Refinancing a mortgage is the process of acquiring a new loan to pay off an existing lender.
Refinance Articles / Resources:
A mortgage is generally the largest debt most homeowners have to manage, and it is a good idea to give your personal real estate finance portfolio a check-up at least once a year.
Since there are several reasons a homeowner may choose to refinance, we’ll take a look at the top four circumstances.
A drop in mortgage rates, a desire to shorten the current term of required mortgage payments, to consolidate debt, to ride yourself of pending interest rate adjustments or a balloon payment are four of the most popular reasons to choose a refinance.
…..(read more about Four Possible Reasons to Refinance)
Calculating the net benefit of refinancing can be a challenging task if you do not understand what to calculate.
We are going to focus on the net benefits of refinancing from the standpoint of lowering your interest rate.
Although there are several reasons to refinance, lowering your mortgage rate to save on interest payments over a specific term, is popular.
Calculating the actual savings can be a tricky chore unless you know the difference between cash flow savings and interest savings.
For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit (HELOC), or do a cash-out refinance.
A Home Equity Loan is similar to the Line of Credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed.
Both a Line and a Loan would hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage.”
Since second mortgages are paid after the first lien holder (in the case of default foreclosure or short sale), interest rates are generally higher than First Mortgage rates in order to justify the risk.
Fees, Interest Rate, and Timelines are the three main factors to consider when choosing which option is best for your personal set of needs and goals.
Frequently Asked Questions:
However, there is a way to structure a closing cost and interest rate scenario that will decrease the amount of fees, or how a borrower pays them.
Basically, the costs to produce the new mortgage are either financed into the loan amount, or covered by the lender in exchange for a slightly higher interest rate, or covers by the borrower at the time of loan closing.
Deciding on the best option involves weighing the difference in cost up-front, vs the increased monthly payment over a set period of time.
Q: How long do I have to wait to refinance after a purchase transaction?
Typically the general rule-of-thumb is 6 to 9 months, but there may be exceptions! It is always recommended that you review your existing Note to make sure there are no pre-payment penalties.
Another thing to consider is the cost of refinancing. If you’re watching the market and are considering refinancing to lock in a lower rate in the near future, it may be more cost effective to pay a discount point up front, for a lower rate now, vs paying for a full refinance a few months later.
Q: I heard that I should only refinance if I drop 1% on my mortgage, is that true?
Some people say ½%, 1%, to never. Every mortgage is different and everyones goals and needs change, so we recommend a no cost consultation to help you make the right decision.
Q: Why can’t I just compare my current payment to the proposed payment and figure out my net benefit?
You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations. Let’s say you have a 15 year mortgage currently and you are comparing to a 30 year mortgage.
If everything else is the same (interest rate, loan amount, etc) except for the amortization your interest savings per month would be $0 but, you are going to show a cash flow savings because of the longer amortization. Again, we recommend a free consultation so that all aspects of costs and terms can be matched to your new set of circumstances.
Q: Do I have to refinance with my current mortgage company?
No, you may choose to shop the rates and programs of any number of companies, however each bank or lender that you call, will require a new credit report be run in order to provide you with an actual quote. As a Mortgage Brokerage company that is approved with many of the large banks and lending institutions, we have the ability to shop for, and deliver the same Big Bank loans, for less than they can, without you having to run all over town. We can do this because we don’t have the high costs of all the brick and mortar or executive salaries to contend with.
Q: Is it easier to refinance with my current mortgage company?
Sometimes your current company can reduce the documentation that is required, but this usually comes at increased costs and interest rate.
Q: Will I automatically qualify?
No, in most cases you will have to qualify for your new refinance, unless you have an FHA or VA loan and are looking to take advantage of a lower rate, or a shorter term. If you have a government loan, you may be able to Streamline Refinance without having to provide tax returns, pay stubs, or even order an appraisal. Again, a quick no obligation call can better answer this question.