Personal Finance

How To Refinance Your House

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

Your decision to refinance your mortgage is only the first step. If you know what to expect from a mortgage refinance, you’ll have a far better chance of getting what you want out of it and saving money in the process.

There are four major milestones that must be reached by mortgage refinancing applicants before their new loan can be closed.

How to Refinance Your Home Mortgage

Obtaining a mortgage loan of any sort is a lengthy and significant undertaking. Your forethought is essential at this stage. The benefits and drawbacks of refinancing, in general, and for your specific loan’s intended use, must be considered.

Do you require a cash-out refinance to fund a home renovation project, which might result in a higher rate, or are you refinancing to receive a lower rate loan (cutting borrowing expenses relative to your present loan)?

The next, and longest, phase is actually searching for and applying for a new loan. This involves gathering all the paperwork and facts you’ll need to apply for your loan, assessing your loan possibilities, and estimating the cost of your new house mortgage. The entire process will likely take a few weeks.

  1. Identifying the Purpose and Goals of Your Loan

Refinancing a mortgage is a major financial decision that should not be made carelessly. If you’ve made the commitment to do it, you presumably have some sort of end in mind.

However, before moving further, you should evaluate your long-term goals and figure out what you want to accomplish through the refinancing. Prior to it being too late to make a change, you can find a secondary or even tertiary purpose or advantage that changes your approach to the procedure.

  1. Confirm the timing and gather all of the necessary materials.

Now that you know why you need a loan and where you want your money to go, you can check to see whether refinancing makes sense for you. In such a case, you should start putting together your application materials and/or planning out your strategy.

Considering Your Timing and Deciding Whether to Wait

Whenever you decide to refinance your loan will depend heavily on the loan’s original purpose. For those who want to use their home’s equity to fund a sizable renovation — say, a kitchen or bathroom makeover, or even a basement finish — should hold off on doing so until their loan-to-value ratio is low enough to generate a sufficient windfall. Depending on the value of your home, that moment may not come until you’ve lived there for ten years or more (and change in value over time).

If you make your 30-year mortgage payments on schedule for 10 years, you’ll have the $50,000 you need to do a big kitchen redesign, assuming you build up $5,000 in equity each year throughout your first decade as a homeowner (without accounting for a potential increase in equity due to a rise in market value).

If, on the other hand, you want to prevent an increase in your ARM payment, you should refinance far before that time, often between the fifth and seventh year.

Information Gathering and Application Materials

You’ll need a lot of details and paperwork for the refinancing application and closing processes if you decide to go through with it.

  • Evidence of Income The lender may request recent pay stubs, tax returns, or bank statements from you, depending on your job status and income sources.
  • A Recent Home Evaluation. Before closing, your refinancing lender will request a house appraisal, so you do not need to do it yourself. To avoid unpleasant shocks, you may estimate your home’s potential market worth using open-source local sales data.
  • Information about Property Insurance Coverage. In order to package your escrow payment, your lender (and eventually, mortgage servicer) will require information on your homeowner’s insurance. If you haven’t checked your property insurance coverage in more than a year, now is the time to look around for a better bargain.

If your lender needs anything else from you before closing, have it ready. The closing may be jeopardized by the presence of any missing data or by any delays in delivering required papers.

  1. Calculate Your Potential Refinancing Costs

After that, get an approximation of your refinancing expenses by using a free mortgage refinance calculator, such as the one provided by Bank of America.

The primary goal of this computation should be to ensure you can comfortably make your new monthly mortgage payment after the refinancing. This calculation can also verify that your preferred loan term and structure will help you save money on interest during the life of your loan, should that be one of your goals in refinancing. After factoring in the closing fees, the loan should be profitable at the very least.

Calculating the Break-Even Point

The idea of breakeven is straightforward. Refinancing becomes profitable whenever the sum of interest you pay throughout the loan’s term is equal to the amount you paid up front to close the deal.

In economics, the breakeven point is defined as the instant at which you no longer incur any losses. After you’ve reached your refinancing payoff point, whatever further interest you save is essentially a bonus.

The breakeven point is dependent on two variables. To start, a longer loan duration boosts your chances of making a profit. The rate at which your interest rate shifts is much more crucial. The lower your new rate is compared to the rate on your old loan, the more money you’ll save per month and the quicker you’ll get your money back for closing costs.

The moment at which you break even on your mortgage refinancing should be calculated automatically by a decent calculator. If you’d rather not do that, you may figure out when you’ll break even by rounding up the difference between the closing fees of your refinancing loan and the monthly savings over the original loan.

Since you won’t know the precise closing costs or monthly savings from your loan until after you’ve applied and received the loan disclosures, you’re using an estimated range at this time to determine your breakeven point.

One optimistic scenario (closing costs at 2% and a short time to breakeven) and one pessimistic scenario (closing costs at 6% and a long time to breakeven) should be run, as closing costs for a refinance loan can range from 2% to 6% of the refinanced loan’s principal, depending on the origination fee and other large expenses. The true result is probably going to be a compromise between the two extremes.

Keep in mind that if you expect to sell or pay off the loan within two years, or if you can’t cut your interest rate by more than 1.5 to 2 percentage points, refinancing is rarely worthwhile.

  1. Shop, Apply, and Finish

You’ve nearly reached the finish line in your refinancing journey and are now prepared to shop, apply, and finalize the deal. Take your time and follow each stage in sequence, beginning with a concerted attempt to find competitive refinancing quotations, moving on to the application and evaluation process, and then concluding with a closing that seems much quicker than the initial one.

To obtain many quotes quickly, use a Quote Finder (online broker).

First, you may save time and effort by using an online broker like Credible* to get numerous refinancing quotations from banks and mortgage providers. Get the details about your property and your goals ready, such as:

  • Type of property, such as single-family or townhouse
  • Such as primary residence or vacation property.
  • Purpose of the loan, such as decreasing the monthly payment
  • Address zip code
  • Estimated property value and remaining debt on the first mortgage loan
  • Expenditure needs, if any
  • Standard personal data, including projected credit score and date of birth

If your credit is good or excellent, you may anticipate receiving several conditional refinance offers, some of which will arrive immediately and others of which will arrive through email or phone over the following hours and days.

You shouldn’t feel obligated to take any of them, despite the salesperson’s best efforts, but you should keep track of the ones that seem the most interesting to you.

Approach previous banks and lenders you’ve worked with.

Your next step should be to find out if your current mortgage lender, as well as any other financial institutions with which you have an established relationship, provide refinancing loans.

Refinancing loans are available from most financial institutions. A lot of them provide discounted rates for long-term or high-asset customers, but their standard rates aren’t as low as those of direct lenders who don’t have to pay for pricey branch offices. It’s a good idea to make a few phone calls and/or Internet searches.

Within 14 days, apply for several loans.

Until you apply for a refinancing and obtain the formal loan disclosure that all lenders are required to send to every potential borrower, you won’t know the actual cost of any offer.

Although your credit score may momentarily drop if you submit an application for a refinancing loan, you must agree to a hard credit pull in order to properly submit an application. And you shouldn’t finalize your refinancing until you’ve considered many offers to be sure you’re obtaining the best possible rate.

The good news is that the main consumer credit-reporting bureaus aggregate all loan applications for a certain loan type (such home refinancing loans) submitted during a two-week period as a single application, regardless of the final application count.

To paraphrase, if you apply for all of your intended refinancings within two weeks, your credit report will only reflect a single inquiry.

Bottom Line

The simplest way to take advantage of current low interest rates is to refinance your mortgage loan if you are a house owner. It’s also the most promising financially.

However, the low rates of interest now available aren’t the only incentive to consider a mortgage refinance. Many homeowners also refinance in order to get rid of their FHA mortgage insurance, tap into their home’s value, or postpone the first increase on their adjustable-rate mortgage (ARM).

And a refinancing loan might serve several purposes. You can accomplish two goals at once, including lowering your interest rate and monthly payment (and lifetime borrowing costs). If you can lower your monthly payment or total cost of ownership through negotiation, it’s probably worth your time.

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