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Tag: mortgage refinance

Posted on May 5, 2022

How to Refinance Rental and Investment Properties

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An 8% rental property mortgage may have seemed like a great deal 15 years ago. But rates have dropped like a rock, and your investment property’s kitchen and bathroom have seen better days.

Should you sell and start over? Not if you’re willing to refinance your mortgage. 

Borrowers refinance their mortgages all the time, for many reasons. While you shouldn’t do it lightly, given all the costs involved, it serves as a viable option in your property owner toolkit.

How to Refinance Rental and Investment Properties

If you’re ready for a change in your rental property mortgage, follow these steps to make it happen.


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1. Gather Your Documents

Like any mortgage, investment property loans come with huge paperwork requirements. 

Plan on providing the following documents along with your initial loan application:

  • Government-issued photo ID
  • Property insurance declaration page
  • Current mortgage statement
  • Proof of income — typically two years’ tax returns or two months’ pay stubs, though some lenders don’t require income verification from investment property owners
  • Current bank account statements
  • Current brokerage account statements, including retirement accounts
  • Business profit and loss statements, if applicable
  • If the property is rented, a rental lease contract
  • LLC or other legal entity documents, including articles of organization, operating agreement, and EIN, if applicable
  • If required in the property’s jurisdiction, the rental property registration

Note that the requirements vary depending on the type of lender. If you approach a traditional mortgage lender — the kind that mostly writes mortgages for homeowners — expect them to ask for more paperwork. Expect the process to take longer as well. 

Portfolio lenders, who keep the loans on their own books and often double as hard money lenders, require less documentation. In most cases, these lenders don’t require income documentation. Instead, they review the rent you collect and use a formula called Debt-Service Coverage Ratio (DSCR) to estimate your future cash flow. 

Lenders calculate DSCR by dividing the monthly rent by the monthly principal, interest, taxes, insurance and association dues (PITIA). In general, they consider a DSCR above 1.2 as solid. Portfolio lenders use this metric rather than debt-to-income ratios (DTI).

2. Apply

Contact several lenders to start shopping around, comparing interest rates, points, and flat “junk” fees. 

Bear in mind that most conventional mortgage loan programs allow a maximum of only four mortgages reporting on your credit history. That limits their usefulness for your first few properties, at most. 

Portfolio lenders don’t typically place these caps, or report to the credit bureaus at all for that matter. In fact, they tend to lower their pricing for more experienced real estate investors. Check out Visio, Kiavi, and LendingOne as good examples of portfolio lenders.

While portfolio lenders often don’t require income documentation, they do still check your credit report. Pull your own credit report before applying, and get verbal pricing quotes when shopping around. Allow only your final choice lender to pull your credit report. 

3. Lock In Your Interest Rate

Once you’ve chosen a lender, submit your full application with all documentation, and lock in your interest rate. The lender will then provide you with a written confirmation of your loan pricing, known as a Good Faith Estimate.

Your loan estimate is usually good for settlements within the next 30 days. Don’t give them any excuses to delay your loan beyond that 30-day window. Always respond to their requests for more documents immediately. 

4. Go Through Underwriting

After you send your loan officer the completed loan application along with all the initial documents they requested, the loan officer typically orders an appraisal. Your loan file goes to a processor who organizes it and flags any missing information for the loan officer to ask you about. 

When the appraisal and all other documentation is in your file, it goes to underwriting for risk review. Underwriters confirm that your loan represents an acceptable risk for the lender. Expect them to ask for additional documentation during the process and to review the property appraisal with a fine tooth comb. 

If they feel comfortable with the loan’s risk profile, they approve it for settlement, and the loan officer contacts you to schedule a closing date.

5. Close on Your New Loan

As a real estate investor, you’ve sat through settlements before. And you know how cramped your hand gets by the hundredth signature. 

Ask for a final settlement statement the day before closing. Review every single line carefully, particularly the fees. Do they align with the initial Good Faith Estimate document that the lender gave you? If not, what has changed? The new document should clearly spell out any deviations.

Also, double check that the title company didn’t collect money for property taxes or water bills that you already paid.


Mortgage Refinancing Requirements

To begin with, lenders cap the percentage of the property value that they lend you. They refer to this as loan-to-value ratio or LTV. If your property is worth $200,000, and they limit your LTV to 80%, that means the most they’ll lend you is $160,000. 

For refinances, lenders determine property value based on the appraised value. For purchases, it’s the lower of either the purchase price or the appraised value. 

Lenders also want to confirm you’ll still earn positive cash flow on the rental property, calculating DSCR. 

Credit matters too, whether you borrow from a conventional lender or a portfolio lender. Expect higher minimum credit scores for investment property loans than for home mortgages. I know a few lenders who will go as low as 600 or 620, such as Civic Financial, but most require a minimum score of 660 or 680. 

Finally, most lenders require you to have plenty of cash reserves at settlement. The industry standard is six months’ mortgage payments, although some lenders allow less, and a few require more.


Reasons to Refinance Your Rental Property

As a general rule, I discourage investors from refinancing their properties. It restarts your amortization schedule at Square 1, extends your debt horizon into the future, and costs you thousands of dollars in closing costs. 

Still, there are times when it makes sense to refinance a rental property. Here are a few of the most common reasons why landlords refinance.

1. Lower Your Mortgage Rate

If you took out a mortgage when you had bad credit or when interest rates were far higher than today, you may now be able to refinance at a much lower rate. That could in turn boost your monthly cash flow or at least allow you to break even after pulling cash out of the property.

Calculate how long it would take you to recover the money you spent on closing costs with your interest savings. For example, if refinancing would cost you $4,000 in closing costs, and your new lower monthly payment saves you $100, it would take you 40 months to break even on the refinance. 

Better yet, add together the entire life-of-loan interest for the mortgage refinance and all closing costs. Compare that number to the remaining interest due on your current mortgage. That’s the real apples-to-apples comparison, and you may just find that your current mortgage will cost you less in remaining interest than the combined interest and fees on a refinance. 

2. Change Your Loan Term

If you initially bought your investment property with a 15-year mortgage, the property’s cash flow might not be as nice as anticipated. Most non-landlords don’t realize how many expenses landlords incur, from repairs and maintenance to vacancy rate to property management costs. 

So, some landlords refinance their 15-year loan to a 30-year fixed mortgage to push their annual cash flow above water and stop losing money each year.

If you bought your property with a 30-year mortgage and are thinking about refinancing to a 15-year mortgage to pay it off faster, don’t. Just pay more each month toward your existing loan’s principal. You can also try these other tactics to pay off your mortgage early. 

3. Convert an ARM into a Fixed-Rate Loan

Mortgage lenders prefer to lend adjustable-rate mortgages (ARMs) rather than fixed-interest loans. It gives them better protection against future changes in interest rates while creating an incentive for borrowers to refinance.

If you took out an ARM when you initially bought the property and the initially fixed interest rate is about to switch over to adjustable, consider refinancing to a fixed interest rate mortgage. Unless rates have fallen significantly since you bought the property, your new rate is likely to be higher than the old one.

4. Cash Out Home Equity

Investors often like to pull equity out of their properties and put it to use in other investments.

Most commonly, they pull out equity to put toward a down payment on a new investment property. That enables them to keep growing their real estate portfolios — and their monthly cash flow.

But property owners can also tap equity to fund renovations, either at the property being refinanced or another investment property. For that matter, they can put it toward some other type of investment, from stocks to real estate crowdfunding to real estate syndications. After all, if you can borrow money at 5% and invest it at 10% — the historical average of U.S. stock returns — it makes a winning strategy in the long run.

In fact, some investors cash out their equity rather than ever selling property. If you’ve already paid off the property in full, and you want an influx of cash, you could sell — but then you’d lose the asset. A cash-out refinance could be a more attractive alternative that allows you to keep the asset while earning monthly rental income. 

5. Repay Investors

If you borrowed money from friends, family, or other private investors to fund your down payment, you’re likely to have a shorter repayment period than if you’d borrowed from a bank. When it comes time to pay them back, you might need to refinance the property to do so.

You can avoid this by funneling all of your monthly cash flow to these private investors before their loan is due. With diligence and a little luck, you can pay them back in full without having to spend thousands on refinancing. 


Final Word

As you explore creative financing options for investment properties, don’t forget that you can use primary residence financing in house hacking. 

For example, say you buy a fourplex and move into one unit while renting out the other three. You take out a conforming loan with a far lower interest rate than you’d pay on a rental property loan. You make a 3% to 10% down payment with a Fannie Mae or FHA loan, rather than a 20% to 30% down payment. 

After one year, you can move out of the property without violating the terms of your mortgage. Then you can do it all over again, quickly building a leveraged portfolio of real estate investment properties.  

Yes, you pay a little money in private mortgage insurance (PMI). But as soon as you reach 80% LTV on your mortgage balance, you can remove it.

Just beware that the mortgage limit still applies, so you can probably only do this with up to four properties. After that, you’ll need to use investment property mortgages to finance your rentals. 

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G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.
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Source: moneycrashers.com

Posted on May 4, 2022

6 Things That Get More Expensive As the Fed Hikes Rates

Unhappy woman with a credit card
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To no one’s surprise, the Federal Reserve raised its benchmark federal funds rate today, increasing it by 50 basis points and putting it into a range of 0.75% to 1%.

The Fed took the action as part of its widely publicized campaign to bring inflation under control. Several additional rate hikes are likely between now and the end of the year.

As we have pointed out many times, an increase in the federal funds rate — which is the rate that banks charge other banks for short-term loans — always creates winners and losers. Some people benefit financially from rate hikes, others suffer. And many of us experience a little of both.

The positives of rate hikes — primarily higher savings account and CD returns — are great. But in many ways, they pale next to the potential damage that rate hikes can inflict on our finances.

Following are some areas of your financial life that are likely to become more expensive now that the Federal Reserve has once again raised the federal funds rate.

Carrying a credit card balance

Upset woman shopping online
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Failing to pay off your credit card bill in full each month is never a good strategy. But once the federal funds rate rises, things become much worse for those who carry a balance.

As you likely have noticed, your credit card rate does not remain static over time. It is a variable rate that can go up and down. And when the Fed raises rates, lenders typically increase these variable rates in response.

That is because the federal funds rate has a strong influence on the prime rate, which is the rate commercial banks charge to their most creditworthy customers. Banks use the prime rate as a starting point for setting many other rates, including credit card rates.

So, expect your credit card rate to rise after this latest hike. More importantly, prepare now for many additional federal funds rate hikes, and the likelihood of steadily increasing credit card borrowing costs.

The best way to avoid this danger is to pay off debt as quickly as you can. If you need help, check out Money Talks News’ Solutions Center, where you can find a reputable credit counselor.

To learn more tips for taming credit card debt, check out Money Talks News founder Stacy Johnson’s advice in “Tips and Tricks to Help You Destroy Debt.”

Buying a home

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There is a widespread myth that when the federal funds rate climbs, rates on fixed mortgages follow right behind it.

That isn’t so. There is no direct connection between the federal funds rate and fixed mortgage rates. However, the two do tend to move in the same general direction. So, if the Fed continues to hike rates repeatedly, it would be unusual if mortgage rates went the other direction and began to fall significantly.

Also, if you already have a fixed-rate mortgage, nothing will change with your payment. That rate is set in stone, and Federal Reserve rate hikes do not affect the terms of an already-established fixed-rate loan.

If you have an adjustable-rate mortgage (ARM), though, things are different. A rising federal funds rate is more likely to cause your borrowing costs to rise. ARMs adjust periodically according to the terms of the loan. Depending on the benchmark your loan is tied to, your rate may move north in tandem with the federal funds rate.

Refinancing a mortgage

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Mortgage rates have moved sharply higher recently, and a rise in the federal funds rate won’t help reverse that trend.

Still, that doesn’t mean you should reject a mortgage refinance out of hand, even after today’s Fed decision.

As we noted in the previous section, rates on adjustable-rate mortgages can be particularly sensitive to hikes in the federal funds rate. So, if you have an ARM, it might be worth considering refinancing into a fixed-rate loan, even if that loan is likely to be quite a bit more expensive than it would have been six months ago.

If this sounds like the right move for you, go to Money Talks News’ Solutions Center and search for a great rate on a mortgage refinance.

Purchasing a car

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If you have the cash to buy a car outright, you’re golden: An ascending federal funds rate will mean little to nothing for your finances as you look for a new vehicle.

But most of us are not that fortunate. Instead, we require an auto loan to finance our purchase.

Thanks to the Federal Reserve’s latest move, rates on auto loans are likely to push higher. If you need this type of loan, make sure you shop around for the best rate. If you can afford it, you might also consider making a larger down payment as a way to defray some of those higher interest costs.

Renovating your home

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Americans love home sweet home, and they tend to pamper their abodes by renovating them at every opportunity. If you have used a home equity line of credit — or HELOC — to finance a past renovation and are still paying off what you borrowed, prepare for your costs to rise.

HELOC rates typically are variable, meaning there is a good chance your lender will respond to a rise in the federal funds rate by increasing the rate on your outstanding loan.

Starting a business

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This is an under-the-radar impact of a hike in the federal funds rate. Many small businesses borrow money to get started, and these loans may be tied to variable rates.

For example, the Small Business Administration’s 7(a) Loan Program — the SBA’s most widespread loan program — offers variable-rate loans. As we mentioned earlier, these are the types of loans most sensitive to changes in the federal funds rate.

So, if you are a small-business owner looking to borrow, your costs may be higher now, thanks to the Fed’s latest move.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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Source: moneytalksnews.com

Posted on April 25, 2022

Best Home Improvement Loans of May 2022

A reminder that all loans might not cover all properties — for instance, FHA 203(k) loans are typically used for single-family properties, although other structures may be covered if they fall under certain restrictions — or the dollar figure you want, so make sure you search for the loan product that serves your needs.
Not listed

What Is a Home Improvement Loan?

7.49-18.00%
With a cash-out refinance, you use some of the equity in your home to get cash. In this refinancing option, you change the terms and amount of the loan, replacing your previous mortgage with a new one (so it’s not a second mortgage like with a home equity loan). You tap into some of the equity you’ve built up — the amount you can borrow is typically capped at around 80% of your home value — to get access to cash and a new fixed-rate mortgage. (Note: You’ll have to pay closing costs with this option.)

Why You Might Want a Home Improvement Loan

When you’re shopping around for lenders and home improvement loans, there are lots of items for you to consider. Here’s a shortlist of what items you want to review and consider when researching home improvement loans:

  1. You require a large amount of funding. Sometimes a home reno project requires money you just don’t have (or can’t save for in a reasonable amount of time before you start a project).
  2. It’s an emergency. If you’re on a tight timetable or an urgent need has popped up, home improvement loans might be the best option for your situation.
  3. You want to pay a little bit over time. Perhaps you’d prefer to borrow funds and spread the payments out versus dropping a good chunk of change down all at once.

K to 0K

Secured Loans vs. Unsecured Loans

Exact requirements will vary by lender and loan type. In general, you’ll need some combination of the following:

  • Secured loan: This type of loan requires collateral, like a home. Since the borrower is putting up an asset, a lender typically views lending this money as less risky. A mortgage is an example of a secured loan.
    • A secured personal loan is generally easier for a borrower to get.
    • Secured personal loans tend to have lower interest rates.
  • Unsecured loan: This type of loan doesn’t require collateral; rather, a person’s creditworthiness helps a lender determine whether or not they should lend someone money. A student loan is an example of an unsecured loan.
    • An unsecured personal loan might be more difficult for a borrower to qualify for.
    • Unsecured personal loans tend to have higher interest rates.

Apply online

6 Types of Home Improvement Loans

Alternatively, if you have good credit, you could apply for a new credit card and likely get approved in a short period of time. Depending on your creditworthiness, look for a credit card with an introductory 0% APR for a set period of time (one year, 18 months, etc.) before the higher interest rate kicks in. That way you can pay the expense off over time if you need to, which is a money-saver in itself considering the average credit card APR hovers around 20%.

1. Credit Card

Best for Borrowers Who Want Options
If you prefer a traditional bank with brick-and-mortar locations, Wells Fargo might be your preferred choice. If you’re OK operating entirely online, a lender like SoFi will likely meet your needs.

2. Personal Loan

Many lenders require a minimum credit score to qualify for a home improvement loan. For example, you typically need a minimum credit score of at least 620 to secure a home equity loan.
More Information About Navy Federal Credit Union

3. Home Equity Line of Credit

Not listed
Key Features

4. Home Equity Loan

3.5 out of 5 Overall
Yes

5. Cash-Out Refinance

Wells Fargo
Discover is probably most known for being a credit card brand. But, the company also offers online banking accounts and products, and a variety of loans (on top of many credit cards, of course). Discover has a highly rated mobile app, over 60,000 fee-free ATMs and a quick interactive quiz on its website to help users find the best bank account for their needs.

6. FHA 203(k) Rehab Loan

Contributor Kathleen Garvin (@itskgarvin) is a personal finance writer based in St. Petersburg, Florida, and former editor and marketer at The Penny Hoarder. She owns a content-writing business and her work has appeared in U.S. News, Clark.com and Well Kept Wallet.
APR
Ultimately, the best home improvement loans or funding will depend on your qualifications, needs and availability. (Per the latter, some institutions have halted greenlighting HELOC loans with the current market in flux.) Of course, you will also want to consider personal loan rates, any origination fees, repayment terms and other factors when choosing how to pay for any home improvement projects. (Which we’ll touch on later in the article.)

There is no *one* home improvement loan; there are several types of loans that fall under the category of “home improvement.” (And sometimes this loan is simply referred to as a personal loan.) Qualifications vary by lender, but many have similar requirements — like having proof of employment and a government ID or birth certificate.

Lender Best For APR Apply Online
Wells Fargo Borrowers Who Want Options 5.74% to 19.99% Yes GET DETAILS
Navy Federal Credit Union Military Community 7.49 to 18.00% No GET DETAILS
Discover Customer Support 4.15% to 8.99% (for first liens) Yes GET DETAILS
SoFi Borrower-Friendly Terms 5.74% to 21.78% Yes GET DETAILS
Upstart Borrowers With So-So Credit 5.22% – 35.99% Yes GET DETAILS

5 Best Home Improvement Loans in May 2022

Best for Borrower-Friendly Terms

Wells Fargo

APR

Upstart is an AI lending platform that strives to increase access to affordable credit. Using its proprietary verification process, the majority of loans are approved nearly instantly with the platform. Going beyond creditworthiness, Upstart also reviews borrowers’ level of education, field of study and employment history as qualifying factors.
Upstart is an AI lending platform that strives to increase access to affordable credit. Using its proprietary verification process, the majority of loans are approved nearly instantly with the platform. Going beyond creditworthiness, Upstart also reviews borrowers’ level of education, field of study and employment history as qualifying factors.
Upstart is an AI lending platform that strives to increase access to affordable credit. Using its proprietary verification process, the majority of loans are approved nearly instantly with the platform. Going beyond creditworthiness, Upstart also reviews borrowers’ level of education, field of study and employment history as qualifying factors.
More Information About SoFi

  • Same-day funding
  • No prepayment penalties
  • No collateral required

More Information About SoFi

  • Credit score isn’t the major qualifier
  • No down payment and no prepayment penalty
  • Funds are available the next business day

APR
No
Discover offers home equity loans and mortgage refinance options to consumers. For home equity loans specifically, borrowers have access to fixed monthly payments, up to several hundreds of thousands of dollars in loan amounts and SoFi is one of the newer, savvier financial institutions on this list with an impressive scope of offerings and as of January 2022 is a chartered bank. SoFi offers the traditional banking products, plus lots of member benefits such as a referral program, member rewards and career coaching.
For each lender, it’s essential that you review the different loan options and terms for more information.

Loan amounts

Loan amounts
Navy Federal Credit Union

What You Need to Get a Home Improvement Loan

Check out The Penny Hoarder’s review of SoFi Checking and Savings for 2022.

  • A good or excellent credit score
  • Proof of income (w-2s or pay stubs for traditional employment, and likely years of records if you’re self-employed)
  • Government ID or birth certificate
  • A certain amount of equity in your property (a home equity line of credit, for example)
  • You must be a member of some banks (like with Wells Fargo) to secure a personal loan

5.74% to 21.78%

What to Consider When Looking at Home Improvement Loans

Discover

  • Total loan agreement (loan terms)
  • Loan amount and maximum loan amount
  • Monthly payments
  • Your credit history and credit score (and any upcoming purchases you may want to defer to keep your score intact)
  • Fixed interest rates
  • Adjustable interest rates
  • Secured personal loans (require collateral)
  • Unsecured personal loans (don’t require collateral)
  • Any prepayment penalties
  • Late fees

Not listed

Additional Ways to Finance Home Improvement Projects

Whether you own a condo, stand-alone house, mobile home or vacation property, you can apply for a home improvement loan. 
If you’d prefer not to take out a loan but need access to funds, you have options there, too.
Yes

Frequently Asked Questions (FAQs) About Home Improvement Loans

OK, this isn’t a loan, but it’s still an applicable payment option. If you’re in a pinch, you could put a home expense on an existing credit card. Ideally, this would be a card you can pay off at the end of the month without accruing interest (or better yet, one that will earn you points or other favorable benefits for using it).

A personal loan is an unsecured loan that can be used to pay for just about anything. If you need money quickly, this might be your best bet.
It’s a good idea to list out the total amount of money you want to fund your project. Compare different payment methods (loans, credit cards, home equity lines of credit, etc.) and see which terms and conditions meet your needs.
K-0K
Online application
To be sure, there are hoops to jump through with an FHA 203(k) loan and it takes a more significant amount of time to get approved — applications must be submitted through an approved lender, there are listed eligible rehab activities, you may only be able to work with certain contractors and you can only use this loan for a primary (not rental) residence, to name a few regulations. However, for the most part, you only need to put at least 3.5% toward a downpayment and can get qualified with a fair credit score.
We’ve answered some of the most common questions about home improvement loans to help you make a decision about whether to apply for one and which financial institution you might select.
Upstart
SoFi
Whatever your reasons, remember that all personal loans require some consideration of the pros and cons before you push forward.
Navy Federal Credit Union was founded in 1933 at the tail-end of the Great Depression. This credit union serves U.S. military members in all branches, veterans, Department of Defense employees and their family members — to the tune of 10 million member-owners. Navy Federal has branches all around the world and offers many of the traditional banking products.
Key Features
Is Any Type of Property Eligible for a Home Improvement Loan?

Credit score
Like most situations in the personal finance space, your individual needs and eligibility will determine the best home improvement loans and course of action for you.

Posted on February 26, 2022

What Is a Streamline Refinance?

Mortgage Q&A: “What is a streamline refinance?” While qualifying for a mortgage refinance is generally a lot harder than it has been in the past (now that lenders actually care how your home loan performs), there are less cumbersome options available. In fact, many lenders offer “streamlined” alternatives to existing homeowners to lower costs and… Read More »What Is a Streamline Refinance?

The post What Is a Streamline Refinance? appeared first on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

Posted on February 26, 2022

The Mortgage Refinance Process: Complete Step-by-Step Guide and Timeline

Most homeowners know what a mortgage refinance is, but aren’t necessarily familiar with the process and many steps that take place along the way. If you’ve never refinanced your mortgage, or haven’t in a while, it can be beneficial to refresh your memory so you know what to expect. Whether you’re looking to refinance your… Read More »The Mortgage Refinance Process: Complete Step-by-Step Guide and Timeline

The post The Mortgage Refinance Process: Complete Step-by-Step Guide and Timeline appeared first on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

Posted on January 28, 2022

Homeowners: Call Unlock to Get Access to up to $500K in Cash

When you’re strapped for cash, it can feel like you’re stuck between a rock and a hard place. Medical bills pile up, debt starts to snowball and retirement can feel impossible.

And for homeowners, sometimes it feels like the only option is selling their house and hoping the cash is enough to cover their needs.

But a single phone call can change that.

A company called Unlock will give people access to the equity in their home, through a Home Equity Agreement. It isn’t a loan, so there are no interest charges, no monthly payments and most importantly, no selling your home to get the cash you need.

Before You Call a Realtor, Call This Company

Selling your home to access your equity should be a last resort. When you work with Unlock, you’ll get access to tens or even hundreds of thousands of dollars without a monthly payment, interest, or any of the other drawbacks of a loan.

Knowing how much cash you can get from Unlock takes less than a minute and doesn’t require a credit check or credit card. You can get up to $500,000 of your own equity in your home.

Answer a few simple questions about your house and your estimated credit score (Unlock works with people who have scores as low as 500). In less than 60 seconds, you’ll see exactly how much cash you can get from your home.

The next step is booking a no-pressure call with an Unlock  Home Equity Consultant. Once you sign the paperwork, you can have your money in as little as 14 days.

Why a Home Equity Investment is Better Than a Loan

Taking out a loan can sometimes be more hurtful to your situation than necessary. Whether it’s a mortgage refinance, a HELOC or a more traditional loan, they come with monthly payments and plenty of interest. And it means more money out of your pocket every month throughout the life of the loan.

Full disclosure: a Home Equity Agreement (HEA) from Unlock isn’t free money. Even though there are no monthly payments like a HELOC or a refinanced mortgage, Unlock will be investing in your home and sharing in its value in the future..

So when you go to sell your house in the future, you’ll be sharing part of that profit with them. But if your house loses value, they share in that loss, too.

That means besides a small origination fee, you won’t be paying anything to access the equity you already have in your home. It’s your money; you can do what you want with it. By using Unlock, you won’t have to worry about paying them back every month.

If you’re a homeowner and need cash  — but don’t want to sell your home — see how much equity you can unlock in your own house today.

Kari Faber is a staff writer at The Penny Hoarder. 

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Posted on January 28, 2022

How to Pay Off Your Mortgage Early and Save Thousands

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Editor’s Note: This story originally appeared on The Penny Hoarder.

If you own a home, your mortgage payment is probably your biggest monthly expense.

But what if you could eliminate that huge financial obligation ahead of schedule — and own your home free and clear?

There are a few tried-and-true ways to pay off your mortgage early — simple changes like making an extra monthly payment as well as more complex and expensive options like refinancing.

Paying off your mortgage early doesn’t make sense for everyone. It’s important to consider your individual circumstances, including your monthly budget. But if your top priority is paying off your mortgage faster, these tips can help you make it a reality.

Most loan servicers let you pay off your mortgage early without penalty — but this isn’t always the case.

Some companies only accept extra payments at specific times. Others may charge prepayment penalties.

Check with your loan service provider to see if any restrictions apply to extra mortgage payments.

You also need to clarify that you want your extra payments applied to the principal of your loan — not to interest or the next month’s payment. By hacking away at the principal, you reduce how much you shell out in interest over time.

Lenders usually give you the option online to apply extra payments to the principal only.

If this option isn’t clearly marked, reach out to your loan company for instructions.

Before you decide you don’t have enough extra money to pay off your mortgage early, check out these strategies. They’re not as painful as you might think.

1. Make One Extra Payment a Year

Extra money
Nicoleta Ionescu / Shutterstock.com

Making 13 mortgage payments in a year instead of 12 may not sound like a big deal — but it really adds up.

How effective is this strategy?

One extra payment per year on a $250,000 30-year fixed-rate mortgage with a 3.5% interest rate means you’ll pay off your mortgage debt four years early and save more than $20,000 in interest.

There are a couple of ways you can squeeze extra mortgage payments out of your yearly budget.

One option is depositing one-twelfth of the monthly principal into a savings account each month. So, if your monthly principal is $850, set aside about $71 a month.

At the end of the year, empty the account to fund your 13th mortgage payment.

If you’re worried about dipping into savings, you can always pay one-twelfth extra on your mortgage each month. So, instead of paying $850, you’d pay $921.

This way, you’ll pay the equivalent of an extra payment by the end of the year.

2. Pay Biweekly

senior couple drinking coffee on computer
Monkey Business Images / Shutterstock.com

Setting up a biweekly payment schedule is an easy way to cross off 13 mortgage payments in a single year.

Some mortgage lenders let you sign up for this option, which allows you to make half of your mortgage payment every two weeks.

This results in 26 half-payments — or 13 full monthly payments — each calendar year.

That means you’ll pay less interest over time while lowering your principal balance at an accelerated rate.

Biweekly payments can be a good strategy for homeowners who get paid every other week. This way you can schedule your house payments around your paydays.

However, some lenders may charge extra fees if you opt for biweekly payments. Others may not offer the service at all.

If that’s the case, explore your other options, such as setting aside a little extra cash each month or making a slightly larger monthly payment, as we discussed earlier.

You’ll still reap the benefit of making one extra payment each year — you just won’t get the convenience of your lender creating a monthly payment split for you.

3. Pad Your Payment Each Month (If You Can Afford It)

Happy man with money
Krakenimages.com / Shutterstock.com

It might not always be possible to make that extra mortgage payment each year, or set aside one-twelfth of the principal each month.

If there’s not much wiggle room in your budget, you can still take smaller steps to chip away at your principal.

Even $50 a month in extra payments can result in a dramatic drop in your loan balance and how much interest you pay over the life of your loan.

One strategy is to simply round up your mortgage payment to the nearest $100 when you can afford it. So if your mortgage payment is $875, pay $900 instead. (As always, ask your loan servicer to put the difference toward the principal).

If you want to take a small, gradual approach, you can increase your mortgage payment each time you get a raise at work.

You don’t have to put all your bumped up take-home pay toward your mortgage (that’s probably not a great idea anyway). Instead, apply a percentage.

Let’s say your new raise at work means $600 more in your bank account each month. If your top priority is paying off your mortgage as quickly as possible, assign 70% to 80% of your new raise to your monthly payment (in this case $420 to $480).

If your dollars are better spent on different financial priorities, like beefing up your 401(k) contributions or paying down higher-interest debt like credit cards or student loans, then assign just 10% to 25% of your new raise to your mortgage ($60 to $150 using the former example).

This gradual ramp-up might be a good strategy if you’re young and plan on steadily increasing your annual income over time.

4. Refinance Your Loan

Mortgage loan refinance
Yuriy K / Shutterstock.com

Another way to pay off your mortgage early is to refinance your loan for a shorter term and/or at a lower interest rate.

For example, you could refinance a 30-year mortgage for a 20-year or 15-year term.

The monthly payment will almost certainly be bigger and you’ll pay closing costs, though those are generally folded into the loan balance. Regardless, refinancing your current loan can be a good idea because it dramatically reduces your long-term interest payments.

Here’s an example of what refinancing to a shorter term might look like:

  • Let’s imagine you have a 30-year mortgage that’s been paid down for eight years. When you bought your home for $349,000, you put a 6% down payment on it.
  • With a 4.5% interest rate, you’d still owe about $439,000 in principal and interest for the final 22 years of the loan.
  • If you refinanced into a 15-year mortgage at a 3% interest rate, your monthly mortgage payment would increase by roughly $250.
  • But you’d eliminate your loan seven years ahead of schedule and save yourself $94,000 of interest in the process.

A shorter term on a mortgage means it goes away sooner, but you’ll need to allocate more of your monthly budget for housing.

That’s because refinancing to a shorter term will likely increase your monthly mortgage payments — especially if you refinance earlier in the life of the loan.

It makes sense — the repayment period gets crunched down, so you have to pay more over a shorter period.

On the other hand, if you bought your house longer ago when interest rates were higher, refinancing now at a lower rate could mean only a small increase in your monthly payment. But you’ll still enjoy big savings long-term.

You need to make sure your monthly budget can handle this added expense.

If your finances are tight, paying hundreds of dollars more a month on housing is risky. It can limit your ability to meet other financial priorities, like saving for retirement or maintaining a healthy emergency fund.

If you think your income may decrease in the future, it’s wise to explore other options, like contributing extra cash to your mortgage when you can afford it like we discussed earlier.

You’ll also need to consider refinancing closing costs, which typically total 2% to 3% of your loan principal amount. As an example, a $200,000 mortgage refinance could cost you $4,000 with a 2% refinancing fee.

You’ll want to make sure those fees don’t negate the interest savings, otherwise refinancing to pay off your mortgage early doesn’t make much sense.

5. Recast Your Mortgage Loan

Reverse mortgage
William Potter / Shutterstock.com

An alternative to refinancing your mortgage is recasting the loan.

Mortgage recasting is the process of reducing your mortgage balance by paying a lump-sum on the principal. Your mortgage lender then adjusts your repayment, or amortization, schedule to reflect the new balance.

The result: Smaller monthly mortgage payments. You’ll also save money on interest over the life of your loan.

Recasting has a few benefits. First, your monthly payments get smaller, not larger.

You’ll also pay significantly lower closing costs compared to refinancing. Recasting fees are typically a few hundred dollars — not several thousand.

Recasting won’t change your interest rate, though. That’s nice if your interest rate is already low — not so nice if it’s high.

It’s also debatable if recasting your loan will actually help you pay off your mortgage faster. After all, it doesn’t shorten your loan term — it just reduces how much you pay each month.

But at least in theory, lowering your payments can make it more feasible to pay off your mortgage early. If you’re paying $1,200 a month instead of $1,600, it might be easier to make that one extra payment a year, for example.

Recasting isn’t an option for everyone.

You need a pretty big chunk of cash to put down on your mortgage balance. Lenders often set a minimum amount, such as $5,000 to $10,000. Others may require 10% of your outstanding mortgage balance.

If you’ve recently come into an influx of extra money, mortgage recasting may be an attractive option.

However, not all mortgage lenders offer recasting and not all loans are eligible (FHA loans and VA loans, for example, don’t qualify).

In that case, you can still make a lump sum payment on your own (we’ll talk more about that next). Doing so still decreases your loan balance, but your monthly payments won’t get any smaller.

6. Put Any Windfall Toward Your Mortgage

Woman thinking about money
Krakenimages.com / Shutterstock.com

If you’re serious about getting out from under the major monthly expense of a mortgage payment, consider putting unexpected cash toward the principal.

Tax refunds, work bonuses, and inheritance payments give you a chance to pay off a chunk of your mortgage without significantly impacting your monthly budget.

Other windfalls can include profits from selling a car, gaining access to trust money, cashing out an investment, or winning the lottery.

Since VA and FHA loans can’t be recast, making a big payment toward the principal yourself is a nice alternative. Plus, you won’t pay any closing fees.

You’ll need to decide if stashing your newfound cash in an illiquid asset is the right move for your finances. But it’s a good option if you’re laser-focused on paying your mortgage off early.

Just make sure to coordinate with your loan servicer so the money goes toward reducing your principal, not paying off interest.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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Source: moneytalksnews.com

Posted on January 18, 2022

What Is Prepaid Interest? Here’s Why You Need to Pay the Mortgage Lender Ahead of Time

As the name implies, “prepaid interest” is money you owe to a bank or mortgage lender that is paid in advance of when it is actually due.

In terms of why it needs to be paid before the due date, there are several reasons, though it mostly boils down to the fact that mortgages are paid in arrears.

This means mortgage payments are due after the month ends, because interest must accrue (over time) before it can be paid.

This differs from rent, which is paid in advance of the month in which you occupy a rental unit.

If buying a home or refinancing an existing mortgage, prepaid interest will often be listed as a line item along with your other closing costs. Let’s learn why.

Prepaid Interest on a Home Purchase

Mortgages are generally due on the first of the month, though there is also typically a grace period to pay until the 15th.

Additionally, mortgage lenders don’t accept partial payments, so an entire month’s payment must be paid each month.

When you purchase a home, there’s a good chance you’ll close on a random day of the month, say the 10th or the 15th, or the 24th.

This means your mortgage will accrue interest for an odd number of days during that initial month.

Instead of asking you to pay that odd amount of interest as your first mortgage payment, you simply take care of it at closing.

By take care of it, I mean pay it in advance at a daily rate so you start with a clean slate once the loan funds.

Using one of our closing dates above, those who close on the 10th would owe 20-21 days of “per diem interest” at closing. Per diem simply means per day. It is also known as interim interest.

This ensures the lender is paid interest for the time you hold the loan and reside in the property, despite a full mortgage payment not being due yet.

However, as a result of that prepaid interest, your first mortgage payment is pushed out a month.

Remember, a full month of interest must accrue before a payment is generated.

So if your home loan closed on January 10th, you’d pay 21 days of prepaid interest at closing, but the first mortgage payment wouldn’t be due until Match 1st.

Why? Because you already paid the interest that would normally be included in your February 1st payment at closing.

And now you must wait until interest accrues throughout the month of February to pay that amount in March, along with a portion of the principal balance (the loan amount).

This is often referred to as “skipping a mortgage payment,” though it’s not really skipping, it’s deferring and paying the interest portion only.

Prepaid Interest on a Mortgage Refinance

prepaid interest

If you already own a property with a mortgage attached, interest accrues daily throughout the month.

Assuming you decide to refinance that loan by taking out a replacement loan, interest will be due on both the old loan and the new loan at closing.

Similar to a home purchase loan, the interest will be calculated by taking the mortgage interest rate and how many days each lender holds your loan.

This will be broken up between old lender and new lender, with interest before your closing date going to your old lender, and prepaid interest from closing date to month-end going to your new lender.

So if you close on January 20th, you’d pay 20 days of interest to your old lender and 11 days of interest to your new lender.

This way the full month’s interest is squared away when you close, and you can start fresh with no interest due.

Then after a month’s time, enough interest will have accrued to make a full payment, which will be due on March 1st.

For the record, the payment due on January 1st would cover interest for the month of December.

In terms of how that interest is paid, you’d owe daily interest to the old lender based on the current principal balance and mortgage rate.

For example, if your loan payoff was $250,000 and your mortgage rate 3.5%, daily interest would be roughly $24. That’s about $480 for 20 days.

On the new loan, you’d owe 11 days of interest based on the new loan amount and interest rate.

If we’re talking a rate and term refinance with a 3% interest rate, it’d be $20.55 a day for 11 days, or $226.

Together, you’d owe about $706 to both lenders for the month of January.

As you can see, interest is paid to both the old lender and the new lender at closing when it’s a mortgage refinance.

How to Calculate Prepaid Interest

While you shouldn’t have to calculate prepaid interest on your own, thanks to the escrow officer assigned to your loan, it’s good to know how it works.

You can also check their math and better understand how mortgage lending works.

Veterans may qualify for a $0 down VA loan

Let’s look at an example of prepaid Interest.

Loan amount: $200,000
Mortgage rate: 3%
Daily interest: $16.44

First, you take the mortgage rate and divide it by 365 (days) to determine the per diem interest amount.

For example, if the mortgage rate is 3%, it’d be .03%/365, or 0.00008219.

Next, you multiple that by the loan amount (we’ll pretend it’s $200,000) to get $16.44. I rounded it up from $16.438.

Finally, you multiple that amount by the days in which you’re required to pay per diem interest, which will be the total amount of prepaid interest due.

So if you need to pay it for 12 days, it’d be $197.28, and that would be included with your other closing costs, such as your loan origination fee, home appraisal, etc.

Tip: Prepaid interest isn’t a junk fee or an unnecessary add-on. It’s mostly unavoidable unless you close on the very last day of the month.

When Is the Best Time to Close Escrow?

  • Most home buyers choose to close at the end of the month
  • This can help keep closing costs down (including prepaid interest)
  • May also align better with your old rental lease if it renews on the first of the month
  • But if you close early in the month your first payment won’t be due for a long time

Ultimately, you don’t always get to pick when you close, whether it’s a home purchase or a refinance, but there are some considerations here.

If it’s a home purchase, closing late in the month means less prepaid interest will be due. And possibly less wasted rent will be paid out to your landlord.

For example, if you close on the 30th of the month and per diem interest is $50, you’d pay maybe $100.

And you wouldn’t have to pay another month’s rent assuming your lease renews on the first of the month.

Conversely, if you close on the 8th of the month you may owe roughly $1,150 in per diem interest at closing. This means higher closing costs, which could jeopardize your loan approval.

The caveat is your first mortgage payment wouldn’t be due for about seven weeks, versus four weeks for the mortgage that closes on the 30th.

So you get extra time until that first payment is due, which can be nice. And it’s also possible to receive a lender credit that covers the prepaid interest anyway.

Many transactions are structured as no cost loans these days, meaning the lender covers closing costs via these credits and they aren’t paid out-of-pocket directly.

The home sellers may also provide seller concessions to cover these costs.

The flipside is that the interest you pay doesn’t actually go toward paying down your loan amount and is basically just extra interest.

If you close near month’s end, beware that lenders are often extremely busy so there could be delays or mistakes.

If you close very early in the month, such as on the 4th, your lender may provide a “credit” for those days of interest and make your first mortgage payment due less than 30 days later.

The downside is your first payment is due the following month, but the upside is you don’t pay any unnecessary interest.

Best Day to Close a Refinance

  • Generally favorable to close late in the month to avoid higher closing costs
  • But the very last week of the month can be extremely busy and cutting it close
  • Also consider the rescission period that tacks on 3 days to your closing date
  • Signing loan docs on a Wednesday or Thursday could help you avoid extra interest charges

When it comes to a refinance, the same logic basically holds, though you’re paying interest to the old lender and the new lender.

Those who are refinancing to a significantly lower interest rate will want to get it done ASAP to avoid paying the higher per diem rate of interest.

You could argue avoiding the end of the month due to how busy lenders are, and maybe shoot for the third week of the month to keep interim interest at bay.

That would still give you five weeks or so until the first payment is due on the new refinance loan.

And as noted, a lender credit could absorb the interest paid to the old lender and new.

If you time it absolutely perfectly, it might be possible to skip two payments if you close early in the month, though this isn’t for the faint of heart.

Also consider the right of rescission, if applicable, which pushes your loan closing out at least three days.

If you sign docs on a Monday, the lender won’t be able to fund until Friday, and there’s a decent chance you pay “double interest” through the weekend if the old loan isn’t paid off immediately.

To avoid this, even though it’s not a major cost, you’d ideally want to sign on say a Wednesday or Thursday, then fund on a Monday or Tuesday.

Simply put, the earlier in the month you close, the longer it will be until the first payment is due on the new loan.

Tip: If you pay discount points at closing, these are also considered prepaid interest because you’re paying money upfront for a lower mortgage rate during your loan term.

(photo: Abhi)

Source: thetruthaboutmortgage.com

Posted on January 7, 2022

Is This Your Last Chance to Refinance Your Mortgage?

Mortgage loan refinance
Yuriy K / Shutterstock.com

Time may be running out to get the best rate on a home loan.

This week, rates rose to their highest level since May 2020 and are now more than 0.5% higher than they were in January 2021, according to the Freddie Mac Primary Mortgage Market Survey released today.

Freddie Mac, formally known as the Federal Home Loan Mortgage Corp., is a government-sponsored company. It helps foster stability and affordability in the housing market by purchasing mortgages that meet certain standards from lenders. That in turn helps lenders provide more loans to qualified buyers.

The trend toward higher mortgage rates may continue for a while. In a press release, Sam Khater, Freddie Mac chief economist, says:

“With higher inflation, promising economic growth and a tight labor market, we expect rates will continue to rise.”

This week, a 30-year fixed-rate mortgage averaged 3.22%. One year ago, the rate was 2.65%.

Meanwhile, a 15-year fixed-rate mortgage averaged 2.43%, up from 2.16% one year ago.

Freddie Mac’s Primary Mortgage Market Survey focuses on conventional home purchase loans for borrowers who make a 20% down payment and have excellent credit.

Of course, the forecast that rates will go higher is only a prediction. No one knows for sure where mortgage rates are headed. Over the past couple of decades, forecasters often have said rates couldn’t go much lower, only to have reality prove them wrong.

Still, there are multiple factors pushing rates higher. Not only is inflation showing up in prices everywhere, but there are now whispers that the Federal Reserve might raise the federal funds rate in March, much earlier than many experts had expected.

Although mortgage rates do not rise in lockstep with increases in the federal funds rate, the two rates generally move in the same direction.

So, if you want to lock in a great rate, now might be the time. You can look up refinance rates for lenders such as Better, a Money Talks News partner, right on the lenders’ websites.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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Source: moneytalksnews.com

Posted on January 7, 2022

How to Compare Mortgage Refinance Offers

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If you own a home, you probably see a lot of advertisements or get mail about refinancing your mortgage. Refinancing your home loan can help you save money, lower your interest rate, or convert an adjustable-rate mortgage to a fixed-rate mortgage.

To get the best deal on your refinance, you need to compare offers from multiple lenders. Read on to learn how to evaluate these offers and select the option that best fits your needs.

How to Compare Mortgage Refinance Offers

When you apply for any type of loan, whether it’s a mortgage, car loan, or personal loan, you should take the time to comparison-shop. If you look at multiple loan offers, you’ll usually find a better deal.

1. Check Your Credit Score

The first thing to do when you’re thinking about refinancing your loan is check your credit score. Credit scores are one of the first things that a lender will look at when a borrower submits a loan application.

The better your credit score, the better your odds of getting approved for a loan. A good credit score also gives you more loan options to choose from and may help you secure a lower interest rate on the loan you eventually chose. And that’s likely to save you some money in the long run.

If you have a poor credit score, the loans you qualify for might involve higher upfront fees and a higher interest rate than your existing loan. That could defeat the purpose of refinancing. 

It’s easy to check your credit report for free. If you find errors on your report, work with the reporting credit bureau to remove them. And if you find your credit isn’t as strong as you thought, table the idea of refinancing for the time being and work on boosting your FICO score.

2. Consider Your Goals for Refinancing

Before you apply for a new mortgage loan, think about your goals for refinancing. Your reason for refinancing will make a huge difference in the loan you choose. 

For example, if you want to lower your monthly payment, you wouldn’t want to refinance to a loan with a shorter term. If you want a lower mortgage interest rate, you wouldn’t choose a loan with a higher rate.

Let’s take a look at some of the most common reasons you might want to refinance your mortgage.

Lower Monthly Payments

Refinancing your mortgage can help you reduce your monthly payment, giving you more flexibility in your budget. Extending the term of the loan or reducing its interest rate are two ways to do this.

Lower Interest Rate

If rates have decreased or your credit has improved since you got your current loan, refinancing your mortgage can help you reduce your interest rate, which will save you money in the long run.

Remove PMI

If your down payment for your current mortgage was less than 20%, you likely have to pay for private mortgage insurance (PMI). If your current loan-to-value ratio has risen above 20% due to your loan payments or increasing home values, refinancing can help you get out of paying PMI.

Cash Out Home Equity

If you’ve built a lot of equity in your home and want to use it for something else, like home improvement or investing, use a cash-out refinance to turn your home equity into money you can spend.

Adjust the Loan Term

Refinancing your mortgage lets you reset its term. You can extend the loan’s term or shorten it based on your financial goals.

Add or Remove a Co-Borrower

If you want to add a co-borrower or remove someone from a loan, the easiest way to do so is likely to refinance your loan. For example, you might refinance to remove an ex-spouse from your loan.

Convert an Adjustable Rate to a Fixed Rate or Vice Versa

Refinancing is an opportunity to switch from an adjustable rate to a fixed rate or vice versa, reversing the choice you made when you got your original mortgage. 

Switching from an adjustable-rate mortgage to a fixed-rate mortgage prevents a potential interest rate spike after the adjustable-rate loan’s rate lock period ends. Meanwhile, converting to an adjustable-rate mortgage could temporarily lower your rate — as long as you plan to sell during the rate lock period.

3. Compare Mortgage Lenders

Once you’ve made sure your credit is in good shape, take a look at a few different lenders. You can consider lenders in your local area like banks and credit unions as well as online lenders.

To find the best mortgage for your needs, look for a lender that is advertising the type of loan you want. 

Do you need an FHA loan? Make sure the lender offers that type of mortgage. If you have an expensive home, you’ll want to make sure the lender offers jumbo loans.

You can also do some preliminary comparison of the loan terms, such as the annual percentage rate the lenders are advertising for their loans.

4. Request Quotes From Multiple Lenders

Once you’ve settled on a few lenders that you’re interested in working with, ask each of those lenders for a quote.

As part of providing the quote, the lender will probably ask you for some basic information, such as the loan amount that you’ll need, your annual income, the amount of home equity you’ve built, and so on.

Based on the information you provide, each lender will give you a sample mortgage loan offer. This will include things like the interest rate, fees, and monthly payment for the new mortgage they are offering.

One of the best ways to do this is to use an online loan broker or quote website like LendingTree. These sites take your information and search for lenders that work with people like you. You can get a quick look at offers from multiple lenders this way.

If you only get a couple of quotes from these sites, you can then move on to approaching lenders on your own.

Keep in mind that these sites make money by referring you to lenders, so they’ll give your contact info to lenders. You’re likely to start getting calls and emails after requesting quotes, so be prepared for that.

5. Compare Loan Estimate Terms

After you get loan estimates from each lender, sit down and compare them to find the best deal and to make sure that the terms of the new loans beat the terms of your current mortgage.

The important things to look at include:

Interest Rate.

The interest rate of the loan determines how quickly interest accrues. The lower the rate, the lower your monthly payment and the overall cost of the loan because less total interest will accrue over the life of the loan.

Mortgage Points

Mortgage points are paid upfront when you close on the loan. Points are a type of prepaid interest and each point you pay usually reduces the rate of your mortgage by 0.25%. Paying points can save you money in the long run if you plan to stay in your home for a long time.

Fees

You’ll have to pay various fees as part of getting a new mortgage, including underwriting fees, home appraisal fees, application fees, and origination fees. The higher the fees charged, the more expensive it will be to refinance your loan.

Loan Term

The term of a mortgage is the amount of time it will take to repay the loan if you follow the minimum payment schedule. The most common terms are 15 years and 30 years. A 30-year mortgage will have a lower monthly mortgage payment while a 15-year loan will cost less overall. Which you choose depends on your refinancing goals.

Interest Rate Type

When you get a mortgage, you can choose from an adjustable-rate loan or a fixed-rate loan. Fixed-rate mortgages have steady interest rates which offer predictability over the life of the loan. Adjustable-rate mortgages usually have lower initial interest rates, but rates could rise in the future, increasing the cost of the loan and its monthly payment.

Closing Costs 

Closing costs are all of the costs you have to pay to get your new mortgage, including things like mortgage points and fees. You want to make sure that you can afford any closing costs your refinance lenders will charge.


Mortgage Refinancing FAQs

Mortgages and refinancing can be complicated. Make sure you understand the process and why you might want to refinance before starting the process.

Should I Refinance My Mortgage?

Whether you should refinance your mortgage depends on your personal financial situation and your goals for refinancing.

You shouldn’t refinance just for the sake of refinancing. In most cases, refinancing only makes sense if it saves you money over the life of the loan, lowers your monthly payment, or helps you get out of debt faster. You’ll have to run the numbers to see if any of these situations apply to you.

How Much Money Can I Save by Refinancing?

Depending on the interest rate of your old loan and whether you’re paying PMI, refinancing could save you a lot of money.

Imagine you have a mortgage with a $250,000 balance and fifteen years remaining in its term. The interest rate of that loan is 4%. Your monthly payment before taxes will be $1,849 and you can expect to pay $332,820 over the remaining life of the loan.

Refinancing to a 15-year loan at 3% interest will drop your monthly payment by more than $100 to $1,726. Over the life of your new loan, you’ll spend $310,680, saving you $22,140 overall. If the closing costs and other fees are less than that amount, refinancing means saving money and adding flexibility to your monthly budget.

Does Refinancing Remove Private Mortgage Insurance (PMI)?

If you’re able to eliminate PMI from your loan payment, you can save even more. According to a study from the Urban Institute, the average loan that includes PMI had a principal balance of $289,700 in 2020. The Urban Institute reports that PMI averages between 0.22% and 2.25% of your loan’s value. Even if you’re on the lower end of that range and paying 1%, refinancing to eliminate PMI can save you almost $2,900 per year on an average loan.

For conventional loans, you can remove PMI by refinancing to a loan with a loan-to-value ratio of 80% or less, meaning you have at least 20% equity in your home. That equity can come from paying down your original loan’s balance or due to appreciation in your home’s value.

Unfortunately, mortgage insurance is difficult to avoid on some types of mortgages, includinge Federal Housing Administration loans. Depending on when the loan originated, mortgage insurance can be permanent or fixed for 11 years regardless of the equity you build. 

The only way to get out of these payments when you refinance is to refinance to a conventional loan. If you refinance to another FHA loan, you still have to pay for mortgage insurance.

Can I Refinance if I’m Underwater on My Mortgage?

If you wind up underwater on your mortgage, meaning you owe more than your home is worth, it can make refinancing more difficult. Many lenders require that you have some equity in your home before refinancing.

However, there are some lenders that will let you refinance, especially if you can put some extra cash toward the loan balance to get out of being underwater. 

In the past, the federal government has offered special refinance programs for borrowers with government-secured loans, such as the Enhanced Relief Refinance Mortgage program and HARP. Programs like these could appear once more in the future, though that’s not guaranteed.

Can I Refinance if I Have a Second Mortgage?

Some people wind up having multiple mortgages at one time. This can happen if you get a home equity loan or home equity line of credit on top of your current mortgage.

Refinancing with a second mortgage is possible, but can be more difficult than refinancing when you only have one loan.

One common solution is to refinance both loans into a single loan when you refinance. This has the added benefit of leaving you with just one monthly payment to make. It’s also relatively simple to refinance just your second mortgage.

Refinancing your primary loan is more complex. You need to work with both the new lender and the lender who provided your second mortgage and have the second mortgage lender agree to remain subordinate to the new loan. That means that the lender for your refinance loan has first priority to recover its losses in the event that you stop making payments.

If your second mortgage lender won’t agree to this, you won’t be able to refinance just your primary loan alone.

Can I Refinance More Than Once?

Yes, it’s possible to refinance your mortgage more than once. You can refinance as often makes sense for you financially so long as you can find willing lenders.

In reality, you don’t want to refinance your mortgage often. Refinancing incurs major costs, and the process can reduce your credit score in the short term, potentially impacting your ability to qualify for other loans or credit lines.

What Information Do I Need to Provide to a Mortgage Broker?

One option if you’re looking to refinance is to work with a mortgage broker. Mortgage brokers are middlemen who look at your financial situation and try to match you with lenders that will best help you meet your financial goals. This saves you the effort of having to research dozens of lenders to find the best deals.

Your mortgage broker will need much of the same information you’d need to provide to a lender, including:

  • Proof of Income. Bring your two most recent pay stubs and information about any other income you have so the broker can confirm your annual income, which can affect your ability to qualify for loans. 
  • A List of Bank and Loan Accounts. This shows your broker and would-be lenders how much cash you have on hand and your current liabilities. Lenders want to know that you have enough in the bank to deal with upfront refinancing costs. They also need to know your debt-to-income ratio, a key measure of your ability to afford your loan.
  • Details About Your Home and Current Mortgage. Bring your most recent mortgage statement so the broker can see your remaining balance, interest rate, monthly payment, and other details. 
  • Your Goals for Refinancing. Make sure to explain why you’re refinancing, such as to lower your monthly payment or to convert an adjustable-rate loan to a fixed-rate loan. This helps guide the broker as they look for the best loan for you.

Final Word

There are many reasons to refinance your mortgage, but most involve saving money — either by lowering your monthly payment or reducing the total cost of the loan. Understanding why you’re refinancing and knowing how to effectively compare loan offers from mortgage refinance lenders increases the odds that you’ll choose the loan that’s the best choice for your personal financial situation.

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TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he’s not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.
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