Refinance is getting a new loan that pays off the balance of your current mortgage. With this type of loan, you can access your home’s equity or get more favorable terms on your mortgage. If you plan on using your home equity, you must qualify for a loan that is higher than the balance left in your mortgage. If you don’t cash in your equity, a “no cash-out” refinance lets you get a better interest rate and either shorten or lengthen your repayment terms.
Before you decide if home mortgage refinancing is right for you, talk with a loan officer. Some things to consider are whether refinancing is appropriate for your situation, how much benefit you will derive from the refinance, and how to avoid falling deeper into any potential pitfalls. The right loan officer will help you throughout the refinancing process. By asking the right questions, you can choose the best lending option for your situation.
Factors That Influence Mortgage Refinancing
Not all mortgage refinancing options look the same. There are many factors that can affect your available options. When refinancing, your new home loan should look better than the original mortgage or you should be able to access much of the estimated equity in your home. Overall, refinancing has many advantages, some of which include:
● Lower monthly mortgage payments. This is one of the main reasons people refinance their mortgage. When you work with the right lender, the process should lower your interest and overall payments. This savings makes refinancing worth it in the long run. To figure out if refinancing can help you out, talk with a professional about the break-even point and how a refinance can help you.
● Avoidance of private mortgage insurance (PMI). If you choose a down payment of less than 20%, you will often have to pay for PMI. If the value of the home increases and your house’s balance decreases, you may be able to request the cancellation of the PMI, which the lender usually decides.
● Increased home equity. The value increase of your home and the reduction of your loan balance also results in higher home equity, which you can cash in to reach numerous financial goals. Home equity may be used for paying for education, medical bills, or retirement.
At the beginning of the refinancing process, your credit score should be in good standing. If your credit isn’t, there are some measures you can take to improve your score. Talk with your lender about strategies that could help get your score to the place where you would qualify for a refinance.
Even if your credit score is passable, you may want to consider making improvements to get better loan terms. Regardless of whether you decide to refinance, improving your credit score can open up many other home-buying opportunities. Your loan officer can discuss how your credit score will affect your interest rate.
Questions to Ask Before a Refinance of Your Home Loan
If you’ve decided that a refinance is the best option for you, here are some questions to ask your lender before signing on the dotted line.
1. What Are the Closing Costs?
Not unlike your current home mortgage, the refinancing process will also include some fees you will have to pay: the closing costs. A loan officer can help you figure out how much refinancing will cost beforehand by outlining these fees.
When you consult with your lender about closing fees, ask for a detailed estimate. Because lenders set some of the fees they charge, you should verify the rates and fees of at least three lenders. This way, you can measure your options and decide what fees and lender are best for you.
Some closing fees are mandatory and remain consistent for all lenders you consult. These fees include:
● Third-party appraisal fees. You will pay these costs to the appraisal company to confirm your home’s market value.
● Flood certification. A third party determines if the home is in a flood zone.
● Titles fees. The title company charges these fees for their numerous services, such as search of the property’s record and handling the closing procedure.
● Recording fees. A fee paid to the county for the registration of land records.
● Transfer taxes. The tax paid when a seller passes the title to the buyer.
The lender decides the other fees, which vary. The most common of these costs include:
● Origination fee. Also known as the underwriting fee, the lender charges this fee based on preparing and evaluating the loan.
● Application fee. This is a charge made by the lender for checking a borrower’s credit report, as well as the initial cost for the processing of the loan request. This fee depends on the lender’s work.
● Lender’s attorney fee. The lawyer who oversees and conducts the closing will charge the lender, and the lender passes that charge on to you. This fee depends on the number of hours the attorney works on the file.
The overall closing fees for a refinance varies, but they usually cost between 3% and 5% of your original mortgage amount. In general, if you borrow $200,000, you can expect between $6,000 and $10,000 as the closing fee. For example, as a Seattle, WA resident, if you had a mortgage loan of $250,000 and you paid a 20% down payment on a 30-year fixed loan plan, you would have around $8,992 in closing costs.
2. Are There Any Additional Fees Besides the Closing Costs?
Refinancing can be a great option, but, depending on the details of the closing and your lender, there may be additional fees. Ask your loan officer about any additional costs you are responsible for, since some of them are included in your closing fee estimate or may appear as separate costs,
A refinance is a mortgage loan purchase, just like your current mortgage. If you don’t like the terms, you can shop around and look for a better one. Some of these additional fees you might see include the insurance and the property survey, a fee that depends on the location and measurement of the property’s boundaries.
3. Can I Prepay Without Penalty?
If you are interested in paying your refinanced mortgage as fast as possible and ensuring that you lower your interest rate, consider prepaying. However, ask your lender about whether there are penalties associated with prepaying – it may be costlier than going the traditional route. Lenders usually include these prepayment penalties in the mortgage contract, and the law requires the lenders to disclose the fees by the time the contract reaches closure with the borrower.
Ask about the prepayment penalty with each loan officer you are trying out. This fee varies depending on the lender. Some lenders charge this penalty on a fixed rate, while others base it on the percentage of the mortgage balance that remains. The latter charging option can also depend on the loan’s length of time. Certain loan options charge the penalty based on the interest rate they would have potentially earned if the loan lasted the entire term, usually months’ worth of interest.
For instance, you may have to pay six months’ worth of interest if you finish paying off your loan early. The penalty can add a significant cost to your mortgage refinance. For best results, remain aware of each lender’s prepayment penalty specifics and decide whether the added cost is worth paying off the mortgage earlier and getting a lower interest rate.
4. When Can I Lock My Mortgage Rate?
One method of protecting yourself against higher mortgage rates during the refinance process is by locking in your rate. The rate lock temporarily freezes the rate, which the lender can guarantee to the borrower during the process, with some exceptions. Usually, you can lock in your mortgage rate at any point during the mortgage refinance once you reach your approval.
You may have to decide the exact time you want to freeze it, since some borrowers fear doing it too early or too late can cause them to miss out on lower rates. Some borrowers wait until near the closing process to freeze the rate, while others take care of the process as soon as possible since the rate usually increases. These locks tend to last between 30 to 60 days, but some last for as long as the lender decides.
Even the smallest rate difference can mean a large amount of money either saved or spent in the long term – and all mortgages are long-term investments. In addition, a loan officer can educate you on any rules to rate locks, such as how long the locks can last and if they are free or if there is a charge for either using them or for extending the date. Generally, the longer a rate lock lasts, the more expensive it might end up.
5. How Long Does It Take for the Refinance to Close?
The refinancing process usually resembles the same one you went through when you first bought your home – just without the guidance of a real estate agent. However, just because the refinance closing is simpler than the purchase loan does not mean that the procedure is always straightforward, and it may take a while for your refinance application to reach approval.
For example, the loan officer might want to run an assessment of the value of your home before refinancing. This means the closing of your refinance will have to wait for your home’s new appraisal. Ask about this process as soon as possible to get a clear picture of how long this process will take and the steps of the entire refinance process you can expect.
The closing process usually follows an expected pattern, no matter the length of refinancing. By this point, your lender will likely complete your new home appraisal and lock your mortgage rate. Your lender will give you a closing disclosure that details your loan, payment, and closing fees you must pay. You have up to three days to review the disclosure before you sign the final paperwork.
The closing of the refinance requires the attendance of the people included in the loan, as well as the representative of the title company, and your attorney, if you choose not to attend. Bring your closing disclosure, for all parties involved to check the final paperwork, as well as a valid form of ID (driver’s license, passport, etc.), and cash or check to pay your closing fees. Once you review and sign your paperwork and the lender signs as well, the closing procedure is complete.
Signing of the refinance may not be your final step, however. If you have second thoughts, you can invoke the borrower’s right of rescission, which allows you up to three days to cancel the refinance. If the loan officer sees your credit or finances have significantly changed, the underwriter also has the right to cancel the loan.
Final Thoughts on Why it’s Important to Ask the Lender Questions Before Refinancing
Overall, these are the main questions that would be beneficial to ask a loan officer before considering refinancing a home. There is no harm in asking more questions and trying to understand all available options.
While mortgage refinancing presents you with an opportunity to receive lower interest rates, clear off a debt, and pay a new one, it can affect your financial situation if you do not handle it correctly. By asking the right questions and working with a trustworthy industry professional, you can gain the useful information needed to make the right decision.
A mortgage refinance loan is a great way to use the equity in your home for more financial stability or to improve your home. This process allows you to pay off the first loan in full and obtain a completely new loan. This second loan is a great way to get improved interest rates and terms over your first loan such as turning a variable interest rate loan into one with a fixed APR.
About the Author:
This article was provided by Sammamish Mortgage, a 27+ year old Premiere Mortgage Company in Pacific Northwest including WA, ID, OR, CO.
