The Beginner’s Guide to Mortgage Refinance
When you have a mortgage, it can be easy to feel like you’re stuck. Stuck with a certain interest rate, stuck with mortgage insurance premiums, stuck in a loan that will last three decades of your life, stuck sitting on equity that you can’t liquidate. But with a mortgage refinance, you can get unstuck and get a better deal!
Read on to learn more about mortgage refinance and if it’s the right choice for you.
What Is Refinancing?
Refinancing may seem like an odd concept. Essentially, when you refinance a loan, you take a new loan and then use the money from that loan to pay off the old one. We’ll get into the discussion of why someone would want to do this in a minute, but first, let’s look at your options for a mortgage refinance.
If you took a thirty-year mortgage when you bought your house, you can refinance and get a fifteen-year loan instead. Likewise, if you took a fifteen-year loan, you can refinance out to a thirty-year note. It is important to note that your new loan starts on the date of your refinance, so if you’re five years into paying off a fifteen-year note and you refinance to a thirty-year note, you have thirty years left on that loan, not twenty-five. There are a lot of different options for loan terms, so I’d recommend talking to us if you want to explore this further.
There are a lot of reasons that people refinance, many of which have to do with income changes. If you had a longer note and you’ve gotten some substantial raises, you may be able to save a lot on interest by refinancing to a loan with higher payments but a lower term. And if you’ve lost income and can’t pay your mortgage anymore, refinancing to a longer note can buy you some financial wiggle room.
You may also want to refinance as a way to get access to the equity you already have in your house. So let’s say you bought a house worth $200,000 for $180,000; you’ve paid $5,000 on the principle for the loan, and you’ve done improvements that have raised the value of the house to $300,000. You now have $125,000 of equity in the house.
If you’re wanting to put on a new roof, finish a basement, remodel a kitchen, or add another wing onto the house, you can refinance your mortgage to get access to a portion of that equity. You could take a loan for $240,000, use $175,000 to pay off the rest of your first loan, and have $65,000 leftover. You can use that money to improve your home without having to pay a second set of interest rates on a second home improvement loan.
Types of Refinance
There are a few different types of refinance you have available to you. The three primary types are a rate-and-term refinance, a cash-out refinance, and a cash-in refinance.
Rate-and-term refinances are used when the only thing changing about the loan is the mortgage rate or the loan term. So in our example of refinancing a thirty-year note down to a fifteen-year note, you’d use a rate-and-term refinance.
Our example of taking $25,000 in equity to remodel a house is a classic cash-out refinance. For this type, the loan balance of the new mortgage must exceed the balance of the old mortgage while staying below 80% Loan To Value (LTV). This is often also used as a form of debt consolidation; you use the cash you get back to pay off other loans.
Cash-in refinances are the opposite of cash-out refinances. The buyer brings cash to put in as a down payment on the new mortgage. Often people will do this in order to get a better rate on their mortgage or as a way to get rid of mortgage insurance premiums if you didn’t have the resources to put a lot of money down when you got your first mortgage.
When to Refinance
The first step to starting a refinance is deciding if it’s the right financial choice for you. If you’re getting a cash-out refinance, you’ll need to consider how you’ll pay off the extra amount on your new loan. If you’re using the money to improve your house, the increased equity will help pay the extra amount when you get ready to sell the house, but if you use that money for debt consolidation or to buy a car, you need to plan for how you’ll pay the extra off.
One good way to determine if you should (or can) refinance is to look at whether you will have a net tangible benefit. The FHA defines net tangible benefit as “a 5 percent reduction to the principal and interest of the mortgage payment plus the annual mortgage insurance premium.” So the new mortgage payment must be at least 5 percent lower than the mortgage payment of the loan being refinanced; without this, you will not be able to refinance.
You should also take a look at whether the thousands of dollars you’ll need to spend to refinance will be worth it. If you’re going to be in the house for a long time, the monthly savings you get on your new mortgage may add up to more than the closing costs. But if you’re moving in two years, you could lose money on the deal.
While you certainly can stay with your same mortgage lender during a refinance, there’s no reason you have to. Like when you first got your mortgage, you should shop around and see who can give you the best deal. If there are issues you have with your existing mortgage lender, look for a company that can resolve those concerns for you.
Shopping for mortgage lenders will cause your credit score to take a hit, so be sure you keep your shopping to under a month and less than two weeks if possible. Look for lenders that can send you a full loan estimate, with approximate closing costs, monthly payments, and terms of the new mortgage within three business days. You should be able to complete most of these applications online.
Before you begin sending in applications to mortgage lenders, you should get together all the paperwork you’ll need for your refinance. This will help you minimize that shopping period and keep your credit score as high as possible. You’ll need many of the same kinds of documents you did during your first loan application.
Get together your tax returns and W-2 forms from the last two years, as well as your last couple of pay stubs. You’ll need proof of your homeowner’s insurance, and any bank or brokerage statements. You should also have documentation of any retirement assets and cash reserves you have.
Refinancing is not quite as long a process as mortgage origination is. Once you accept an offer from a lender, the lender will need to review your application and documentation carefully to make sure they are also happy with the terms of the agreement. And you may have some additional homework to do as well.
You may need to have a home appraisal done, especially if you’re getting a cash-out refinance done. Then you’ll get official terms of your new loan once the underwriting is done. The whole process usually takes about three to six weeks.
Learn More About Mortgage Refinance
Refinancing a mortgage can be a great way to get a better deal on your loan, get access to the equity you have in your home, or consolidate debt. Do your research and be sure a mortgage refinance is the right decision for you.
If you’d like to get help with your mortgage refinance, reach out to us at The Lindley Team. We are one of the highest reviewed teams on Google in the Portland market. Apply now and see how we can help you with your mortgage.