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How to shop for mortgage refinance
To understand a mortgage refinance, the best place to start is with a simple definition of "refinance."
Refinancing refers to a borrower initiating a new loan to pay off an existing loan. So, a mortgage refinance involves getting a new mortgage to pay off your old mortgage.
People do this when they can save money by getting a better rate and term on the new loan. There is also cash out refinancing which allows you to get a larger loan than you need so that you can take cash out of your home's equity.
There are several factors to consider when deciding whether or not you should refinance your mortgage. Here's everything you need to know to help you decide.
What is a mortgage refinance and how does refinancing a mortgage work?
The cost to refinance your mortgage involves interest, closing costs, and possibly prepayment penalties. Lenders will base your interest rate on your creditworthiness and financial profile.
The closing costs can range from 3% to 6% of your mortgage amount, according to the Federal Reserve. So if your home costs $200,000, you are looking at $6,000 to $12,000 in upfront fees.
Here are just some of the fees that may be included:
• Application fee
• Appraisal report
• Attorney fee
• Closing fee
• Loan origination fee
• Document prep fee
• Courier fee
• Flood certification fee
• Title search fee
• Title insurance
• Recording fee
• And potentially many others
The prepayment penalty is a fee sometimes charged by lenders when you pay off your loan early. You'll want to find out if you have one so that you can accurately calculate the cost vs. benefits.
Now, let's take a look at when mortgage refinancing is a good idea.
When should you refinance your mortgage?
Being that there are so many fees involved with refinancing a mortgage, how do you decide if and when you should do it?
Laura Owens, Area Sales Manager for Wells Fargo Bank, says, "Whenever there is a benefit to the clients’ financial situation, they should consider refinancing. For example:
• Securing a lower rate and payment
• Reducing the term of the loan thus eliminating extra interest charges on the life of the loan
• Getting cash-out to help with other financial goals (debt consolidation, investments, etc.)
• There are also times where there would be a lifestyle benefit such as divorce, adding/removing a family member, or partner changing ownership
However, the benefit must outweigh the cost. Owens adds, "Homeowners should consider the costs to refinance in terms of fees that are involved, the impact refinancing will have on the loan payoff, and how refinancing will support overall financial goals.
We advise customers to consider the main reason they are thinking about refinancing (in relation to the costs). For example, how long they plan on staying in the home – if they plan is to stay for several years, the benefits that can be gained from lower monthly payments may make sense in a refinance."
A "break-even calculation" is helpful here. Add up all the costs to see how long it will take you to break even and start saving. If you are reasonably confident you will remain in your house past the break-even point and long enough to save a considerable amount, refinancing your mortgage is a good idea. Many refinance mortgage calculators are available online to make this calculation easy.
What are the requirements to refinance a mortgage?
Are you eligible to refinance your mortgage? Here are the general requirements for most lenders:
• Sufficient income
• Good credit score
• Acceptable debt-to-income ratio
• Savings and assets
• At least 20% equity in your home
What if you don't meet these requirements? Learn about the best mortgage options for people with bad credit.
Further, these government programs may be able to help.
Refinance mortgage government programs
FHA Streamline Refinance
If you have an FHA loan, this program from the Federal Housing Administration helps you refinance it to a lower rate. You can skip much of the paperwork and even the appraisal in many cases. To qualify, you must be current on your payments, be able to reap a net benefit from refinancing, and have FHA insurance on your current loan.
Can't decide whether you should go with an FHA loan or a conventional mortgage? See how they compare to each other to figure out which option is right for you.
Home Affordable Relief Program (HARP)
HARP helps homeowners with little to no equity who have loans owned by Fannie Mae or Freddie Mac that were originated before May 31 of 2009. The program was created by the Federal Housing Finance Agency (FHA) and U.S. Treasury.
If you qualify and have stayed current on your payments, you can refinance your home loan into a more affordable alternative.
HARP enables the following:
• Offers you a lower interest rate
• Allows for shorter loan terms
• Doesn't require new or additional mortgage insurance
• Enables the switch from an adjustable rate to a fixed rate
• Has no minimum credit requirement
• No loan-to-value limitations
• No appraisals or underwriting
If this program sounds like a good fit for you, pursue it as soon as possible as it expires December 31, 2018.
If not, here's how to find a good deal on mortgage refinancing from a lender.
How to choose a lender for mortgage refinancing
Here are the main factors that should be taken into consideration when comparing lenders.
The key to saving is getting an interest rate that is lower than your current one. To do that, you will need to compare the rates of various companies. The only way to find out what rate a lender will offer you is to apply or go through pre-qualification.
Make sure to also look at the type of interest rates offered. These may include:
• Fixed rates, which offer more stability
• Adjustable rates, which often start lower than fixed rates but adjust over time
• Converting rates that start as a fixed and then adjust after a certain amount of time
Fixed rates will allow you to accurately calculate your savings from refinancing, as the payment will be the same for the entire loan. Adjustable rates may help you save more, but present risk as they adjust. A converting rate can provide a bit of both. Be sure to check the type of interest rates available from potential lenders.
Lastly, some lenders allow you to purchase points upfront which will lower your interest rate.
The biggest drawback for refinancing your mortgage is the fees. They will determine whether the financial move is beneficial or not. Being so, it is of the utmost importance to find out all of the fees a lender will charge you in the process.
You may find it pleasantly surprising that some lenders offer no closing costs. This can be helpful for those who don't have the thousands of dollars up front to cover the fees.
However, the costs may be added to your mortgage balance or you may get a higher interest rate, so be sure to compare the options. To get the full picture, compare the upfront, monthly, and overall costs.
The loan term is how many years a loan will last. Lenders vary in the loan terms they offer for various types of interest rates and loan types.
For example, US Bank offers the following:
• Conventional fixed-rate: 10,15,20,30-year terms
• Adjustable rate: 3,5,10-year terms
• FHA: 15,30-year terms
• VA: 15,30-year terms
• Jumbo fixed-rate: 15,20,30-year terms
The loan term will impact the overall cost of your refinance, so you will want to make sure the lender you choose has the term you need.
Be sure to check the eligibility requirements of the lenders your are vetting. While the above-listed criteria is standard, each lender will be a bit different. Some will be more flexible with income and credit requirements while others may be more flexible with equity requirements and savings. Knowing this information will improve your chances of approval.
"At Wells Fargo, we differentiate ourselves by providing an experienced team focused on exceptional customer service. With the country’s largest mortgage network of more than 7,900 home mortgage consultants and a presence in more than 1,600 locations nationwide, in addition to online and via phone, we can work with customers when, where, and how they want to meet their home financing needs," says Owens.
Customer service is one of the main benefits of this company. Look for lenders with a similar focus. Key factors to check for are multiple contact channels, far-reaching coverage, and positive reviews from existing customers.
Application and loan origination processes
The process for applying and originating the loan should be easy and pain-free. Take note of how you can apply, how long it takes to process your application, if you can get pre-qualified, the amount of paperwork that is involved, etc. Some lenders put more of a focus on easy processing.
What are the mortgage refinance rates today?
Ready to find the right lender for your mortgage refinance? Above, you will find a lengthy list of companies to review and compare. Learn about their offerings, starting rates, fees, and what past customers have to say about their service.
Once you narrow down your favorites, reach out to get quotes on the costs. Be sure to run the numbers to find your break-even point as well as how much you will save overall. Then, if it all makes financial sense, go with the lender who offers the best deal.