Refinance Your Mortgage, Without The Stress

What You Should Know About Refinancing

Whether it’s your first home refinance or you’ve not refinanced in a while, it’s a good idea to brush up on the basics. Taking out a new mortgage on an old house is a decision you’ll need to weigh carefully, since there are long term financial ripples to consider. For example, if you’ve been paying down your 30-year fixed mortgage for 10 years, refinancing into a new 30-year mortgage means you’re not only extending your term by another decade, but adding all that interest on, too. But, if you’re about to sell your house and just need to reduce the payment until it finds a new family, well, that’s a different story.

Refinancing is generally done in one of two ways:

1. Traditional refinancing involves replacing your existing home loan with one that has a more favorable rate or term.

2. Cash-out refinancing involves the same changes as traditional refinancing, but with an additional sum of money for the borrower to use at their discretion (like a personal loan).

Just like any other time you borrow money, you should consider both the pros and cons of the home refinancing, both those that impact you immediately and those that may sneak up on you over time. Let’s take a look at some of the benefits, and then we’ll look at the drawbacks.

Refinancing CAN HELP REDUCE YOUR INTEREST RATE AND MONTHLY PAYMENTS

Refinancing can be a smart financial move, especially if you can reap some of these benefits:

• Reducing your interest rate. Although interest rates have been relatively stable since 2012, refinancing is worth a look if your credit is shinier now than it used to be. With a fully polished credit portfolio, you may find that you can improve your interest rate enough that it’s worth a mortgage refinance.

• Locking in your interest rate. Adjustable-rate mortgages can be nerve-wracking, since you never know what to expect from your monthly payment. That’s why most responsible mortgage and real estate professionals recommend only using them for the short term, then refinancing into something with a fixed rate. That way, you have complete control over your finances.

• Reducing your monthly payment. If you’re going through a tough time and your payment is getting to be a bit much, a refinance may be able to give you a little breathing room. You may be able to avoid paying mortgage insurance or simply reduce your payment by spreading the remaining balance of your loan out over another 30 year term.

• Cashing out your equity. Homeowners in areas with rapidly increasing home values may be interested in tapping their equity to help pay for major purchases or upgrades to the property. (There’s also no law against using that money for a jetski, but it’s just a really bad idea.)

• Paying off a mortgage with a balloon. You might have gotten a mortgage that’s amortized over 30 years with a five year balloon, for example. What that means is that you have to pay that puppy in full before the five years are up. The loan holder doesn’t care if you borrow again to do it, so long as you pay it off, and most people end up refinancing to make everything work.

THE RISKS OF HOME REFINANCING

Refinancing isn’t for everyone, and it is a serious financial obligation that you need to really consider. Here are the drawbacks:

• Starting from zero again. When you refinance, the loan’s term starts over, you’ll be at day one of repayment. That means another 30 years of payments on that note unless you sell before it’s paid in full. Do you really want to do that?

• Acquiring additional debt. If you choose to cash out and buy that new minivan with the proceeds, you’re only going deeper in debt. Further, debt on your home can be more serious than other types of debt since it can lead to the dreaded “f” word -- foreclosure.

• Increasing your monthly payment. Along with that additional debt, you may also see a pretty fat increase in your monthly payment -- even if your rate was significantly reduced -- because at certain equity thresholds you’ll also be obligated to pay for extras like mortgage insurance. This is a fairly big drawback.

• Paying more in fees than you gain in rate savings. The math can get kind of complicated, but it’s important that you do it or ask that friend you made in Accounting 101 for their help (in exchange for a bottle of wine and some avocado toast, of course). Often, the improvements to your rate that you’ll earn aren’t worth the additional fees you’ll incur when refinancing. If the fees exceed the savings you’ll see during the time you plan to occupy your home, it’s not a good deal.

• Reduced equity in your home. This one is pretty obvious, but it’s important to stress. During the housing crash of the mid-2000s, a lot of people learned the hard way what happens when you have no equity in your home. You can’t move, for one, but if the market starts to slide, you can’t even sell your house without taking a giant bath. Now, there’s no crime in cashing out some equity to help improve the overall value of your home with improvements, but it’s a careful balance. Leave something for a rainy day.

• Falling into a riskier loan product. When you bought your home, you probably had a Realtor that you could ask about different mortgage products and lenders, so you could avoid walking into a trap. Although many of the worst lending practices have been removed from the market, there are still some really bad loan products out there and the lenders selling them are counting on you not knowing enough about them to see the difference. If you’re going to refinance, run the paperwork by that financial whiz from school (or a real estate professional) to get an honest evaluation.

Developing a Smart Home Refinance Strategy

When you decide to refinance, the process is much the same as it was when you initially applied for your mortgage. Your lender will evaluate your debt to income ratio, your creditworthiness, and your home’s value before deciding if they’re willing to refinance the property. You’ll need the same paperwork as you did to get your initial mortgage, along with the most recent mortgage statement. 

Before you get started, it’s extremely helpful to have a few things ready to help build a solid refinancing strategy:

• Your purpose for refinancing. Knowing what your goals are for refinancing is the key to choosing the best refinancing option. Decide whether you’re adjusting your loan term, changing your rate type, trying to get some extra cash, lowering your monthly payment, etc.

• Your credit score. Most lenders have minimum limits for borrowers to qualify for refinancing. While 620 is a common minimum among lenders, homeowners with lower credit scores can still be eligible for refinancing. (It all depends on the lender.) Make sure you know your credit score by checking with a verified credit reporting company.

• The current value of your home. Knowing how much equity you have (or don’t have) is crucial to finding out your refinancing options. Typically, you cannot refinance a home loan for more than what the home’s worth. This is particularly important for borrowers that are interested in the cash-out refinancing option.

• Your monthly mortgage payment. Always keep your current budget in mind, as this will help you figure out how much you can afford to pay each month.

• Your debt-to-income ratio.  If you combine all of your monthly debt payments and divide them by your gross monthly income, you’ll find your debt-to-income ratio (DTI). Lenders look at a borrower's DTI to assess the borrower’s ability to pay back a loan amount. The higher the DTI, the higher the risk for the lender, and the less likely they’ll want to help you refinance your home. 

In addition, it's important to realize that the program you used to get your initial mortgage may also dictate what kind of refinancing you’re able to do. Although FHA and conforming conventional loans bought by Fannie Mae will always refinance USDA and VA loans, the reverse isn’t always true. In fact, USDA will only refinance USDA loans. 

Here’s a chart with details on refinancing:

As you can see, for the most part, common loan programs will refinance one another, but if you’re a veteran or live in a rural area, you need to ask the right questions to be sure you’re able to complete the refinance you have in mind.

Streamline Refinance Versus Traditional Refinance

Another point to ponder when you’re considering a refinance is whether you’ll do a streamline refinance or a traditional refinance. Some loan programs have specially built programs, like the FHA streamline refinance program, or the VA streamline refinance program, that can help you restructure your loan without a ton of stress. But, like anything, there are pros and cons to each type of refinancing, so you should weigh your options before deciding which route to go. See below:

How to Choose Your Refinance Lender

Once you’ve found a few lenders that align with your refinancing goals, the next step is to reach out to them to get more detailed quotes and details of their refinancing plans. This is the time to ask the important questions that will ultimately influence your final choice. Homebuyers should find out:

• The availability of representatives. Entering a long-term loan agreement rarely ends at the closing. You’ll want to make sure that you can reach your lender when you need to.

• Who will be servicing the loan. There are some lenders that sell your loan to another company after closing. Know who will be servicing your loan, and what to expect from that entity moving forward. 

• What the rates and fees are. Shopping around for the best rates is important, but homeowners should also ask about any other fees or costs they may face. Note that lower rates and great service don’t always go hand in hand. Look for the best option, not the cheapest.

• How the process must be completed. You can accomplish most things online these days, but not all lenders have full online support for their loan application. Borrowers may be required to travel to a branch location for the closing.

• How long the process will take. The time it takes to successfully complete a loan application and enter into a loan agreement varies by lender. Depending on your time limitations, you might want to find a lender that prioritizes your loan and gets it processed faster.

• How past customers have reviewed the lender. Nothing beats reviews from people who have experienced working with the lender firsthand. See what others have said about the service and the experience in general. Some lenders may not have lived up to client expectations, and you might save yourself some trouble!

Fees are an often-overlooked aspect of refinancing. Refinancing costs usually fall between 2% and 3% of the borrowed amount. It’s important to discuss with your lender how this fee will be paid. Some lenders will require it up front, but most tend to add it to the total amount that must be paid back.

Always check potential fees before choosing a home refinance lender 

Regardless of what fees you may be charged, it’s wise to compare the costs to what you pay now. This will help you figure out how much you actually save. Other fees can include, but are not limited to:

• Application fees

• Property appraisal fees

• Property inspection fees

• Attorney fees

• Closing fees

• Title search fees

• Insurance fees

what you might need to apply for a home refinance

If you decide to refinance, you'll basically be applying for a new home loan-- and that means you'll need some documentation. The documents most commonly requested by lenders for mortgage refinancing are:

• Social Security card

• State identification

• 3 most recent pay stubs

• 2 most recent W2s

• 2 most recent bank statements

• Credit card statements

• Loan statements

• Homeowner's insurance

• A list of any/all assets

• Retirement and investment accounts

HARP Refinancing May Be Your Best Solution

There’s one other type of refinance still kicking around that a limited number of homeowners are eligible to use. The Home Affordable Refinance Program (HARP) was started in 2009 in response to all the homeowners who were losing their homes or simply walking away because they had so much negative equity that they couldn’t sell.  Unlike some other programs, HARP refinancing has no minimum credit score threshold, so even if you have bad credit, you might be able to take advantage of the program. 

In the last few years, many HARP participants have adjustable rate mortgages, which they planned to refinance before the rate adjusted, but hey -- the real estate market imploded before they could refinance. It was a really dark time. (We don’t like to talk about it. #RealEstateDarkAges.)

Due to that disaster, the HARP program lingers. Currently, it’s slated to go offline on December 31, 2018, but it’s already been extended a few times. Still, if this sounds like a good fit for your situation, take advantage while you can. You’ll need:

• A totally perfect mortgage payment history for the last six months

• No more than one mortgage late payment in the last year

• A loan originated before May 31, 2009

• Freddie Mac or Fannie Mae-owned loan

• LTV ratio greater than 80 percent

Stay updated on the HARP program here,  or call Fannie or Freddie to find out if your loan is eligible for the program. It’s easier than ever to qualify-- and, since the program was started, it's helped a whopping 3.4 million Americans refinance their homes. Plus, over time, it can help homeowners rebuild the equity in their home. So, if your loan is from those #RealEstateDarkAges, HARP refinancing could be worth looking into. 

Understanding Your Rights When You Refinance

Refinancing your primary residence is a lot like buying a new home, in ways. There’s something very specifically different that a lot of lenders like to gloss over because they really don’t want you to consider it an option: your right of rescission.

The right of rescission, in layman’s terms, is your right to cancel your refinance for any reason in the three days after closing. It gives you a little time to look over the paperwork, make sure you made the right decision, and ensure that your lender didn’t commit any monkey business when you weren’t looking.

It’s important to note that this only applies to refinance loans made by a new lender; streamline refinances (when you’re refinancing with your original lender for better terms) do not automatically have the right of rescission. Theoretically, you have a relationship with your streamlining lender and you know they’re going to do you right. A new lender, on the other hand, is a stranger.

You have to make your intent to undo the refinance you just completed very clear, in writing, and document it well (an overnight postal letter with delivery confirmation is a great way to do this). When the new lender gets your notice, they’re obligated to turn back time, including returning any fees paid within 20 days.

Your old lender will take you back (of course they will -- you were all they ever wanted and all they ever needed).

When is it Time to Refinance? 

Choosing to refinance or not is a very personal choice, much like any other financial decision. Going into it with as much information as possible can make the process much easier. While some people decide to never refinance their home, others choose to refinance their home multiple times in order to to help further their financial and family goals. When it comes to refinancing, it makes sense to shop around, since rates and fees vary. If you shop for those loans around the same time, you can avoid your credit taking a beating.

And, hey, if you need anything else, let us know. Home.Loans is here to help you with these difficult financial questions. We can’t tell you what’s right for your family, but we can help you figure out the difference between the APR and the APY or what the heck a title search is for. Get in touch with our team today!

Mortgage Refinancing Knowledge Base