Mortgages

How to Refinance Your Mortgage: Complete Guide

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Are you a homeowner? As you pay down your mortgage, you start to acquire equity in your home. If you initially purchased tour home for $300,000, and over that last 10-years, you paid off $100,000 on your home loan, then you now have $100,000 of equity in your mortgage.

This figure doesn’t take into account the interest payments or the appreciation in your homes market value, but you will still have the equity available. When you refinance your mortgage, you gain access to the capital, which is $100,000 in this case.

You are free to use this cash in any manner you see fit. You could place a down payment on investment property, remodel your kitchen, or settle other debts with higher APR, such as credit card facilities.

When you refinance your home, it’s a far easier process than applying for a home loan. The banks use the real estate as collateral in the deal, and should you default, they foreclose of your home and sell it to cover the outstanding debt.

If you’re looking into refinancing, then here’s everything you need to know to ensure you get the best deal possible.

What to Know Before You Refinance

There are a few things you need to be aware of before you decide to refinance. Some lenders may charge you a hefty penalty for refinancing your original mortgage, or you pay it off too soon. This calculation is the difference between the appraised value of your home and the money you owe the lender.

In some cases, these fees can extend into the thousands of dollars. Before you decide to refinance, check with your lender to see if they have any charges or penalties for refinancing. Your credit score also plays a significant role in your refinancing deal. If it’s been a while since you looked at your score, then it’s vital that you check your credit report before applying for a refi deal.

When looking to improve your credit score, there are a few beneficial actions you can take. Shop around for a balance transfer card to pay off your outstanding credit card facilities. Consolidate any student loans to a favorable interest rate, and cut back on your expenses to improve your debt-to-income ratio.

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Understanding the Costs of Your Mortgage

Before you decide to sign any refinancing documents with a lender, it’s vital that you know the costs involved in your present mortgage. Compare your current interest payments against what you would pay on a new mortgage. This exercise allows you to make a better decision around paying off your debt.

Find a mortgage calculator online and use it to calculate the components of your mortgage, such as interest, transfer fees, and closing costs. Understanding all of the elements of your mortgage, and the refinancing allows you to see if you are getting a good deal, or if the new loan does not make any financial sense. If you refinance into a higher interest rate, or you take an extended mortgage period longer than your original term, it could end up costing you thousands of dollars more than your original facility.

Shop Around with Lenders for Better Interest Rates

If you find that you have a good credit score that’s above the 700-mark, you may gain some benefit from shopping around for your refinancing deal. In today economy, banks and lenders are desperate for your business. If you play one lender off against others, it may end up with one of them, offering you a better deal to secure your business.

Before you start shopping around, make sure you have the following paperwork in order.

  • Identity cards, driver’s license, or your passport.
  • Proof of residence.
  • Your last six payslips.
  • 6-months of bank statements
  • Your previous two tax returns.
  • Profit and loss statement and company account statements for self-employed individuals.

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Understand the Real Costs Involved with Refinancing

When applying for your refi deal, there’s more to pay attention to than the loan estimate. Always be on the lookout for hidden fees which can account for up to 6-percent of the loan value. Some examples of charges to include in your costing analysis include;

  • Appraisal fees.
  • Credit report fees.
  • Application fees.
  • Tax transfer, underwriting, and insurance fees.
  • Title research fees.
  • Document processing fees.

It’s important to note that if your original mortgage included PMI, (Private Mortgage Insurance), then you’ll need to cover this cost as well.

Your Options for Mortgage Refinance

There are various mortgage refinancing options available to you to meet your financial needs and goals. Here is a rundown of the options available.

Cash-Out Refinance

These facilities provide you with more cash than you need to pay off your old mortgage, and you get the difference in cash. As an example, let’s assume you owe $70,000 on your home that has a market value of $250,000. If you require $40,000 to remodel the kitchen and bathrooms, you could decide to take a cash-out refinancing deal for $110,000. This facility covers the outstanding amount you owe the current lender on your mortgage, plus the $40,000 for the remodeling costs. The lender will settle your old mortgage, and give you $40,000 in cash.

Cash-out refinancing deals are the most popular facility available, and you can use the cash for a variety of functions, such as the remodel, or settling debts that have a higher APR than your mortgage. This strategy allows you to save money on higher-interest facilities that are draining your monthly cash flow.

With these deals, the lender takes on a considerable amount of risk. So, you can expect the approval process to be stringent, and you’ll have to have a stellar credit score for consideration of this refinancing facility.

Rate-and-Term Loans

This refinancing deal allows you to shift the loan term or the interest rate on your current mortgage facility. You could change your current 15-year loan term to 30-years, and benefit from a lower monthly payment, or vice versa if you want to pay off your mortgage early.

You could switch from a fixed-term loan to an adjustable-rate mortgage that tracks the interest rate. Considering that the Federal Reserve is embarking on the next easing cycle, you could benefit from an ARM as interest rates start to fall, reducing your monthly payment.

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Government Programs That Lower Your Mortgage Payments

Various government programs assist homeowners in lowering their monthly payments or help them to secure better terms on their existing mortgage.

Interest-Rate Reduction Refinance Loans

For those homeowners paying off a Veterans Loan, the IRRRL facility allows you to refinance to a lower interest rate, reducing your monthly payments. To take advantage of this loan, you don’t need to apply it to your existing residence to qualify. This refinancing deal has similar terms to a rate-and-term facility.

Most lenders will require that you have a minimum credit score of between 580 to 640 to qualify for an IRRRL facility. Lenders also prefer if you have a debt-to0income ratio that’s less than 55-percent as well.

However, both of these criteria are considerably lower than a standard mortgage refinancing deal that requires credit scores above 680, and DTIs of less than 30-percent. Lenders also take into account your payment history on your outstanding debt when calculating your interest rate for the new mortgage facility.

VA Cash-Out Refinance Loan

If you have a VA loan, then you also have the option to apply for a cash-out refinance deal. To qualify, you’ll need to maintain a credit score above the 640-mark, and have your home appraised. The property must be your primary residence to take advantage of VA cash-out refinancing.

If you qualify, you can use the facility to refinance your conventional mortgage facility into a veteran’s association loan.

Other qualifying criteria include;

  • You must be an active-duty servicemember for 90-consecutive days or longer.
  • A veteran with more than 90 to 181-days of continual service history.
  • A Reserve or National Guard member for a minimum of 6-years, along with an honorable discharge.
  • A surviving spouse of a service member or veteran who died in the line of duty.

In addition to the origination and closing costs involved with the mortgage refinancing, you’ll also need to cover the VA funding fee, which accounts for 0.5-percent of the total loan amount for IRRR loans. Cash-out facilities also carry fees that range between 2.15 to 3.3-percent, depending on your previous VA loan history.

Lenders will waive the funding fee for disabled veterans who experienced their injury in the line of duty. Spouses of service members or veterans killed in the line of duty are also eligible for the waiver, providing that they have not remarried.

FHA Streamline Refinancing Deals

If you currently hold a Federal Housing Administration loan, you can refinance it using the streamlining process. Many government refinancing programs allow you to apply without completing much of the paperwork involved in a first-time application.

As a result, most lenders don’t need to provide the lender with proof of income, credit reports, or account statements. As a previous holder of an FHA loan, you can also void the appraisal process as well. In the case of this refinance, the lender uses the last valuation as the basis for the new deal.

Your current mortgage must be older than 210-days (7-months) to qualify for the refinancing, and you need a good payment history with the lender. Your new refinancing deal must show that the new mortgage payment will be at least 5-percent less than your current monthly payment.

If the lender does not think that the refinancing will put you in a better position financially, they may deny your request. Be prepared to pay closing costs on the deal ranging from $1,000 to $5,000.

USDA Streamline-Assist Refinance

Holders of USDA mortgages can also apply for the streamline-assist refinancing program. Similar to the FHA loan we covered above, you get to skip out on most of the documentation process that you had to submit for your original mortgage application.

To qualify for the refinancing, you’ll need to have a 12-month history of making your mortgage payments on time. Id successful with your application, then you’ll need to pay an upfront fee of 1-percent of the loan value, and a 0.35-percent annual fee. Lenders will roll your closing costs into the new mortgage facility.

If your home is underwater in terms of the loan value, you may still qualify for the loan, at the discretion of the lender. If your home is no longer in the zone for USDA loans, it won’t affect your second application. However, you still need to fall within the income threshold as set by the USDA, and your new loan figure must be saving you at least $50 on your existing monthly payment.

Wrapping Up – Tips for Refinancing Your Mortgage

As we bring our guide to refinancing your mortgage to a close, let’s reflect on the key takeaways related to refinancing deals.

It’s vital that you consider the costs of the refinancing. You need to ensure that the long-term savings benefits of your new mortgage outweigh all of the costs involved in the new mortgage facility.

Refinancing your mortgage only makes financial sense when the new loan has significantly better rates and terms – otherwise, you are going backward with your finances, and many lenders will refuse to write you a refinancing deal. Make sure that you are winning in the long-run, and calculate all of the fees and property taxes involved in the agreement.

Ensure that you check your credit score before applying, and collect all of the necessary documentation before making your application.

Refinancing may sound like a dream come true, especially if you are looking at a cash-out deal. However, it’s vital that you understand that this is not free money – you need to pay it back to the lender, with interest.

If you don’t understand all of the costs involved and struggle to calculate if the deal is worth the hassle, then we suggest you speak with a licensed financial advisor before committing to the refinancing.

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Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased reporting.oliver@moneycheck.com


Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank or credit card issuer and have not been reviewed, approved or otherwise endorsed by any of these entities.


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