Like buying a house, there are certain requirements that must be met before you can get a loan. One of these requirements is having enough cash available at closing to cover any fees associated with the transaction. In this article, we take a closer look at the pros and cons of refinancing to help you decide whether or not it’s right for you.
What is mortgage refinancing?
Mortgage refinancing means getting a new loan that will pay off your old one. This could be done in several ways, including paying less than you owe on your current mortgage, making fewer monthly mortgage payments for a longer period of time, or having your interest rate lowered.
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Types of mortgage refinancing
Refinancing your mortgage can help you save money and pay off debt faster but it requires careful planning and consideration of what type of mortgage loan works best for your situation.
Here are six common types of refinancing options:
- Cash-In Refinance: With a cash-in refinance, you take out another loan based on the current value of your property. This allows you to access some or all of the equity you’ve built up over the years.
- Rate-And-Term Refinance: With a rate-and-term, you lock in a fixed interest rate for a specific loan term. After the mortgage term ends, you’ll either continue paying the same amount each month or switch to a lower monthly payment.
- Streamline Refinance: With a streamlined refinance, you avoid mortgage refinance closing costs and paperwork by taking out one large loan rather than multiple smaller ones.
- Home Equity Line Of Credit (HELOC): A HELOC lets you tap into your home’s equity without selling it outright. You make payments directly to the lender, who uses the funds to repay yourself plus interest.
- Short Sale/Foreclosure: If you owe more on your house than it’s worth, there are ways to sell your home while still covering the outstanding balance. In a shorter term sale, the seller agrees to accept less than the full market price. In a foreclosure, the bank takes ownership of the property and sells it at auction.
- Cash-Out Refinance: A cash out refinance is when you take out your home equity loan and use that money to pay off another debt instead of paying down your mortgage. This can be a great way to lower your monthly payments because you will have less interest being paid on your new loan than if you were just refinancing your current mortgage.
What are the main reasons for refinancing a mortgage?
Mortgage refinance offers homeowners the opportunity to lower their current interest rate and save thousands of dollars over time. However, before you take advantage of this option, it’s important to understand why you should consider refinancing your current loan.
Below are some of the main reasons for refinancing a mortgage:
- To lower monthly payments on your original mortgage
- Because you want to pay off your loan sooner
- You’re worried about high-interest debt
- You want to buy something else with the money
- To save money on taxes
How Much Does It Cost To Refinance Your Mortgage?
The closing average costs associated with refinancing a home are typically split into three categories: origination, appraisal, and legal fees. Depending on the type of loan and the mortgage lender, there may be additional refinancing costs like recording fees and credit reports.
The most common types of loans include FHA, VA, conventional and government programs. Each type of loan requires different documentation and therefore incur different rate types and potential costs.
Here’s a breakdown of the typical fees associated with most loans:
- Origination fees and underwriting fees: 0.5%-1% of the loan balance
- Mortgage registration fee: $75-$500
- Appraisal fees: $300-$400
- Credit check report fee: $10-$100
- Document preparation fee: $50-$600
- Home inspection: $300-$500
- Flood certification fee: $15-$25
- Title search and insurance fee: $400-$900
- Recording fee: $25-$250
- Reconveyance fee: $50-$65
- Title insurance: $100-$300
These are the upfront costs that you can expect to spend if you are looking to refinance your mortgage. To gain a more accurate calculation of how much it will cost you, there are plenty of mortgage refinance calculators online which will give you a better idea of the average cost to refinance your mortgage.
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How Does Mortgage Refinancing Work?
To start off, you need to check whether you qualify for mortgage refinancing. Your lender will be able to tell you whether you’re eligible for one. You should also take into consideration closing costs. When you buy a house, you’ll pay closing costs to your bank when you close on the deal.
These fees vary depending on where you’re buying, so make sure you know what they are before you get started. Average closing costs typically range from 1 to 4 % of the purchase price. That means if you spend $200,000 on a house, you could end up paying around $4,000 in closing costs.
To refinance your mortgage, you should find a new lender. Don’t use the same one that services your existing mortgage. Compare lenders’ current rates and fees and ask them about their availability and how long they typically take.
Once you’ve chosen a lender, you can apply for a new mortgage. Applying for a home equity line of credit (HELOC) can be just as simple as applying for a regular mortgage. Your loan officer should require only one document — your most recent pay stub. Below is a breakdown of the entire process.
Get approved to refinance
The first thing you need to do is actually get approved to refinance your loan. This is usually a simple process with some quick background checks to ensure that refinancing is a viable option for you. You do not need to do much at this stage, just contact a refinancing expert and present them your application. You should find out fairly quickly if you have been approved, and then the rest of the process can get underway. Remember, there will be an application fee.
Lock In Your mortgage Interest Rate
The process of locking in your rate isn’t complicated. Once you’ve found a lender and gotten pre-approved, you’ll be asked to choose either a floating or locked rate. Locking your rate typically costs less upfront, but it could mean paying more over the life of your loan.
Lenders typically offer borrowers a lower rate if they agree to lock in their interest rate for up to 30 days. This gives the lender certainty about what rate it’ll pay out during the term of the loan, since rates fluctuate throughout the day. It allows borrowers to shop around for the best deal without having to worry about changing their mind once they’ve already signed a mortgage contract.
You’ll usually be offered several different options, including fixed-rate mortgage and variable rates, depending on how much you borrow and what kind of loan you choose. Depending on your mortgage type, you can secure anything from a 2-year fixed mortgage rate to a 15-year fixed mortgage rate. Once you find one that works for you, it’s important to keep track of your locked rate.
Underwriting
Once you apply for a loan, your lender begins the lending process. Lenders perform several steps during the underwriting phase, including verifying your employment history, income, assets, and debt levels. They also check whether you qualify for government assistance programs like FHA loans or VA mortgages.
During this stage, lenders look closely at your credit report. You may receive notifications about missed payments or late payments on your account. In addition to determining your eligibility for financing, lenders make sure that you understand the terms of your agreement, such as repayment periods and interest rates.
Appraisals
Your lender will use an appraiser to determine the current market value of your house. An appraisal provides important data to help lenders decide whether to approve your request for a loan. Appraisers generally compare similar homes sold in recent months, looking for trends and patterns.
The appraisal might include a walk-through inspection, where the appraiser takes a close look at your home to see if there are problems that could affect the value of your property. Appraisers also consider things like neighborhood amenities, zoning restrictions, and local real estate conditions.
Loan Options
After performing due diligence, your lender will give you a list of loan types and options. These include fixed-rate and adjustable-rate mortgages, reverse mortgages, and even no-interest loans.
Closing On Your New Loan
Once underwriting and home appraisal have been completed, it’s time to begin making payments on your new mortgage. To do that, you’ll need to close on your loan. This usually happens within 30 days of signing the contract. When you’re ready to close, your lender will contact you to schedule a meeting.
You’ll attend the meeting with a representative from the lender, along with a person from the title company. They’ll review the terms of the loan with you and answer questions about how the process works. In addition to reviewing the loan, they’ll take care of the paperwork needed to close.
At the closing, you’ll go through the final steps of getting paid off the old loan and taking out a new one. First, you’ll make a down payment on the house. Then, you’ll pay off the old loan. Finally, you’ll sign the papers transferring ownership of the property to yourself and the bank. Afterward, you’ll receive a check for the remaining balance owed on the old loan. If you’ve already closed on a previous loan, you’ll use the same forms to transfer the money owed on that loan into the new one.
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3 tips to lower the cost of mortgage refinancing
A good credit score is one of the most important factors to consider when refinancing your mortgage but it doesn’t always mean you’ll save money. In fact, some people end up paying more because they didn’t do enough research. So how does someone get the best refinance deal? Here are expert tips to help you find the best possible rates and fees.
Improve your credit history
If you haven’t paid your bills on time or missed payments altogether, your credit score could take a hit. This includes late payments, collections accounts, charge-offs, foreclosures and bankruptcies. If you’re having trouble making ends meet, try to cut expenses. For example, stop buying unnecessary items like cable TV, gym memberships and subscriptions. Also consider refinancing your student loans.
Pay your bills on time
Payments that fall due during the month tend to show up as negative factors on your credit reports so it’s a good idea to pay your bills early. Since most banks offer automatic payment plans, you can avoid missing a single bill.
Be responsible with your spending
When you use a credit card, the lender sends information about your account activity to the credit bureaus. Credit card companies want to see how responsible you are with your spending. If you spend less than you earn, you’ll probably end up paying off what you owe each month — and that will improve your credit score.
Mortgage refinancing services
When it comes to refinancing your mortgage, it is essential that you work with a mortgage refinancing expert in order to ensure that you fully understand your options, the benefits of refinancing and that you have someone there to walk you through this complicated process. At Refinancement Hypothecaire, we want to make the process as seamless as possible and get you the best possible deal.
Our professional advisors will take into account your situation and your needs and work to find the best option for you. Our main goal is to provide you with support along your journey of refinancing, and we want you to know that you do not have to commit to this daunting process alone, we are here to help every step of the way.
