What Does It Mean to Refinance A House?
When you refinance the mortgage on your home, you are effectively exchanging your existing mortgage for a more recent one, which will often have a new principal and a different interest rate. This is because the new mortgage will be for a greater amount. After this, your lender will use the more recent mortgage to pay off the older one, leaving you with only a single loan and a single payment to make each month.
There are a few different motivations that drive homeowners to refinance their houses. You may take advantage of the equity in your house by obtaining a cash-out refinancing, or you can look into obtaining a better interest rate and/or a lower monthly payment by obtaining a rate and term refinance. It is possible, via the process of refinancing, to remove a co-signer from the mortgage, which is something that often takes place in the event of a divorce. You also have the option of including another person on the new mortgage.
How Does Refinancing A Home Work?
Refinancing is generally simpler than purchasing a house, but it involves many of the same stages. Refinancing typically takes 30 to 45 days.
Let’s examine refinancing.
First, research refinancing options to find the most suitable one for you.
Your lender asks for the same information you submitted when you purchased the house when you refinance. They’ll check on your income, assets, debt, and credit score to see whether you can refinance.
Your lender may need:
- Two most recent pay stubs
- Two most recent W-2s
- Two most recent bank statements
In a community of property state, your lender may require your spouse’s documentation (regardless of whether your spouse is on the loan). Self-employed people may need greater income proof. Also, have your recent tax returns prepared.
You are not required to refinance with your existing lender. If you switch lenders, the new lender pays off your old one, terminating your connection. Compare each lender’s mortgage rates, availability, and customer satisfaction rankings.
After being approved, you may be offered the choice to lock or float your interest rate.
Refinance rate lock
15 to 60-day rate locking. Location, loan type, and lender affect rate lock time.
You may receive a better rate by locking for a shorter duration since the lender doesn’t have to hedge the market as long. If your loan doesn’t close within the lock period, you may have to pay to extend it.
You may also be able to float your rate, which implies not locking it. This option may provide you a reduced rate, but it increases your mortgage rate risk.
In certain circumstances, a float-down option might give you the best of both worlds, but if you’re comfortable with rates when you apply, it’s preferable to lock.
Your lender starts underwriting as you submit your refinancing loan application. Your lender checks your financial information during underwriting.
Your lender will check the property, like when you acquired it. This includes a house appraisal. The refinancing appraisal is an important component of the process since it decides what alternatives are available to you.
The value of your property impacts how much cash you may earn when refinancing. If you’re seeking to cut your mortgage payment, the value might affect whether you have enough home equity to drop private mortgage insurance (PMI) or qualify for a specific lending choice.
Refinancing requires an appraisal, just like buying. Your lender requests an appraisal, an appraiser visits your house, and you get an estimate.
Make sure your house looks good for the appraisal. To make a good impression, clean and repair. Make a list of house improvements you’ve done since buying it.
Your next steps depend on whether:
Loan amount matches assessment. If the home’s valuation matches or exceeds the loan amount, underwriting is complete. Your lender will provide closing information.
What if the appraisal comes back low? If you obtain a low appraisal, your refinance’s loan-to-value ratio (LTV) may be too high. At this point, you may either reduce the amount of money you wish to obtain from the refinancing or cancel your application. You may perform a cash-in refinancing to obtain your present deal’s terms.
After underwriting and appraisal, conclude your loan. Your lender will give you a Closing Disclosure before closing. That’s where you’ll find all of your loan’s final figures.
Refinancing is quicker than buying. The loan and title holders, as well as a representative from the lender or title business, attend the closing.
At closing, you’ll review and sign loan paperwork. Any closing fees not included into your loan are paid at this time. If your lender owes you money (for a cash-out refinancing, for example), you’ll get it after closing.
You have a few days after closing before you’re locked in. You may cancel your refinancing during the 3-day grace period if anything goes wrong.
Recasting (Restructuring) vs Refinancing
Many lenders will not tell you this, however you may restructure (recast) your mortgage at a cheaper interest rate. With some easy paperwork and around $250.00, you might get a reduced rate and monthly without incurring all of the additional refinancing expenses.
Finally, you should consider not refinancing at all. You may have already paid a significant percentage of the mortgage interest. Because mortgage interest is significantly weighted in the early years (front-end loaded), refinancing may not make sense if your current payment is largely principal.
As you can see, the savings are not limited to the payment; there may be more to it. Hopefully, these suggestions will help you save a lot more money than you imagined possible.
If your lender refuses to recast the loan and instead provides a regular refinancing, ask for credit for the years you’ve already paid. In a year, you will have already paid $24,000.00 at $2,000.00 each month!
So, ask for a 28-year mortgage and you won’t have to pay for another two years. If your bank would not do it, you may do it yourself by prepaying the loan over a 28-year period.
Another great strategy to save money is to maintain paying your current payment after refinancing. Refinancing a 30-year loan into a 15-year loan may substantially lower your interest costs, but keeping your original payment can accelerate your mortgage and cut it by 3 years or more.
4 Reasons to Refinance Your Mortgage
1. Change Your Loan Term
2. Lower Your Interest Rate
3. Change Your Loan Type
4. Cash Out Your Equity
Should I Refinance My Mortgage?
It is generally wise to refinance if doing so would result in a cheaper interest rate by one percent or more. The break-even point calculation is the most accurate approach to know for sure whether a refinancing is in your best interest. Calculate this by dividing the entire amount of your closing expenses by the amount you expect to save each month. The outcome is the time period during which you will see a return on your refinancing investment.
If you save $150 per month via a refinancing but incur $5,000 in fees, you won’t break even until you’ve made 33 payments ($5,000 / $150 = 33.33). The refinancing is beneficial if you intend to remain in your current house for at least the next three years.
When it comes to refinancing, the Consumer Financial Protection Bureau (CFPB) advises waiting until you can “break even” within two years. A refinancing may be costly, but it’s not a bad idea if you expect to stay in your house beyond the break-even point. If you plan to stay in the house for the foreseeable future following the refinancing, you’ll be able to save more money.