any savings you might get from refinancing.

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Are You Looking For The Best Refinance Mortgage Rates And Information To:

Lower Your Rate?
Remodel or renovate your home?
Any combination of the above?

We are laser-focused on approving mortgage refinances for these reasons or any other reason in a simple, no-nonsense way, at the absolute best rate.

As a leading Canadian Mortgage Broker having worked with hundreds of mortgage refinance transactions, I take all the best information I have learned over the past 14 years and distilled it into the article below. Or feel free to connect with us for a no-obligation conversation.

For your best refinance result, lets take a look at:

What is a mortgage refinance?
How does a mortgage refinance work?
Pros and cons of refinancing is it worth it?

Step by step how to complete a mortgage refinance from start to finish.
Top tips and advice for your best refinance result
Refinance Vs Home Equity Line of Credit

Refinance if you have low credit.

Tips For Negotiating Mortgage Rates

When Does Refinancing Your Mortgage Make Sense?

There are a few things to keep in mind when negotiating terms with a lender. In the first place, you must always provide lender documentation proving your income and credit. Make certain that you understand your needs and do not expect to receive a lower interest rate than with a conventional mortgage. Finally, you should keep in touch with your lender to ensure that you are getting the best deal possible.

Change Your Loan Term

Many people refinance to a shorter term to save on interest. For example, say you started with a 30-year loan but can now afford a higher mortgage payment. You might refinance to a 15-year term to get a better interest rate and pay less interest overall.

You can also refinance to a longer term to lower your monthly payment.

Is Now A Good Time To Refinance Your Mortgage

Leslie Cook Samantha SharfOriginally Published:11 min read

With interest rates hovering around 7%, most homeowners will find that now is not a good time to refinance their mortgage. There are fewer than 200,000 borrowers who could benefit from a rate and term refi at todays rates, according to real estate data company Black Knight.

Well help you figure out if youre one of those homeowners who can still benefit from a refi and walk you through what you need to consider before taking that step. If you decide that now is the right time to refinance, shop around the best mortgage refinancing companies to find the right fit for your needs.

Why Refinancing Your Loan Could Make Sense

1. To get a lower interest rate

When youre making mortgage payments, youre paying against the principal and the interest your lender charges on the loan. The lower your interest rate is, the less youll pay in interest over time. This can mean you pay more of the principal loan amount each month to pay off your mortgage more quickly, or that you free up more of your monthly budget for other day-to-day expenses or for saving for future goals.

Taking advantage of a lower interest rate is the #1 reason homeowners refinance their mortgage, according to the U.S. Census Bureau.

2. To reduce the time frame of your mortgage

You may be able to refinance to reduce the amount of time it will take to pay off your mortgage. For example, if you had 22 years left on your initial loan, you may be able to refinance by choosing a 15-year or 20-year mortgage. Its important to review the impact this may have on your monthly principal and interest payment, however. Shortening the length of your mortgage may make your monthly payment higher, depending on the interest rate and other factors.

3. To switch from an adjustable rate to a fixed rate

If you have an adjustable-rate mortgage , the interest rate can go up or down over time based on market conditions. If you have an ARM and you expect interest rates to go up, you may consider refinancing to lock in a fixed rate, especially if rates are low.

4. To eliminate mortgage insurance

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Consider The Loan Term When Refinancing

For those who dont want a mortgage hanging over their head for 30 years, the use of a rate and term refinance illustrated above can be a good strategy.

Especially since the big difference in interest rate barely increases the monthly payment.

But you dont need to reduce your loan term to take advantage of a rate and term refinance.

You can simply refinance from one 30-year fixed into another 30-year fixed, or from an adjustable-rate mortgage into a fixed mortgage to avoid a rate reset.

Some lenders will also let you keep your existing term, so if youre three years into a 30-year fixed, you can get a new mortgage with a 27-year term.

If you go with another 30-year loan term, the refinance will generally serve to lower monthly payments, which is also a common reason to refinance a mortgage.

Many homeowners will refinance so they can pay less each month if theyre short on funds, or wish to put their money to work elsewhere, such as in another, higher-yielding investment.

So there are plenty of options here just be sure youre actually saving money by refinancing, as the closing costs can eclipse the savings if youre not careful.

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Get A Lower Interest Rate And Monthly Payment

As a borrower, you could potentially save thousands of dollars over the term of your loan when you lock in a lower interest rate. And in many cases, a lower interest rate also means a lower monthly mortgage payment. This interest savings could allow you to pay off other high-interest debt, add to your savings account or put more dollars toward retirement.

Consider Private Mortgage Insurance

During periods when home values decline, many homes are appraised for much less than they had been appraised in the past. If this is the case when you are considering refinancing, the lower valuation of your home may mean that you now lack sufficient equity to satisfy a 20% down payment on the new mortgage.

To refinance, you will be required to provide a larger cash deposit than you had expected, or you may need to carry PMI, which will ultimately increase your monthly payment. It could mean that, even with a drop in interest rates, your real savings might not amount to much.

Conversely, a refinance that will remove your PMI would save you money and might be worth doing for that reason alone. If your house has 20% or more equity, you will not need to pay PMI unless you have an FHA mortgage loan or you are considered a high-risk borrower. If you currently pay PMI, have at least 20% equity, and your current lender will not remove the PMI, you should refinance.

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The Truth About Refinancing Your Mortgage

The process of refinancing a mortgage can be a great way to save money on your monthly payments, and in some cases, to get a lower interest rate. However, there are also some potential drawbacks to refinancing that you should be aware of before you make the decision to do so. One of the main things to keep in mind is that refinancing will usually involve closing costs, which can add up to several thousand dollars. In addition, if you have a good interest rate on your current mortgage, you may not be able to get a lower rate by refinancing. Finally, if you are considering refinancing in order to get cash out of your home equity, keep in mind that this can be a risky move and that you could end up owing more on your mortgage than your home is worth if the housing market declines.

A mortgage can be refinanced in the same way that a home purchase can be refinanced. The first and most important qualification you must meet is that of refinancing your mortgage. To lenders, the new loan must achieve an LTV ratio of at least 80% in order to qualify as an LTV. There is no fee for refinancing a mortgage. The closing costs, such as underwriting and origination fees, are the same as those of a purchase mortgage. With a loan-to-value ratio of more than 90%, it is not uncommon for a mortgage to be refinanced. refinancing loans are available in a wide range of styles, but the majority fall into one of three categories.

You Want A Fixed Rate Home Loan

Why Should I Refinance My Mortgage? | LowerMyBills

You could be coming to the end of a fixed rate term and want to see if you can get a better interest rate or a more flexible home loan once your fixed term ends. Fixed rates can work really well in the right situation but often when your fixed rate term ends, youre rolled over to a higher variable rate by default. If you wait until after your fixed term to refinance, you may avoid paying a break cost fee associated with leaving a fixed rate home loan, which makes it a prime time to look around at what home loan offers are available.

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Refinance Out Of An Fha Loan

If youve taken out an FHA loan in recent years, you know that youre stuck paying mortgage insurance premiums for either 11 years or the life of the loan, depending on how big your down payment was. Thats a long time to pay those premiums.

Since you cant ask your lender to cancel FHA mortgage insurance once you have 20% equity, refinancing may be the only way to get rid of it.

You Need To Change Your Loan Term

There are several reasons homeowners might want or need to change their loan term. Heres a bit more information on switching to a longer or shorter term.

Longer Mortgage Term

Are you having trouble making monthly mortgage payments? A refinance can allow you to lengthen the term of your mortgage and lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan to lengthen the term of your loan and make a lower payment each month.

When you lengthen your mortgage term, you may get a slightly higher interest rate because lenders take inflation into account, and a longer mortgage term means you will likely pay more in interest over time. If you know your current payment schedule isnt realistic for your household income, a refinance can free up more cash so you can invest, build an emergency fund or spend it on other necessities.

Shorter Mortgage Term

You can also refinance your mortgage in the opposite direction, from a longer term to a shorter term mortgage. When you switch from a longer-term mortgage to a shorter one, you will likely enjoy lower interest rates and youll also own your home sooner.

Usually, switching to a shorter term also means that your monthly payments will increase, so make sure you have enough stable income to cover your new payments before you sign on for a shorter term.

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 .