Refinance Process
Refinance Process
Refinancing a mortgage is the process of acquiring a new loan to pay off an existing lender.
Depending on the loan program, qualifying scenario and interest rate, a refinance can be handled between two separate banks, or by just getting a new mortgage loan with the same lender.
Four Possible Reasons To Refinance -
A mortgage is generally the largest debt most homeowners have to manage, and it is a good idea to give your personal real estate finance portfolio a check-up at least once a year.
Since there are several reasons a homeowner may choose to refinance, we’ll take a look at the top four circumstances.
A drop in mortgage rates, lowering current mortgage payments, debt consolidation or changing mortgage programs are four possible reasons to choose a refinance.
A mortgage is generally the largest debt most homeowners have to manage. It’s a good idea to give your personal real estate finance portfolio a check-up at least once a year.
Since there are many reasons a homeowner may choose to refinance, we’ll take a look at the four most common.
1. Mortgage Rates Drop:
Typically, the most common reason that homeowners refinance their mortgage is to secure a lower interest rate. Interest rate and loan amount determines the total cost that a borrower will pay. The lower the interest rate, the less the overall cost will be. Interest is calculated on a daily basis and usually paid back to the lender on a monthly basis.
2. Lower Payments:
Lowering a mortgage payment can be achieved by lowering the mortgage rate, lengthening the loan term, combining two or more loans or removing mortgage insurance.
3. New Mortgage Program:
Refinancing an Adjustable Rate Mortgage (ARM) to a new Fixed Rate Mortgage (FRM), combining a first and second mortgage or paying off a balloon loan are three possible reasons to explore a refinance.
4. Debt Consolidation:
If there is sufficient equity, sometimes paying off consumer debt by combining all debts into one lower monthly mortgage payment can significantly reduce the short-term deficits in a budget. However, it’s important to keep in mind the total cost of that debt by adding it into a 30 year mortgage payment.
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Frequently Asked Refinance Questions:
Q: Do I have to refinance with my current mortgage company?
No, you may choose any company to refinance your mortgage since the new loan will replace the existing mortgage.
Q: Is it easier to refinance with my current mortgage company?
It is possible your current mortgage company may require less documentation, but this could add additional cost or a higher interest rate. Do your homework and shop around to make sure you’re getting the best deal.
Q: Will I automatically qualify if I’ve never made any late payments?
No, you will have to qualify for your new refinance. However, certain programs will allow for reduced documentation like a FHA to FHA Streamline Refinance.
Frequently Asked Questions Regarding Refinancing:
Q: Is there such a thing as a “No Cost” mortgage?
Technically speaking, there are always costs involved with any mortgage transactions. Appraisal, inspection, underwriting, prepaid taxes, insurance, interest…. the list can go on.
However, there is a way to structure a closing cost and interest rate scenario that will decrease the amount of fees, or how a borrower pays them.
Basically, the costs to produce the new mortgage are either financed into the loan amount, or covered by the lender in exchange for a slightly higher than market interest rate.
Deciding on the best option involves weighing the difference in cost up-front vs the increased monthly payment over a set period of time.
Q: How long do I have to wait to refinance after a purchase transaction?
The rule-of-thumb is 8-12 months, but there may be exceptions. It’s important to check with your lender at the time of initial application to make sure there aren’t any short-term penalties for refinancing withing the first year.
Another thing to consider is the cost of refinancing. If you’re watching the market and may want to lock in a lower rate in the near future, it may be more cost effective to pay a discount point for a lower rate vs paying for a full refinance a few months later.
Q: I heard that I should only refinance if I drop 1% on my mortgage is that true?
Some people say ½ % , 1% to never. Every mortgage is different.
For Example: A no cost loan can have a 1 month breakeven point with only a .25% drop in interest rate. Now that you know how to calculate your net benefit you are able to figure out what is best for you.
Q: Why can’t I just compare my current payment to the proposed payment and figure out my net benefit?
You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations. Let’s say you have a 15 year mortgage currently and you are comparing to a 30 year mortgage.
If everything else is the same interest rate, loan amount ect. except for the amortization your interest savings per month would be $0 but, you are going to show a cash flow savings because of the longer amortization.
Q: Do I have to refinance with my current mortgage company?
No, you may choose any company you wish to refinance your mortgage since the new loan will replace the old mortgage.
Q: Is it easier to refinance with my current mortgage company?
Sometimes your current company can reduce the documentation that is required, but this usually comes at increased costs and interest rate. Make sure that you check to make sure you’re getting the best deal.
Q: Will I automatically qualify?
No, you will have to qualify for your new refinance. However certain programs will allow for reduced documentation like the FHA to FHA Streamline.
