This guide is a building block intended to help those who know nothing or have very little prior knowledge on the subject. Those who are better versed, we hope will still find value in this piece that delves into the topic of mortgage refinance.
What is a mortgage? Basic Info:
A mortgage is a loan taken out by a borrower (new homeowner) from a financial institute, including a mortgage company, think Quicken Loans, a commercial bank, or in some cases another financial institution (example: federal housing loan). Should a borrower meet the lenders’ criteria for a loan; criteria include credit score, income (ability to pay the loan back),
Choose the Right Loan Option
There are different loan options to consider when it comes to mortgages there are a variety of loans. The most basic distinction comes in the form of either fixed-rate or adjustable-rate mortgages, the difference, of course, being that a fixed-rate mortgage’s interest rates do not change over time. whereas an adjustable-rate does.
Within adjustable-rate mortgage policies (ARM’s) there is a degree of variation as well, some ARM’s set a cap on how high-interest rates can climb, while also limiting how low your interest rates can get as well. The important thing to remember about ARM’s is that they are partially based on a broader market of interest rates that forms an index.
Should you decide to go with an ARM it is important to get the information regarding cap’s on interest rates, frequency of adjustment, how high payments can go with each adjustment from lenders before taking out the mortgage.
Length of a Loan
Another area of discrepancy among mortgages is the difference in the length of a loan, the most common loan for a home mortgage is a 30 year fixed interest loan, some people take 15-year mortgage’s. While others take even shorter payment periods, and all the same, others take 40-year mortgages.
As with anything connected to a mortgage loan option, the best option for homeowners to take depends on a variety of factors which include: personal preference, the amount of your down payment, as well as the potential for you as a borrower to qualify for special loan programs.
The Financing Process
The mortgage financing process is comprised of a few basic steps which look like this; after making an offer on a home that has been accepted by the seller of the home, borrowers should than proceed at this time to get loan estimates from a variety of lenders across the different financial institution branches (mortgage specialist, commercial bank). Following the sale of the home from the previous owners to the current owners, current owners must have the house inspected and begin to look for homeowner’s insurance. Lenders will then order a home appraisal to ensure that the property is worth the amount being borrowed on it. After the above has been completed and the mortgage is approved the last step to complete is the signing of the closing documents.
2nd Mortgage
It is important to note that a 2nd mortgage can be taken out on a home, allowing owners to borrow against the property value of their own homes.
The payment of 2nd mortgages comes in several forms the most common of which, lump-sum pays homeowners with a one-time payment, which they can use for their heart’s desire, repayment terms can vary but are typically paid over a while most commonly fixed monthly payments.
A 2nd mortgage can also be refinanced but is typically more difficult to be approved for than a first mortgage refinancing an outcome resulting from risk. A 2nd lender will not receive payment should you default until the primary mortgage lender has received all of their money.
Another less-common, term of repayment is borrowing on a line of credit, theoretically, you don’t have to take any money out but you do have access to the credit and the lender should set a maximum borrowing limit on that line of credit; much like a credit card debt can be accrued and then paid off allowing for an indefinite amount of withdrawals.
Reverse Mortgage
A loan that you do not have to pay back while you live in the home with the reverse mortgage taken out on it, the loan is repaid when the borrower sells the home/moves away or dies. Reverse mortgages are available to homeowners 62 and older.
Mortgage Refinance, WHY, HOW?
After reading the first section of this page it may seem unwise to even consider going through the mortgage process again, for that we say there are plenty of reasons why one might wish to refinance their mortgage. Below you will find an overview of what a mortgage refinancing is and entails, as well as information on why you might want to refinance your mortgage, and though similar to the original process of getting a mortgage, how to get a mortgage refinanced, a general overview of sorts is included as well.
Mortgage Refinancing- What it is and How to?
Refinancing a mortgage simply entails paying off the existing loan on your current mortgage and replacing that mortgage with a new one. The primary benefit of refinancing a mortgage is the ability to get the refinanced mortgage on new more beneficial terms, which are in some way beneficial to borrowers. this can be the result of several things including a change in the interest market index, an increase in the value of the home that is being refinanced or even simply to change the length of the mortgage loan.
When Should You Refinance?
Refinancing is wise when it proves to be financially beneficial to restructure your loan due to a variety of factors; mortgage rates are going down, a homes equity increases, improved credit rating provides the opportunity for a lower interest loan.
If you have an adjustable-rate mortgage and interest rates are increasing it would be beneficial to try and refinance your mortgage to a fixed-rate loan. In addition to lowering the interest rate on your mortgage (saving you money) mortgage refinancing a mortgage allows for a deal of loan restructuring, for those who would like to pay less each month a longer mortgage is a good idea, for those who have the means and would like to pay their home off quicker with less money lost to interest, mortgage refinancing to a short term (from a 30 yr to 15) is something to consider.
When Should You Avoid Refinancing?
There are times when refinancing a mortgage is not a wise decision and will likely result in more loss than gain.
The three main categories of homeowner who should consider sticking with their original mortgage and avoid refinancing, according to the Federal Reserve’s Guide to mortgage refinancing are those who have had their mortgage for a long time; the reason being that due to amortization those who refinance late in the mortgage are setting themselves back by restarting the amortization process and thus paying money back on interest rates as opposed to earning equity.
Another reason for not refinancing your mortgage is if you plan on moving shortly after refinancing. Despite the potential for lower monthly payments a mortgage refinance may end up costing you more than you save, check out this break-even calculation reference to help you with your decision.
Types of Refinancing
Below you will find an overview of the entire mortgage refinancing process as there are several steps that you, as a homeowner should take before, during, and after refinancing your loan, which includes:
Setting clear financial goals
Don’t simply refinance for the sake of refinancing, there should be a specific financial future related reason behind why you are considering refinancing (shorter loan term, lower payments = money saved).
Make sure you qualify for a mortgage refinance
Just as borrowers need to apply to take out an initial mortgage loan, borrowers will also need to apply for a mortgage refinance . Having a good credit score is crucial if your credit is not up to par consider improving your credit situation before trying to refinance a mortgage.
Determine your home equity
An important part of the refinancing process is to figure out the value of your home equity. Home equity is the value of your home above what you owe the bank on your mortgage.
Home equity can be calculated by checking your latest mortgage statement and subsequently finding your current balance owed, then either check home value sites like Zillow or Trulia which grant easy access to an approximation of your home value.
If you want a more accurate (albeit more expensive) form of an appraisal, look into hiring a real estate agent or, a more specified home appraiser who is licensed/certified to provide fair and objective appraisals.
Your home equity is the result of the difference between your balance owed and the appraised value of your home. An example of calculating home equity is as follows: If you, a homeowner, have a current balance on your mortgage of $150,000 and your home is valued at $320,000 your home equity is then $170,000.
Shop lenders
Similar to an initial mortgage, when refinancing a mortgage it is advisable to check out multiple lenders and determine which option is best for you and your family financially.
Things to look for when considering a lender for a mortgage refinance are the interest rates (duh!) which for those looking to spend less and save money is a crucial factor. If mortgage rates are down (rates are determined by the various lenders, due to competition they remain relatively uniform around 3-4% as of January 2020).
Additional important factors to compare when shopping between various lenders are of course the reputation of the financial institution you are borrowing from; just as banks screen borrowers, homeowners should screen lenders before refinancing.
Loan repayment terms may differ between lenders as well and is something to look into whilst making a mortgage refinancing decision. After finding the lender that is right for your particular situation the next step is to apply for a mortgage refinance , sending the lender any required documents, as well as locking in on a set interest rate. If your loan is approved, the final steps are the closing steps which include an appraisal, fees, and signing of paperwork.
Factoring cost
After applying for a refinanced home mortgage the next step is to get your home appraised. Both the application and the appraisal have fees ranging from $250 to $600 a piece, there is also a loan originator and document preparation fee that typically hovers at around 1% of the total value of the loan, $3,000 for a $300,000 loan.
Additional fees that can add to the cost of refinancing are city/county recording fees these are a small fee usually between $25 and $200. All in all, homeowners can be prepared to shell out as much as $5,000 in order to refinance their house, numbers are typically lower but expect to pay into the several thousand.
Conclusion
Mortgage refinance can be a prudent financial decision, as long as you understand your reasoning for refinancing and it is providing you financial benefit. You should also do your research on lenders, and make sure to choose the plan that is right for you.
We hope that this guide taught you everything that you need to know to refinance mortgage properly, however, the links that were included in this paper are government authoritarian links that have troves of information should you need something more specific.
