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Refinancing is a huge undertaking and there are a lot of different things that you need to understand about it. We have put together this guide for you so that you can understand everything there is that you need to know about mortgage refinancing in the current state of affairs. We are also going to share what we feel are the best recommendations when it comes to mortgage refinancing marketplaces and lenders. You are here reading this article because it is very likely that you know mortgage refinancing is the best option you have right now, so let’s get into it, shall we?
While you may think that starting a relationship with the new lender is your first step, it isn’t. The first step is trying to understand how mortgage refinancing actually functions, and how it applies to your individual situation. There are a lot of times when a loan you are planning to take might seem like the best option but under the surface, it will have a negative impact on you as a borrower of the loan. The benefits that you are due to receive depend a lot on your personal situation. Mortgage refinancing is supposedly one very complex thing but we feel that it doesn’t have to be. If you understand it for what it is, you will find mortgage refinancing to be quite simple. This post is going to help make it simple for you.
What is Mortgage Refinancing?
Mortgage refinancing is essentially just the replacement of the current home loan with another loan that offers you more favorable terms.
There are a lot of factors that come in to make you capable of refinancing your loan and get better terms for it. The current interest rates for mortgage loans, the terms and conditions of the existing loan, your credit worthiness, and the equity you have on your home being very few of them.
Refinancing your mortgage isn’t always the best option for a lot of people because the fees might make it unfeasible for some people depending on their situation. Also, if there’s a high rate of interest on the existing loan on your home, you will find it really hard to get another loan that offers better interest rates.
That being said, refinancing your mortgage might be a smarter option for you. Apart from the basic benefits, there is a lot more to it, and you will get to know as you read on.
Situations Where You Need to Refinance Your Mortgage
Before making the decision to refinance your mortgage, you need to know whether or not you really need to. Here’s a look at some of the reasons for you to refinance your loan and the benefits you can get from it in those circumstances.
Shortening Your Loan Term & Your Total Debt Obligation
When you’re refinancing to a shorter term loan, it usually means you’re making the switch to a 15 year loan that has a fixed rate but there are lenders that offer timeframes between 15 to 30 years. In the bigger picture, the advantage of the 15 year fixed rate loan is that you’ll end up paying less in comparison to the 30 year loan. The interest rates are also usually 3% lower when it comes to comparing the 15 and 30 year loans.
Keeping that in mind, the issue with the 15 year loan is that the monthly payments you’ll have to make are going to be higher than with the 30 year loan. Some people prefer to use the extra cash they have from the 15 year loan to make investments in low risk ventures that can beat the higher interest rates of the loan.
Stop Paying Mortgage Insurance
Another reason to refinance your mortgage would be if you had made a down payment of less than 20 percent when you purchased your home because you might be paying PMI. If the outstanding debt on your loan is less than 80 percent of the value of your home, you have the option of refinancing your mortgage. That means you will no longer have to make the PMI payments.
Switching From Adjustable Interest Rates to Fixed
Adjustable interest rate loans are when the interest is subject to change depending on the current conditions of the market. If the rates in the market start to go up, it’s better to get your mortgage refinanced into a fixed rate loan. Considering how things have happened in the past, the rise in the rates start when the rates have been low. Right now, the interest rates in the market are really low, and if you have adjustable loans on your home, you might want to consider making a switch to fixed rate loans through refinancing.
Cash In Refinancing
By using cash in refinancing, you can take cash and put it towards the loan by refinancing your mortgage. There are prepayment penalties that are part of a lot of home loans that are the reason for cash in refinancing. If you pay your loans before the due date, there is more fees that you will incur. As absurd as it may seem, this is the only way to make sure that the lenders of the loan get their due even if the loan is paid off earlier than agreed.
Another reason why you might need to get cash in refinance on your mortgage is when you get divorced. If this is the case, the former spouse of the person will be liable to pay some of the existing loan and other refinances.
Cash Out Refinancing
This is when you take a new loan worth more than what you already are due to pay on the current loan and take whatever difference you get from it in cash. People use the cash out refinance to make all several small debts into a single larger one. This makes it possible to make payments on a single mortgage rather than many small debts.
Cash out refinancing is also feasible when you want to renovate your home. They have to make more payments on their mortgage because of this but it also increases the overall value of their home so it is a win-win situation.
Adjusting Interest Rate and Term to Reduce Monthly Payments
One of the most common reasons why people refinance their mortgage to take out 30 year loans is so that they will extend the number of payments they will make but reduce the monthly payments due.
A lot of the times, the lenders will allow you to re-cast the current loan or start a 15 or 30 year term with them so that there’s no need for you to refinance your mortgage. Considering the fact that this allows you to lower your interest rates, the total debt you will have to pay can be significantly reduced. The interest payments you will make take place over your lifetime so even a percentage or two of difference on the interest rate can have a big impact on the long run in terms of total debt obligation.
Lenders are very much aware of this and they tend to structure the loans in a way that the borrower pays off the interest in the start of the loan term. If you’re planning to refinance your mortgage to get a lower rate of interest so that you pay less in the long run, you need to make the move a few years into the term of the initial loan. As a borrower in 2018, it’s actually quite a good time to do so because the interest rates have gone down drastically from when you might have initially taken the loan.
The Pros and Cons of Different Kinds of Mortgage Loans
Mortgage loans come in different shapes and sizes. That means there are different kinds of loans that you can make use of for refinancing your mortgage. For you to get a better understanding of it, let’s take a look at the different kinds of loans available for you to capitalize on and see how they can work out for you when you want to refinance your mortgage.
15 Year Fixed Term Loan
There are so many reasons for you to want to refinance and get a 15 year fixed rate mortgage. For instance, we’re going to take a situation that can happen to literally anybody: You’ve recently come into some money and you want to use that for your mortgage. If there’s enough money for you to cover the whole cost of the original loan, you might have a low monthly payment since the total of the loan is lower because of the cash you’ve put forth.
Pros: You’re going to be through with paying the debt a lot sooner.
Cons: The monthly payments will be higher in 15 year loans compared to the 30 year ones. That’ll mean less cash in your hands in the immediate sense.
30 Year Fixed Term Loan
It’s the most common form of loan used for mortgage refinancing. The popularity of the 30 year fixed term loan makes sense because it can be used for a number of things like reducing monthly payments, to make a switch from adjustable mortgage payments or even for refinancing through cashing out.
If you need the 30 year loan for reducing monthly payments, you can check with the lender to see if they’re willing to offer you competitive rates. They might just allow you to re-cast your loan and that will mean you won’t have to go through the whole process of refinancing your mortgage.
Pros: You will mostly find yourself with lower monthly payments, total debt obligation might be reduced and if you’re going for cash out refinancing, you might be able to get a lot of cash quickly by refinancing the 30 year term loan.
Cons: You’re going to be paying back your loans for a longer time now. This doesn’t make a lot of difference to investors since they can use the cash they get in hand from this to make greater investments. The fees can be problematic with every loan and if it’s too high, it might not be worth refinancing your mortgage.
Government Issued Mortgage Refinancing Programs
The government also has a vested interest in the real estate market and to get things going, the government has also sponsored several programs that can help people trying to buy homes or for refinancing any existing loan they have. Here’s a quick overview of some of the programs that the government offers in order to help people that need to refinance their mortgages:
US Department of Agriculture (USDA): The USDA offers loan programs to people whose total household income is lower than the average. The homeowners who qualify for the USDA programs have to be residing in areas defined by the USDA as rural areas. Refinancing through this should be done if you’ve already got a USDA backed loan and get up to 102% of home value when you refinance.
US Department of Veterans Affairs (USVA): These loans are backed by the Office of Veterans Affairs even though they’re offered by standard lenders. They can only be used by veterans, active personnel in the military, spouses of military personnel. This can be used to reduce monthly payments or to cash out.
Pros: You can refinance up to the full value of your home. Interest rates are lower because it’s backed by the Office of Veteran Affairs and there’s no PMI.
Cons: You cannot use this if you’re not a veteran otherwise this is one of the best options out there.
Federal Housing Administration (FHA): If you want to refinance into an FHA loan, you don’t need to have a loan already backed by the FHA. If you do have an existing FHA backed loan, the refinancing is called streamline refinancing since you’ll be making the payments of the loan smoother. You can even cash out refinance with the FHA backed loan.
Pros: Low requirements in terms of equity and interest rates are low.
Cons: You can be liable to pay PMI.
Home Affordable Refinance Program (HARP):
The HARP loans have been made for people who’ve taken loans before the 31st of May, 11 years ago and have a loan to value ratio over 80 percent – basically someone who hasn’t been able to build up on the equity on their home/someone in a state of financial duress. For the ones drowning in debt, HARP offers refinancing up to 125 percent of the value of their homes.
Pros: Aids a homeowner to build equity on their property.
Cons: Only applies if you’re really struggling to build equity or cannot pay off your existing loan.
Adjustable Rate Mortgage
These mortgages are usually offering mortgagees lower interest rates in comparison to fixed rate loans. The only real time adjustable rate mortgages make sense is when you’re planning to sell the house right after refinancing the mortgage. That and if you’re considering refinancing again after the rainy days go away. When the rates are going lower, more and more people resort to ARM refinancing but they make a switch to fixed rates when the rates in the market are getting higher.
What Affects Mortgage Refinance Rates?
There are several things that come into play which determine the interest rates that will be available to homeowners when they’re looking to a new loan in order to get refinancing on the mortgage. Of them, there are only a few you can do anything about. Here’s a quick look at each of them and what impact they have on your situation.
Your credit score and your credit history play a significant part in the refinance rates on your mortgage. If you have a high credit score with a good credit history, the lenders will be more likely to offer you lower interest rates compared to those who don’t have a very good credit history. To have an effect on this factor determining your mortgage refinance rate, you should do all that you can to have a good credit history. If you have a steady income for over a couple of years, you will make the lenders more likely to offer you better interest rates.
Kind of Loan
The kind of mortgage loan you choose when you’re refinancing your mortgage is one of the most important determining factors that affect the rates you will get. We’ve already gone over the different types of loans. We are aware of how switching to fixed rate longer term loans will decrease the monthly payment and increase the overall debt obligation. It’s also the best way to pull out of the equity you’ve built up on your home.
The thing is that even the short term loans can be capitalized on by people depending on their situation. You need to be well aware of the different kind of government sponsored loans because they’re likely to provide lower rate interest opportunities.
Ratio of Loan to Value
The amount you put forth in the down payment affects the initial interest rate for the existing loan you’ve taken. Just like that, the amount of equity you’ve built in your home when you refinanced your mortgage affects the interest rates that lenders will be willing to offer you. This is called the loan to value ratio i.e. the amount you have to pay compared to the value of your home. When the loan to value ratio is lower, you’re going to get lower rates of interest.
Current Rates of Refinancing Mortgages vs. Historical Rates
The mortgage refinancing rates in 2018 are much lower than the historically recorded interest rates of mortgage refinancing. This means that the refinancing rates are a lot cheaper because they’re essentially nothing more than loans to replace mortgages.
Historically, the mortgage interest rates have varied from their lowest of 3.3 percent back in 2012 to reaching highs that were north of 18 percent in the 80s. Ever since the crisis of the housing market a decade ago, the interest rates on mortgage refinancing have been in and around 6 percent.
When you do a comparison of the 30 year fixed rate loans with the 15 year fixed loan rates, the longer term loans have always been a bit more expensive for the borrowers. That being said, both of these have seen the same trends. Adjustable rate mortgages have historically been a lot less expensive than the ones that have fixed rates.
Should You Consider Refinancing Your Mortgage?
Earlier on, we have gone over the main reasons why someone would want to refinance their mortgage. If you feel like the reasons match with your situation and refinancing your mortgage is indeed the best option, you should start thinking about the more immediate questions like if refinancing your mortgage really makes sense to you in the current situation you’re in. You cannot just think about it on the surface and make a decision about refinancing because it just seems like a good idea. It’s very likely that if you’re not thinking it through, your financial situation right now might make it more difficult for you to actually refinance your mortgage.
When you read on you will find that we have written about the things that can help you decide whether or not you qualify for a new mortgage loan with another lender.
Qualifications for Refinancing Your Mortgage
There are certain terms and conditions that you have to meet in order to be able to qualify for refinancing your current mortgage. In spite of the fact that you might think you’re going to be able to make the payments of the fees and refinancing will be good for your situation, you do need to convince the lender to give you the loan, right? There are three main things you’ll be using to convince the lender to give you the new loan.
Your credit score is going to play a vital role. You need to show the lender you’re considering that you are able to meet the necessary minimum levels.
The lenders are looking for lucrative opportunities and one of the biggest reasons they need to convince themselves to give you the loan is the income that people borrowing from them make. They’ll compare the income with the monthly payments you will be obliged to make.
Equity on Your Home
When you’re taking the new loan, the value of your home should be more than that of the value of the loan. The USDA is the only exception when it comes to this since it allows 102 percent refinancing.
Qualifying for Mortgage Refinance with a Bad Credit Score
While lenders usually require you to have a good credit score in order for them to even consider giving you the loan, there are ways to refinance your mortgage even when you’ve got a bad credit history. The government sponsored refinancing options are something for you to consider if you have a bad credit history.
The US Veterans Affairs are a good option for veterans and the USDA for people living in rural areas of the country. The FHA refinancing option does not have a lot of stringent requirements for you to qualify. HARP is for those people who took loans before 2009 but accumulated less than 20 percent equity on their homes.You can even find a cosigner that has a better credit score. Of course, the last resort is that you can work on improving your credit score.
The Costs of Refinancing Your Mortgage
When it comes to refinancing your mortgage, there are a number of different fees involved. There are those lenders who try to maintain fees to the lowest possible amount and there are lenders who are particularly aggressive when it comes to the fees they will make the borrowers liable to pay. There are different fees involved and here are the different types so that you are not caught off guard once you get into refinancing your mortgage:
Origination Fee – less than a percent of the value of your home.
Points – there are some lenders that charge additional money so they can make more money from the loans. These are negotiable.
Title Insurance – around $400 to $800 as a means of insurance against errors that might happen with the transfer of the title.
Title Search – $200 to $400 that some lenders ask for before they refinance.
Document Processing Fee – $200 to $500 which lenders might charge you for doing the paperwork.
Appraisal Fee – $200 to $600 that the lender might charge as a cost for getting an appraisal report on the property’s value.
Mortgage Application Fee – $250 to $500 as a fee to apply for the mortgage.
Recording Fees – $25 to $250 that can be charged by the county or the city for recording the paperwork processed during the mortgage refinancing.
Credit Report Charge – $50 to $100 that the lender might charge for having to pull out your credit history and report.
Other Fees – There is the chance that you might have to pay more fees like for the reviewing attorneys or land survey fees among others.
Estimating Monthly Payments
In order to get a better understanding of the monthly payments you will be likely to make with the refinancing of your mortgage before you actually talk to the lender, there are refinance calculators that you can find online to help you out. Of course, it doesn’t compare to getting the real estimate once you’ve talked to the lender himself but you get a fair bit of an idea of the situation. It’s worth taking some time out to find out what you can expect from the lender.
How to Refinance Your Mortgage
Now that you have learned sufficiently about mortgage refinancing and you have the absolute and utter belief that it is indeed the best option for you right now, it is time for you to actually figure out how you’re going to go about refinancing your mortgage. Read on to find out all the steps you need to take in order to refinance your mortgage.
The Process of Refinancing Your Mortgage
Now, let’s take a look at all the steps involved with mortgage refinancing.
You have to figure out the approximate benefits you will get financially from refinancing your existing mortgage. Since you’re convinced that it will benefit you at this moment in time to refinance your mortgage, it is time to do the math and see what it will be worth. Doing this research will help you ask the lenders more specific questions about the refinancing so that they are convinced that you’re confident and aware about what you want. Online calculators, as we’ve previously mentioned, will be of great help for you to do that.
The next step in the refinancing process is to gather all your financial documents and get the credit score sorted. You need to know your credit score since it is vital information to help you figure out whether or not you even qualify for the loan. The lender will also run their calculations on your credit score. You might need to get copies of the last two tax returns. There are lenders who also ask for the stubs of payment slips of the recent payments that you have made.
You need to then figure out the value of your home right now. This is again an important factor since the lenders use the value of your home and compare it to the remaining value on the current loan. There is a chance you need to pay for the services of getting an appraisal report to the lender or get an appraisal done by a professional home appraiser to determine the value.
Now you have to compare all the options you have for mortgage refinancing loans and then choose the lender. Review all the companies that offer mortgage refinancing options and the offers they give. When it comes to choosing the lenders, there are a few who offer different conditions that better suit your particular situation. There’s more on finding the best mortgage refinancing lenders later on.
Now that you have chosen which mortgage refinancing option you are going to consider and the lender whom you will borrow from, you need to calculate the whole cost of the refinancing (inclusive of any and all fees). Never sign the contract unless you have everything sorted out and you’re aware of all the costs of refinancing your home.
Once you’ve sorted everything out and calculated all the costs including the fees, you’re ready to sign the papers. You lock in the rates when you sign the contract so it’s good to sign as soon as possible. This is also when you have to pay up most, if not all of the fees so be ready for that.
Finding the Best Lender for Mortgage Refinance
Finding the best lender possible for refinancing your mortgage is crucial for you. Here is an overview of the different types of refinance companies for you to consider.
Brokers and Marketplaces
Brokers and marketplaces are not going to offer you the loans directly. Instead, they are going to review offers from several lenders and choose one from them that suits you best. Brokers are pretty much the same as marketplaces but the term is more specifically used to any firm that can manually help you get connected to a lender that suits your situation the best. Then there are marketplaces like LendingTree that use an automated process to connect you with the lenders. Both of these can be useful depending on the situation. Small time brokers might be more likely to find your highly customizable loans due to personal relations they might have built up with the lenders. Marketplaces don’t have that additional human element coming into play.
Local mortgage refinancing lenders are direct lenders but they are more often than not smaller lenders. They’re willing to offer you more flexible terms when it comes to the agreement you make with them based on your particular situation. There are even alternative options like some real estate companies and builders that offer you mortgage loans as well.
Of course the most traditional companies to consider for mortgage refinancing loans are banks. They’re direct lenders and have a good track record and they’re pretty much stable when it comes to their financial situation. You won’t have to worry about having your loan sold to another company if the lender decides they cannot keep on supporting your loan.
What Makes Lenders Different From Each Other?
There are a few things that you need to consider when you’re choosing direct lenders or marketplace / brokers.
You need to have your information ready so that you can submit them to the lenders you’re considering. If you’re being offered a loan by a lender that is favorable for you, you should not let just some difficult application process stop you from availing it.
If you’re considering multiple lenders that offer you the same terms and conditions, you need to start with the ones that have a simpler application process and work your way from there. The application process with a lender can actually give you an insight into what it will be like working with them. The process being smooth and quick responses form the company are both very good signs for you and you can count on future communications with the company to be just as good if not better.
The company you’re considering has to be offering loans that can help someone in your situation. There’s already the mention of the different types of loans that companies offer so you can better decide on which one suits you best. Consider everything previously discussed and decide if the loan offering from the company suits your needs.
Lastly, we will tell you about how important it is for you to properly vet the company you’re considering for refinancing your mortgage. There are several ways to go about determining their reputation like the Better Business Bureau ratings and their financial strength.
The best option is to go for companies that have been in the business for a while and they are well established enough to stick around for many more years to come. Any issues with the company can make your life difficult as well. You don’t want any of that.
Mortgage refinancing does not seem like a lot of fun and it isn’t but it is necessary for a lot of people. We hope that with all the information we have provided you, you will be able to makebetter decisions about whether or not you need to refinance your existing mortgage and how to go about it if you do. Best of luck!