The top 15 Questions about Refinancing your Home
1. Why should I refinance my mortgage?
When interest rates drop it's usually a good time to refinance your mortgage. You want the new rate to be lower than the rate you already have. There is no hard fast rule to how much lower the new rate needs to be but generally as long as your new payment is lower by 100.00 to 200.00 it is enough of a benefit to justify the cost.
You may also wish to take cash out to consolidate a second mortgage or consumer debt, do home improvements or use for other reasons. You can dramatically increase your monthly cash flow by paying off debt and lowering your interest rate.
2. What will my new payment be?
Your new payment will be determined by the new interest rate and the length of time you choose to pay the loan back. Common terms are for 30, 15 and 10 year fixed rate loans.
Your payment should be low enough to realize a monthly savings that will justify at least a 24 month break even period.
To get an idea of what your new payment might be, use this mortgage refinance calculator.
3. Do I have to start all over again with a new loan? Why do that?
With most loans, a larger percentage of interest is collected in the first 10 years of the term of the loan. If you have not had your loan for very long and rates go down, it may be a good time to secure a lower fixed rate. Rates may never go lower, you don’t know.
If you have had your loan for 7 years or longer then there should be a particular goal that the home owner is trying to accomplish. This is perhaps where a highly qualified mortgage planner / consultant such as myself can help you.
4. What are my loan options?
Knowing your immediate and long term goals is important. Anyone worth their salt should ask you about your goals and what is most important to you going forward. Mortgage planning encompasses taking in account your career goals, financial goals, goals for your family, helping your parents in retirement and securing your own retirement.
The best consultants are the best listeners. Helping you to achieve your goals is what’s most important.
5. How much does refinancing cost and what are the fees?
This depends- Generally the fee to refinance 250k to 453k is around $2,400-$3,100.00. That does not include pre-paids or reoccurring closing costs.
Mortgage interest is collected in advance and hazard insurance will need to be renewed for one year if your policy is coming due within the next 3 months.
If your taxes and insurance are included in your payment then you will need to fund an escrow account. To set this up you will be paying for your next property tax installment in advance into a separate account, usually about 6 months or 1 installment. Homeowners insurance will also be collected.
Sometimes you will skip a mortgage payment; this is because prepaid mortgage interest is being collected in advance of your new loan closing.
The appraisal is usually paid for at the time of appraisal being ordered and the cost is $450-$500. Sometimes it can be more.
6. What do I have to pay for out of my own pocket?
Fees are often included in the new loan so you do not have to pay “out of pocket” (except the appraisal, which is usually paid for on a credit card).
Sometimes it is not possible to get all the fees included in the new loan and you will have to come in with some funds. Usually this is the case when the loan-to-value and the current loan balance are very close to being the same. Example: $100,000 house has a $80k loan balance and the new loan can’t exceed $80k to avoid mortgage insurance. In this case there is no room to cover the closing costs; the house would have to appraise for more than $100k.
7. How does a Mortgage broker get paid and what are Lender Credits?
The new lender pays the mortgage consultant a preset compensation fee. This is what is known as an origination fee. Generally – you do not pay this, the new lender does. In addition, there may be lender credits to you depending on the rate you choose. These credits are applied towards your closing costs and cannot be kept by the originator.
8. What is a “no cost” loan?
When rates go down, sometimes the new market rate can be much lower than your current rate. If you have a 5% interest rate, and the new rate with closing costs added to the new loan balance is 4%, it may make sense to opt for a rate that is slightly higher. This will help you to keep your current loan balance the same without increasing your current loan balance with a new loan.
Loan Amount Rate Payment
Current loan: $350k @ 5% → $1,878.00 - $350k was the original balance and $325k is the current balance
New Loan: $325k @ 4% → $1,670.00 - cost is $2,800.00 (non-reoccurring hard fees)
NO COST: $325k @ 4.125 → $1,696.00 - cost of loan is covered by choosing the higher rate. In this scenario you will come in with your taxes and insurance to keep your new loan balance at $325k.
This is a very general example. The spread between the “no cost rate” and “par” rate can be different from lender to lender and depending on what the market rate is.
9. What are points and why would I ever pay for them?
You have the option to “buy a rate down”. Usually the cost is so expensive that it rarely makes sense, especially when market rates have been as low as they have been.
Sometimes you will have to pay all or part of a discount point when the scenario is such that to qualify for a new loan, the rate on the rate sheet is not “par” after lender compensation. In that scenario you may want to consider a borrower paid option where the mortgage consultant is paid by you and not the bank. This can work out in your favor.
10. Do I need an appraisal?
Not always. Sometimes desk top underwriter and loan prospector will return findings with an appraisal waiver. In such a case an appraisal is not required. I have found that this depends on the loan-to-value (the lower the better) and the age of the home. You also need to be sure the correct postal address is entered into DU or LP.
11. What is a Lenders Estimate of fees?
This is known as a LE or lenders estimate of fees. You will see several of these during the course of your transaction. The LE’s purpose is to disclose the fees of the loan and cannot change. Often these will be “over disclosed”, in other words, the fees being disclosed are more than they will actually be at closing. The reason for this is that loan originators do not want to have to pay for your fees out of their own pocket which is what happens if anything gets missed.
When you get lender estimates and other disclosures, it is important for you to know that you must acknowledge them and sign them as soon as you get them. Your loan consultant should give you guidance regarding this.
12. Why are there 2 interest rates on my lenders estimate?
There will always be 2 interest rates on your Lender Estimates, Truth in Lending and Closing Disclosures.
This is the way California state discloses to you that you are financing fees to close a new home loan.
The purpose here is to make you aware that there are fees associated with your new home loan and that you are financing them into the new balance of your loan.
There is a “note rate” and “APR rate”. The APR is almost always higher than the note rate but is not the actual rate you are paying for the money you are borrowing. The note rate is what is most important.
13. What is the process of refinancing and how long will it take?
- Application – right away. In person or by phone with your loan consultant, you will need to send your mortgage consultant requested documents and sign a loan application with disclosures. This can be many pages but usually done electronically so it shouldn’t be too much trouble.
- Lender Estimate- 1st week- you will need to sign this ASAP as soon as you get them from the lender usually by email.
- Underwriting – occurs during the 2nd week; this takes 48 to 78 hours
- Appraisal – by the end of 2nd or 3rd week during the transaction.
- Conditions – week 3- after file is looked at by underwriter there almost always will be some additional documentation needed to validate what is on the application
- Closing disclosure- should go out sometime during the 3rd week of processing your loan.
- Docs ordered -week 4
- Sign to close. During week 4
- Fund and record.- All done. You should get a check (if cash coming back to you) within days of closing
14. Can I add someone else on to my loan?
Yes – if you are not taking cash out you need to be sure that at least one of the borrowers of the new loan is on the title of the home. You can add someone just before you apply for a home loan. If you want to take money out one of the original borrowers must have been on the title of the property for at least 6 months.
15. Will my credit score drop if I have my credit checked?
You have 30 days to have as many mortgage related inquires as you would like. After 30 days at the beginning of the next reporting cycle your score will absorb a 4-7 point drop in fico score.