Loan originator Ellie Mae reported that 48 percent of conventional mortgages and 28 percent of FHA loans closed in Feb. 2018 were refinances, according to their 2018 Origination Insight Report. If you’re thinking of altering your existing mortgage, a home refinance may be your next step. There are two major types of home refinances:
- Rate-and-term refinance: This option can help you save money by refinancing your current loan balance for a lower interest rate and a term you can manage.
- Cash-out refinance: You can take out a new mortgage for more than what you owe, using this difference to pay off current debt you are dealing with.
Both refinancing options have their benefits and drawbacks. Choosing the one that is right for you is a crucial step in this process. Another reason you might decide to refinance your mortgage is to replace an adjustable-rate mortgage with a fixed-rate loan.
What to look for in a home refinance
When you’re shopping around for a refinancing option, you will want to make sure you’re investing in the best option for your needs and circumstances. There are several factors to take into consideration when choosing a mortgage loan, including:
- Your financial situation
- Desired loan term and type
- Loan costs and fees
The ultimate goal of a home refinance is to lower your monthly payments and overall interest rates. While it may be tempting to purchase a 30-year fixed-rate mortgage refinance, doing so will mean paying more interest over the life of the loan.
The costs of a refinance
When you decide to refinance your mortgage, you will need to pay closing costs on the property. Closing costs typically make up between 1 and 5 percent of the total loan amount. This cost is comprised of the following fees:
- Loan application fee
- Home appraisal
- Origination fees
- Title search fee
- Document fee
- Recording fee
Oftentimes, lenders will request additional expenses, including a home inspection fee, a flood certification if the property is situated in the flood zone and the costs of an attorney to review all documentation.
You’ll want to reach a breakeven point, the time it takes for the reduction in your monthly costs to make up for the costs associated with refinancing a mortgage. For a refinance to be worth the investment, you shouldn’t plan on selling the home before reaching this breakeven point. Here’s a simple equation to help you figure out how long it will take to get to this breakeven point:
Closing costs ÷ Monthly savings = Amount of months to break even
If, for instance, the closing costs are $3,000 and you can expect to save $150 each month, it will take you 20 months to break even on the cost of your refinance – since 3,000 ÷ 150 = 20.
The process of refinancing a mortgage
Once you’ve decided you’re ready to refinance, it’s time to begin the application process. Credit scores are one of the main factors mortgage lenders take into consideration when evaluating borrowers for home loans. Before you begin the process of refinancing your home loan, you should check your credit history to make sure there are no inaccuracies you will need to report. In addition, make sure you are up to date on monthly fees associated with your credit cards.
Once you have found the right lender and loan, you will need to complete the loan application. You may need to share the following information with your lender during this time:
- Current pay stub
- W2s from the past two years
- Recent tax returns
- Bank account statements
- Proof of homeowners insurance
- Most recent mortgage statement
If the loan underwriter approves you for a loan refinance, they will send you a letter and list of conditions. You should review this information closely before locking your refinance rate. In addition, you will want to order and review your loan documents to make sure there are no surprises at closing. Once you are content with this information, you will need to sign these documents.
The amount of time it takes to refinance a loan varies based on the lender and conditions. Any hurdles that arise can delay the process. With all considerations, it typically takes about a month to refinance a home loan.
The right lender for your home refinance
When you’re trying to cut costs and secure funding for your home, it is imperative that you work with a bank that takes care of you. Nationwide Mortgage Bankers offers borrowers a personalized experience, providing support and ease throughout the refinance process. For more information, view our diverse services and get started on your refinance application today.