Refinancing your mortgage can be a great, money-saving option for many homeowners, especially if your credit score has improved and you’re refinancing for a lower interest rate. However, there are also associated costs that must be considered, including fees which can range from 2% to 5% of your balance due.
Could this be a great time to refinance? How soon can you take advantage and possibly get into a lower rate? Even if you can refi, does it make sense for you? Learn how refinancing works, the benefits and drawbacks to refinancing, when the right time to refinance is, and if it’s the right option for you based on your financial goals and what you are looking to accomplish.
When you refinance, your current loan gets paid off and replaced with a new one which has different terms. In the transaction, several things about your loan could change including your interest rate, the length of your loan, the loan balance itself and even the type of loan you have.
In a refinance, a payoff check is issued by the lender handling your new loan to the originator of your current loan. When that happens, your relationship with the old lender ends and your new lender takes over from that point forward.
When you’re refinancing, the loans break down into two categories. We’ll get into these in more detail later, but for now here are the basics.
Consider this scenario. You bought a house several years ago, and at the time, you thought you got a pretty great deal. However, since you closed on your new residence, interest rates have plummeted, and you’re wondering how you can benefit from them. Does this sound accurate? If so, you may be in the right position to consider refinancing your mortgage.
People refinance their homes for many reasons, including snagging lower interest rates, reducing house payments, shortening the loan term, and withdrawing money from a house’s equity.
If you’ve been wondering whether refinancing could benefit you, this is the guide you need. We’ll cover the reasons you might want to refinance, the process you’ll have to follow, and all the questions you’re probably asking
We've created a refinancing checklist to help you through this complex process, check it out here!
Let’s start with a basic definition of refinancing. Essentially, mortgage refinancing is the process of swapping out your current loan for a new one with different terms. It’s a relatively simple idea, and people pursue it with a variety of different motivations. These are some of the most common.
One reason to refinance is to change your loan type. You might want to do this if you started with an adjustable-rate mortgage (ARM) and you’re tired of fluctuating interest rates and payments. A fixed-rate loan could give you the payment reliability you’re craving.
As we mentioned before, snagging lower interest rates is a common reason to refinance. Even if your new interest rate will only drop by half a percent, it’s still a savvy investment—as long as you see yourself staying in the residence for several more years.
If you’re in the financial position for it, refinancing to decrease the length of your loan—from 30 to 15 years, for example—can help you pay your loan off faster. A mortgage can be the most significant financial burden a person will take on in their life and paying it off can open up enormous possibilities for how you can spend your time and money. You may also be able to save additional money in the long-term by paying less interest on a shorter loan.
PMI can be a massive drag on your monthly payment, but refinancing can help you get rid of it. If you originally had to pay PMI as a requirement from your lender because you put down less than 20% on your house, you can have it removed in a refinance if your revised loan meets an 80% threshold in terms of your home’s value.
Deciding when to refinance a home or condo depends on so many different factors that are unique to you and your family. Considering the time and money involved with a refinance, it’s not something you should jump into without fully understanding that process and your motivations.
If you’re wondering about refinancing a condo, know that the process is largely similar to that of refinancing a house—though there are specific requirements your condo and association may have to meet.
Once a lender has determined that your condo is eligible for refinancing, the biggest thing is to look at how the process will benefit you and affect your financial goals. If you want to speed up your payoff timeline, cut your payments, or reduce your interest rate, for example, condo refinancing can be smart. If your reasons for refinancing are to borrow money from your home’s value to pay for other expensive necessities, a cash-out refinance can be a wise choice.
A condo refinance could leave you in a better place if you make sure to do it at a time when interest rates are low, or if you do it to support your other long-term goals, such as funding your children’s college education or paying off your loan faster.
Refinancing can affect your loan payment in both directions. Essentially, you can end up with a higher or lower monthly amount based on several different factors. You’ll just need to provide details such as the current balance of the loan and interest rate, how much time remains on the loan, and the new interest rate. There are many internet calculators that you can use to get an estimate of the new amount you’ll pay.
Refinancing can get complicated, and it’s normal to have a lot of questions about when to refinance and how it’ll affect your life. We’ll walk through some common questions below.
If your main goal is to lower your interest rate, wait to refinance until doing so would bring your interest rate down by no less than half of a percentage point.
Here are a few other optimal situations:
You may feel uncertain about refinancing during an evolving pandemic, but in reality, this may be a great time to refinance. The Federal Reserve cut interest rates to give the economy a leg-up, which means mortgage rates have also gone down
Read our blog all about how COVID-19 has affected the homebuying process here.
Has your credit score improved since you first bought your home? You may want to jump on a refinance as a better credit score can get you better rates and reduce the amount of money you pay.
If you have a USDA, Jumbo, FHA, or VA loan, you can also choose to refinance and potentially get a lower rate. One option to lower monthly payments for FHA loans is the FHA Streamline Refinance Program, which allows you to forgo income/credit score verification and appraisal. However, the streamline program has specific requirements, such as a certain amount of on-time payments, and limitations, such as the inability to pursue a cash-out refinance. You also won’t have the option to finance your closing costs, and you will be liable for mortgage insurance premiums.
What documents do you need to have to refinance your mortgage? Find out here.
Now that you’ve learned what’s involved in refinancing a mortgage, let’s move on to what refinancing looks like in practice.
Don’t start refinancing without knowing exactly why you’re making this switch and what the outcome may be. If you’re doing a cash-out refinance, know that your loan amount will go up. If you’re shortening your loan term from 30 to 15 years, know that your payments may be higher. Each option has a tradeoff, but there’s no need to fret about the cons if you’re secure in your decision.
How is your credit? You must know where you stand with your credit score before starting the refinance process since your credit score has bearing on the quality of the rates you get.
The higher your equity, the better chance you have of getting outstanding rates. Be sure to check your home equity as part of your refinance prep work by subtracting the amount you owe on your home from its current approximate value.
Don’t necessarily go with the first lender you find. Instead, shop around to find the best rates and compare fees from one lender to the next. The extra time spent researching could end up saving you money.
Depending on the particular mortgage lender you work with, you might have to have your home appraised before you can refinance. The cost of this appraisal will add to the amount of money you need to pay during the process.
There’s no such thing as a free lunch—or a free refinance. When you go to close on your loan, you need to take additional fees into account. Building the costs into the loan, when possible, can also make your loan or your rates higher, so consider whether this tradeoff is worth it in the long run.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
Is refinancing right for you? After reading this article, you should understand when the best times to consider a refinance are and how it can benefit you, from securing you a lower interest rate to removing the burden of PMI. When you’re ready, take the next step by reaching out to a reputable mortgage company to find out what kind of rates you could obtain.
A cash-out refinance is the process of taking the equity you have built in your home in the form of a cash deposit into a designated account or physical check. Many people choose this type of refinance to remodel their home or pay down debts, but the funds can be used however the homeowner chooses
Begin the refinance process today right here.
An example of a cash-out refinance:
The homeowner in this example would be able to refinance the $100,000 balance for up to 80% more in value. In this case, the homeowner could refinance their mortgage balance and receive the additional funds of $140,000 in cash at the refinance closing.
This article will outline when and how to navigate a cash-out refinance.
A cash-out refinance can be used in many different situations when you need to pull equity out of your home. It’s best to contact your lender to advise you if and when you are able to do a cash-out refinance. There might be waiting periods or other stipulations in order to qualify for a refinance.
Lenders usually recommend cash-out refinances to homeowners that have a substantial amount of equity in their homes. Most lenders will advise you to leave 20% of your home’s equity within the home during a refinance to avoid high interest rates as well as PMI (private mortgage insurance). Ideally, the homeowner seeking a cash-out refinance should have over 40% equity built in their home and should have a solid plan for what they intend to do with the cash in hand.
The purpose of refinancing is to get better terms on your loan payment, but with a cash-out refinance you may have the potential to receive better terms as well as gain cash in hand. When completing a cash-out refinance you are able to use the funds however you choose, below are a few common options that could help your financial situation.
A common reason homeowners choose to do a cash-out refinance is to remodel their existing home. Depending on the market, you could receive a lower interest rate compared to a credit card or personal loan on a cash-out refinance, plus the remodel can increase your home’s value.
Before you refinance, have a solid plan for your remodel. Meet with several contractors to get quotes and always factor in contingencies (things that could go wrong or end up being more expensive than anticipated!). Be sure to take in account the timeline for the project to be completed and when payments are due at different stages of the remodel. Once you have a plan, apply for an amount that makes sense with your renovation budget.
Refinance rates are very competitive compared to high interest credit card APRs. If you are able to make your credit card payments but are stuck paying high interest each month a cash-out refinance might be a good option.
The first step in considering this option is to gather all of your credit card debt information and carefully calculate the cost of paying them off at your current interest rates. Once you have the total, compare the cost to paying them off in a lump sum plus fees and interest incurred on your cash-out refinance. Using this information you will be able to determine the total savings on each option and you can then make an informed decision.
You may have debt from sources other than just credit cards. If you are looking to roll all of your debts into a single payment with more favorable terms, you could consider a cash-out refinance. Because this refinancing option allows you to use the funds for anything you wish, you can pay off student loans, credit card debt, or even an auto loan.
Be sure to weigh the total debt being paid individually vs rolling all of your payments into one refinance loan. Your refinance is directly tied to your home so only use this option if you are absolutely sure it makes financial sense.
Just like your first mortgage loan, a cash-out refinance has application fees, closing costs, interest rates, credit report fees, and will require an appraisal of your home. According to Freddie Mac, the national average closing costs on a refinance is around $5,000 or between 2-5% of your total refinance amount.
To get the best interest rates and save over the lifetime of your refinance, we recommend having a credit score in the “good” or higher range (670+ credit score). You can, however, still apply and qualify for a cash-out refinance with a sub-par score, but be prepared to pay a higher interest rate and qualify for less cash in hand.
Below are some hard costs associated with a cash-out refinance. Depending on your lender you may have more or less fees and the possibility of rolling your closing costs into your cash-out refinance loan
Item
Average Cost
Application Fee - This is the cost for someone to review your W2’s, bank statements, tax returns, and application.
$0 - $500
Credit Report - The lender will hard pull your to show you have excellent payment history and do not have too much debt.
The lender may or may not charge you for your credit report, this charge can be anywhere from free to up to $100.
Home Appraisal - Is required to inspect the condition and value of the home should you default on the loan.
$300 - $1000 Your appraisal rate is dependent on your home's location and the size of your home. Be sure to compare rates with local companies.
Title Search - Shows the lender that there are no outstanding liens, paperwork errors and more on your property.
$0- $200
Mortgage Points - This helps bring your interest rate down.
0-1% of loan per point
Underwriting Fee - Depending on your lender you may have to pay for someone to verify that you qualify for the loan. This is known as underwriting.
$0 - $900
The Cash-Out Refinance Process
If a cash-out refinance seems like a good way to restructure your loan and to gain access to the equity in your home, here’s how to get started
We also wrote an entire blog just about the refinance process, read it here.
Your refinance application will be similar to your previous mortgage application. Your lender will need to verify your identity, check your credit report, tax returns, W2’s or self employed income statement, bank statements, list of all assets, liabilities, investments, your current home insurance policy and verify any additional properties in your name.
Your lender will likely provide you with a checklist or form with all of the items needed and will contact you for any additional information and explanations
We put together a list of the documents you'll likely need to gather to refinance, read it now!
Your lender will ask you to schedule an appointment with a home appraiser to verify the value and condition of your home. This gives the lender insight on the current market value of the home and will have some weight in determining your cash-out value. In this same step your lender will submit the documentation for a title search on your home. This lets your lender know that you do not have any outstanding liens, unpaid property taxes, will discrepancies, and any other restrictions on your home.
If you qualify for a Property Inspection Waiver (PIW) you will be able to skip the appraisal portion of this step.
If the title and appraisal come back favorably, your lender will start the process of closing your cash-out refinance. A cash-out refinance can take a few weeks to finalize this process. During loan closing you will need to pay closing costs and possibly have the opportunity to buy mortgage points. On average a cash-out refinance will take between 30 and 45 days from application to closing.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
A cash-out refinance can be a great tool when used properly. This type of refinance is most commonly used for home repairs and upgrades but the homeowner is allowed to use the funds however they would like. Some tips when applying for a cash-out refinance are to make sure you have a good credit score, have a large amount of equity in your home, and you have a solid plan of what you want to do with your cash-out funds.
Refinancing can open up opportunities for homeowners to cash out on equity, reduce monthly mortgage payments, or renegotiate the interest rate on their home loan. However, the paperwork and knowledge needed to navigate a refinance can be monumental, and the process can easily become overwhelming.
We wrote a whole blog covering the full refinance process, read it here!
We’ve compiled an extensive checklist of documentation that you as a homeowner will want to prepare ahead of beginning your refinance process. Having all of this paperwork in order can help streamline the process and make refinancing a less stressful and more exciting process.
Homeowners will want to prepare their documentation ahead of time and should know that requesting paperwork from the city and financial institutions can take up to a few weeks. If you are applying for a mortgage with a spouse, you can pool resources and get better interest rates. However, if your spouse has a low credit score or a higher amount of debt, you may need to apply as an individual.
If you apply together, note that it may be best that both of you collect all individual paperwork for the requirements below.
One of the first things you’ll likely need is your own verified personal identification. If you are a U.S. citizen, bring a valid driver’s license to appointments with lenders and be ready to provide your Social Security number.
Pull together any paperwork detailing your current mortgage to have it ready for your lender to verify. This includes the deed, deed-in-trust, and all of the details of your mortgage cost, interest rates, and other fees.
To feel confident that the terms of your new loan are conducive to your personal financial situation, lenders will want to see your proof of income. Be prepared to show records of pay stubs for the past thirty days at a minimum.
Most Lenders will pay close attention to your current debt situation to help discern your ability to make payments and stay above water. You will want to collect paperwork detailing the history and current situation of any debts, including your mortgage, student and auto loans, credit card balances, and home equity loans.
Lenders will pull your credit history to verify your credit score and any outstanding credit debt. If you’re submitting claims to more than one lender, consider providing your own copy of a credit report before they pull your credit, since multiple credit checks can result in lowering your credit score.
Whichever lender you choose will require an official credit check, but having a copy on-hand might help avoid preliminary checks before you’ve narrowed down your choices, which will help maintain your score in the long-term.
Be prepared for your lender to ask for a letter of explanation for credit issues. A request for a letter in no way bars you from being eligible for a refinance, but simply serves as a chance to explain missed payments, dips in credit score, or other shifts in your credit history.
Lenders will also ask for letters of explanation for applicants who have been living rent-free or who have large gaps in their employment. Be prepared to provide any additional documentation that might support what you write in your letter.
Lenders will need a copy of your most recent tax return along with tax forms you’ve received from employers or sent to employees and contractors (1099’s, W-2’s, and the like).
Your lender will most likely require a current appraisal of your home. This ensures that you aren’t asking to borrow more money than the home is worth, and takes into account any renovations and changes made to the property over the years. Lenders typically hire third-party appraisers, so it’s worth preparing to have a stranger walk in and around your home and property in preparation for the refinance.
Prepare to show documentation of your homeowner insurance coverage and history of past payments to verify that your policy covers your home. If the appraisal shows that your home is worth more than what it was at the start of your insurance, you might need to adjust the policy to cover the new value.
Your title insurance taken out with your first mortgage can cover any potential losses associated with the property’s past (fraud, unpaid taxes, etc.) that you might have not known about. The title insurance can also protect your mortgage lender; so they will want to see a copy of it as part of your paperwork.
In addition to proof of income, lenders will want to see proof of your assets. This entails paperwork detailing your savings account along with any CD and retirement accounts, stocks, bonds, and mutual funds, and information on any other investment property that you own.
Lenders will want to see that you’ve been able to make regular payments of the full amount towards your mortgage. This is typically reflected in your credit score, but you’ll want to be able to provide records of your payments and relevant bank statements if requested.
If you’re a business owner or a self-employed freelancer, prepare to show lenders a profit and loss statement. This shows not only the income you’ve made but explains serious purchases or reasons for lowered credit scores. If you are unable to provide income verification from another company, the profit and loss statement helps lenders know more about your income and the expenses related to your business.
If you’re refinancing as part of a divorce, prepare to bring proof of alimony that you are paid or owed as part of your proof of income. You’ll also want to bring documentation of any court order or judicial decree that’s relevant to the refinance as well.
If you're unfamiliar with the fees commonly associated with refinancing, read all about them here.
Each lender has slightly different requirements for what paperwork they’ll need to evaluate your refinance eligibility, so think of this checklist as a set of guidelines of what you might expect to be asked to provide. Make sure to include any additional paperwork that will help explain your financial history and show your ability to make on-time payments and pay off the closing fees associated with the refinance.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
Refinancing can be both exciting and overwhelming. If you are able to collect your documentation and prepare in advance for credit checks and income verification, it will be a lot easier to shop lenders and get a good understanding of your options. Use this checklist to apprehend what you’ll need to bring to have a smooth refinancing process.
Whenever you are borrowing money, whether it’s for a new mortgage, a refinance, credit card, or car loan, you’ll hear the terms interest rate and APR discussed quite a bit. Both of these terms are expenses, and it’s important to understand what each expense means and what they are made up of. What is the difference between interest rate and APR? We’re glad you asked
The interest rate is simply the annual cost associated with borrowing the principal balance from a lender. Interest rates are present on various different types of loans, including; mortgages, credit card balances, car loans, student loans, and even personal loans.
Lenders are in the business of making money, and charging an interest rate on the money lent allows them to do so. Borrowers will be required to pay back the principal balance plus the associated interest rate with the loan
Understanding how the interest rate works is also important. Some loans have a fixed interest rate, which means for the duration of the loan the interest rate percentage does not change. Other loans have a variable rate, or adjustable interest rate, which means the rate is subject to change over time.
The lower the interest rate is, the less money the borrower has to pay back. The higher the interest rate, the more expensive it is to actually borrow money from the lender. Credit card debt has a notoriously higher interest rate, whereas mortgages tend to have lower interest rates.
There are various ways interest rates get calculated. We’ll address three of the most common.
First and foremost, interest rates can be derived from an associated risk equation. If one has a lower credit score, a high debt to income ratio, or an unstable financial history, the lender may view them as a higher risk of defaulting on the loan. To adjust for that risk, the borrower will charge a higher interest rate on the borrowed money if in fact the loan was approved.
Conversely, if the borrower is in a solid financial position, and has a history of paying debt back in full and on time, the lender may not view that borrower as a risk of defaulting on the loan. For that reason, the lender may charge a lower interest rate on the borrowed money.
Secondly, the time of the loan can also affect the interest rate. The longer the loan is, the more risky it can be considered - which results in a higher interest rate. The shorter the loan is, the easier it is for a lender to predict what will happen to the economy or one's financial situation, and will tend to charge a lower interest rate.
Last but not least, market conditions will impact interest rates. The government can pull various levers that will cause the interest rate to change. At a time where consumers are scared to spend money, the government may put policies in place to lower interest rates, resulting in consumers gaining confidence to spend. If consumer spending is high and the economy is thriving, banks and the government may raise interest rates. Various macro and micro economic factors will all influence interest rates, not only in the mortgage industry but in the overarching lending market.
Now that we’ve covered interest rates, let’s dive into what APR is and why you should care.
APR in an acronym for annual percentage rate. Said differently, APR is the total cost associated with borrowing money yearly. This is a more encompassing way to measure the true cost of borrowing money from a lender.
The annual percentage rate (APR) is made up of; the interest rate, any fees associated with borrowing money, any discount points the lender associates with the loan and various other charges you’ll be required to pay on the loan.
APR gets calculated by adding up the total principal balance of the loan, the interest rate on the loan, and the various fees associated with the loan into one final total. Once that number is finalized, you divide that number by the duration of the loan, and convert that total into a percentage of the total loan value.
A $300,000 loan that has $10,000 in fees and a 4.5% interest rate actually has an APR of 4.71%. The 4.71% is the true cost of borrowing money, and as shown, the APR is always greater than the interest rate.
Calculating the numbers by hand or excel is a thing of the past. There are various online calculators that can help you understand your true APR rate by just inputting a few numbers.
The interest rate is needed to calculate the annual percentage rate because the interest rate is added to the total fees paid, and the principal balance, to get one final aggregated number. From there, that total is divided by the number of days in the loan, multiplied by 365 and again divided by 100 to convert that number into a percentage. That percentage is your APR.
Generally speaking, the APR is a more accurate representation of the true borrowing cost of the loan. The lower your APR is, the less expensive it was to borrow the money.
A lower interest rate may be easier on the eyes, as the monthly payment will likely be lower, but don’t be fooled. There may be high fees or costs associated with borrowing, which allows the lender to offer a lower APR
Read all about the hidden fees you may not even know you'll have to pay when getting a mortgage.
There are various times a lender may offer a 0% APR. The 0% APR is generally for a limited period of time, meaning the borrower may borrow the money for 12, 18, or even 24 months interest fee.
Once the time period has elapsed, interest becomes relevant with the loan and the borrower will be required to pay the interest expense associated with borrowing.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
There are certainly a lot of terms and acronyms in the mortgage, finance, or lending field. As a borrower, it’s important to fully understand what these terms are, and how they can impact your monthly payments.
Remember, the interest rate is the cost to borrow the principal amount of the loan, but it does not factor in all expenses. For a more encompassing and detailed understanding of the borrowing cost, use the annual percentage rate, or APR.
The APR is the fully baked financial metric that factors in the all in cost of the loan. The APR will add in the interest, closing fees, and broker fees into one aggregated sum, and divide that amount over the lifetime of the loan. That payment is converted in a percentage, which you’ll know as the APR.
A cash-in refinance is the process where the homeowner brings in additional funds at closing to reduce the outstanding mortgage balance. This allows the homeowner to lower their loan-to-value ratio, potentially qualify for better terms, or even eliminate the need for mortgage insurance. Many homeowners opt for a cash-in refinance when they want to reduce their monthly payments or pay off their mortgage faster. Instead of taking cash out, the homeowner deposits cash into the mortgage to improve their financial situation over the long term.
If you’re making high monthly payments on a mortgage but can’t qualify for a refinance, you might have heard of the opportunity for a cash-in refinance. A cash-in refinance happens when the homeowner brings a cash sum to put towards their home equity to become eligible for traditional refinance options.
Because most lenders require a maximum loan-to-value ratio, homeowners who don’t have a lot of equity in their property often can’t qualify. If you can provide the difference in cash, you can become eligible and then qualify for those lower monthly payments. While handing over thousands of dollars in cash isn’t a pleasant idea, it can help homeowners who need to refinance to a lower monthly payment and in some cases can make sense as an investment strategy.
Cash-in and cash-out refinancing are different scenarios, but the principle is the same: either you’re bringing cash to your mortgage to increase equity for a refinance that will lower your monthly payments, or you are refinancing in order to take that equity out in the form of cash. In both of these scenarios, cash holds the power; it either boosts your home equity or is taken out to be used for other financial decisions.
A cash-out refinance mortgage takes some of your home equity out of your loan to be used as cash. A cash-out requires significant equity to have already been built up in the home, which is then lowered when you take out a portion of it in cash.
A cash-in refinance happens when you don’t have enough equity to qualify for a traditional refinance. It’s an opportunity to boost your home equity by injecting a large amount of capital at one time when monthly payments haven’t built up as much as you need to refinance.
Let’s take a step back to look at an example of when a cash-in refinance is helpful. Say that you bought a home for $400,000 at the height of the housing market. Now the property value is only $300,000, and you’re stuck with a mortgage that’s worth more than the house. You want to refinance to get lower monthly payments, but you don’t have enough equity in the large mortgage to qualify for a refinance.
A cash-in helps absorb the part of your mortgage that’s keeping you underwater in your payments. If your years of payments have only gained you a small percentage of equity, bringing cash will make you eligible for the refinance by improving your loan-to-value ratio, which will allow lower payments and the ability to stay “above water” on the overall loan.
A loan-to-value (LTV) ratio is calculated by dividing your remaining mortgage amount by the value of your property. Today, banks typically require an 80% LTV; that would mean that the maximum amount you could have left in your mortgage on a $300,000 home would need to be $240,000. But if you’re still paying off the initial mortgage of $400,000, chances are you have a lot more to pay off before getting to that 80% LTV ratio. Bringing cash to the refinance allows the opportunity to qualify you for that refinance without waiting years for your monthly mortgage payments to accumulate.
Once your LTV ratio is in the right place, lenders can help you refinance your home. That new equity you’ve built up will give you lower interest rates and can lower monthly payments to reflect the remaining value left to be paid.
Another advantage to building up equity with a cash-in refinance is that it can remove required PMI payments. PMI (private mortgage insurance) is required for conventional loans by most lenders until homeowners have paid off 20% of their mortgage. If you’re stuck with a big mortgage, it can take a long time to get rid of PMI. With a cash-in refinance, your equity will jump and give you the opportunity to stop making those monthly payments.
There are certain scenarios in which a cash-in refinance is not the best option. It’s important to remember that a refinance extends the terms of your loan, and that the lower monthly payments will take more time to pay off the total mortgage balance. It’s good for your month-to-month finances but will extend the time it takes to pay off your home. Since the loan term is extended, you will also be paying a larger amount of interest to the bank.
Another factor to consider is how long you plan on staying in the home. Putting hard-earned capital towards a home that you plan to sell in a year might not actually help you financially; instead, that cash is frozen in a property that you don’t plan to keep.
The bottom line of refinancing is deciding how best to use the cash that you have in hand. If refinancing will get you a lower interest rate in a home that you plan on living in for a long time, that initial cash investment makes sense. But if the interest rates on your mortgage are already low or if you are considering moving, you may want to use that capital on another investment with a higher return rate instead of tying it up in your property.
If you’re looking to buy a house, and do not have a mountain of cash saved up, you’ll need to consider getting a mortgage to help you finance this large expense.
But what exactly is a mortgage? Simply put, a mortgage is a debt instrument used to purchase real estate. A lender will loan a borrower money, and the borrower is obligated to pay the lender back.
An agreed upon repayment plan is established between both parties, and various terms and conditions must be met.
If you're wondering, how does a mortgage work - we’ll start at a high level and break it down step by step. A borrower borrows money from a mortgage lender and agrees to pay the mortgage lender back the full amount of the loan, plus any interest expense. The lender conducts their own research on the borrower before agreeing to lend them money.
There’s a lot of parties and terminology involved in the process.
The first step in getting a mortgage is to work with a licensed loan officer. Be sure whoever you are working with is licensed and registered to sell mortgages.
Loan officers help answer how to get a mortgage, and they’ll assist you with a variety of tasks. They’ll help you determine which mortgage works best for you, will shop for the best interest rate, and will even assist you with all the paperwork you need to complete. We’ll get into more of these details below.
You can select from a variety of mortgage options, each of them serves a purpose. A common option is a fixed-rate 30-year mortgage. This means for the duration of the loan, 30 years, the borrower will pay a fixed interest rate and payment each month. This fixed rate concept can also be applied to other mortgage options, such as a 15-year mortgage.
The following are some common words associated with mortgages and mortgage transactions.
A down payment is simply the amount of money you put down on your home. If the price of the home is $300,000 and you put down $30,000 as your down payment, you put down 10%. Various mortgage types will require a specific percentage for a down payment.
The interest rate is what the lender charges you for borrowing their money, in addition to the principal balance. This rate is referenced as a percentage. For example, a borrower with a fixed interest rate of 3.5% will pay that flat borrowing fee for the life of their loan.
Your loan can have a fixed interest rate, meaning it doesn’t change for the duration of the loan. Or, your loan may have an adjustable interest rate, meaning it can change over time. The lower the rate, the more favorable borrowing money is.
What's the difference between an interest rate and an annual percentage rate (APR)? Find out here!
This is a trickier concept, but amortization is the process of gradually writing off the initial cost of an asset. Remember, someone gets a mortgage for a given period of time. In the early years of the mortgage, the borrower’s payments fund mostly interest expenses.
As the years progress, the borrowers interest expense lessens, and more of their monthly mortgage payment is allocated to the principal balance. Visually seeing this may help paint a clearer picture.
Escrow is another common term used in the mortgage or real estate industry. Escrow is a contractual arrangement where a legal third party receives, holds, and distributes property or money for two parties. Escrow is essentially an unbiased middleman between the buyer and seller, or the buyer and an insurance company.
A buyer gives the escrow agent money to hold, and the homeowner selling their home gives the escrow agent the home. When the sale is finalized, the escrow agent gives the new homebuyer the home and the former owner the money. If the deal doesn't go through, the escrow agent is obligated to give the buyer back their money and the home goes back to the seller.
If you’re curious how to calculate a mortgage payment, there are a few components that give you the final monthly number.
The principal balance is the initial balance of the loan. Using the same example as above, if the home was $300,000 and your down payment was $30,000, or 10 percent, you borrowed a total of $270,000 from the lender - which is the principal balance. Each mortgage payment reduces the outstanding principal balance. The more principal balance you reduce, the more equity you have in your home.
Interest is the fee a lender charges you for borrowing the principal balance. The lower the fee is, the less money you pay. If you have a great credit score, a low debt to income ratio, and put down a sizable down payment, you’ll likely have a more favorable, or lower, interest rate. If your credit score is less than average, and you’re not putting down a large down payment, you may have a higher interest rate.
The interest rate changes with various government involvement and economic conditions. But if you have a fixed rate interest rate, you’re locked into that rate for the life of the loan. Only when your mortgage is an adjustable rate mortgage do you have to worry about your payments being volatile.
Taxes vary by state, county or even on a town level. The tax rate is also referred to as a mill rate. Some mortgage companies allow you to roll your tax expense into the monthly mortgage payment, utilizing the escrow system we discussed above. If your taxes aren’t rolled into the monthly payment, you’ll be responsible for paying your town directly.
Similar to car insurance, you must carry insurance on your home. How much you pay in insurance will vary, just as it does on a car. Variables that impact the insurance expense include; crime rate in the area, if the house has a pool, if the house is in a flood zone, and the value of the property.
Mortgages are not one size fits all. There are various types of mortgages you can choose from. Each one has a purpose; your goals, financial situation and comfort level will dictate which loan is right for you.
A conventional mortgage is a loan that is not secured by a government agency. Conventional mortgages are common, but they typically come with a higher interest rate as they are not insured by the federal government. A private lender, or Fannie and Freddie Mac issue conventional mortgages.
There are three government agencies that can issue a mortgage.
A jumbo loan is used to purchase homes that cost more than what a conforming loan allows. This amount is variable depending on where you live, and can change year over year.
A fixed rate mortgage is when the interest rate on the loan remains the same throughout the duration of the loan. This can be a fixed rate 15 year mortgage, 20 year mortgage, or even 30 years. The interest rate will not change, which makes budgeting easier.
An adjustable rate mortgage is the opposite of fixed rate. When you have an adjustable rate mortgage, your interest expense can go up or down throughout the life of the mortgage. Considering the rate can fluctuate, it makes budgeting a bit more difficult.
Now with a better understanding of the various types of mortgages, how much mortgage can I afford may be the next question on your mind! Remember, the mortgage payment consists of; principal, interest, taxes and insurance. Let’s visit the qualification process.
A lender (or bank) takes a lot of financial variables into consideration when determining your maximum monthly mortgage payment including: your debt to income ratio; credit score; annual household income; and your income potential. Two people with the exact same income can qualify for different mortgage amounts.
Person A makes $80,000/year, has no debt and a high credit score. Person B makes $80,000/year, has a high debt-to-income ratio, and a lower credit score. The lender is likely more inclined to lend person A more money, as they have more confidence person A has the ability to pay them back.
Your lender, and various financial calculators, can figure out what your monthly mortgage payment is. But, it’s important to fully understand what that number is made up of.
Remember, your mortgage payment consists of; principal, interest, taxes, homeowners insurance, and potentially mortgage insurance. You’ll have to understand what the annual amount of each of those expenses are and divide by 12 to get your monthly rate.
The formula can get a bit complex considering the math you’ll have to do on the interest rate. It’s best to know what variables make up your mortgage amount and leverage an online calculator to get the final amount.
Wondering what fees and costs you'll have to pay at closing? Find out here.
Getting a mortgage doesn’t need to be complicated. In fact, in today’s modern world, you can get a mortgage right from the comfort of your own home.
The first step is to get pre approved for a loan. To do this, find a trustworthy lender you’re comfortable working with. All lenders will require a bit of paperwork from you. This includes bank records, pay stubs, insight into your expenses, identification, etc. Supply the lender with accurate records, and within a few days you’ll be pre approved for a specific mortgage amount. You’re now ready to start shopping for a home!
Armed with the pre approval letter, real estate agents will be willing to take you on as a client. The pre approved letter helps you and the real estate agent determine what homes are in your price range.
You can look for homes in your desired price range and area from just about anywhere. Zillow and Trulia are popular real estate sites that will show you homes based on whatever criteria you give them.
Once you find the right place to call home, it's now time to finalize your loan. You’ll submit an offer to the seller, and if they accept, you’re ready to progress to the next step. Pending approval, you’ll go back to your lender and begin the loan finalization process. This includes getting the home appraised, inspected, and one final review of your financials.
The lender wants to be certain your debt to income, and credit score, remains aligned with what they saw when you were pre approved.
If everything aligns, you’ll be ready to close. Generally speaking, there is a bit of a waiting period between submitting your offer, getting it accepted, and officially closing on the loan. Both the buyer and the seller will agree to a closing date at some point in the near future. Once that day comes, you’ll do one final walk through of the home before officially closing.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
A mortgage is a debt instrument used to help finance real estate purchases. Everyone has a different financial history, and various financial goals, so there are many different mortgage options you can choose from. Some mortgages have an adjustable rate, whereas some mortgages have a fixed interest rate. The duration of the loan can vary as well.
Buying a house and obtaining a mortgage is a huge financial decision. It’s best to work with a professional throughout each process. They’ll help answer any questions that come up along the way, and will provide guidance where appropriate. Be sure to only work with licensed mortgage brokers when applying for a loan.
*Does not apply to third party fees and closing costs.
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