The Complete Guide to Your Mortgage Refinance

Does refinancing your home make sense for you? If you’re unsure, you’ve come to the right place. While many think the purpose of refinancing is to take advantage of lower rates, there are several reasons why homeowners choose to refinance. With a little preparation and a push in the right direction, you can have a smooth refinancing journey.

As the market responds to COVID-19, rates are as low as ever making now the perfect time for you to refinance. To help protect the economy steps taken by the Federal Reserve have resulted in lower rates for homeowners thus giving you the opportunity to lock in a lower rate which in turn may save you a lot of money. In this guide you will learn what refinancing is and we give you the tools you need to help you make the decision on whether or not you should refinance your home.

What is Refinancing?

Refinancing is the process of taking on a new mortgage and using it to replace your previous one. Taking advantage of lower interest rates is the primary reason many homeowners choose to refinance. While taking on a new rate may help you save money in the long run, there are several reasons and benefits of refinancing.

Homeowners choose to refinance their homes for a plethora of different reasons. You may want the ability to pay off your mortgage quicker, or maybe you want your monthly payments to be deminished. Perhaps you need some cash for other expenses, or you want to capitalize on lower interest rates. While the reason to refinance is unique to every individual, being clear about your goals from the start is vital.

Here are a few common reasons why homeowners choose to refinance:

• Lower your monthly payment. Interest rates fluctuate daily, and you may qualify for a lower rate than the one on your current mortgage. Evaluate how your current interest rate compares to the economic climate, or speak with your lender to see if you are able to qualify for a lower rate.
• Convert your home’s equity to cash. Paying your mortgage over time builds equity. A cash-out refinance allows you to use the equity you’ve gained and turn it into cash. This money can be used for several reasons including a retirement plan, purchase an investment property, make home improvements, or cover expenses such as college tuition.
• Stop paying monthly mortgage insurance. Refinancing may allow you to tap into your home’s equity to eliminate the need to pay mortgage insurance. Taking on a new loan makes it possible to have a loan program that has no mortgage insurance fees.
• Shorten your mortgage term. If you want to pay off your loan in a shorter period, refinancing can help you get a reduced loan term, thus paying off your mortgage sooner. Speak with your lender to ensure that a shorter team is right for you, since this may result in larger monthly payments.  
• Switch from an Adjustable-Rate Mortgage (ARM) to a Fixed-Rate Mortgage. If you have an adjustable-rate mortgage, refinancing to a fixed-rate loan can lock in a low rate for the life of the mortgage, which may result in significant cost savings. Not only can this result in significant savings, you can rest assured that your monthly payments won’t increase if rates should rise in the future.

Although refinancing has several benefits, there are also a few reasons refinancing may be the wrong decision. Refinancing may not be in your best interest if the current interest rates are higher than the rate you have on your mortgage, the additional fees associated with closing your mortgage are above your budget, or you cannot take advantage of any of the benefits listed above. When in doubt, speak with your lender so you’re positive refinancing is the right move.

The choice is ultimately up to every individual, but there are several ways to make the most of the money you may save if you choose to refinance.

Prepare Your Finances

If you’re truly considering refinancing your home, it’s essential that you prep your finances. While refinancing may offer substantial benefits, there are several fees and financial decisions you need to keep in mind when looking to refinance.

Order and Review Your Credit Report

Your credit report provides a snapshot of your credit history and whether you pay bills on time. It also reveals how much debt you currently have. Although your lender will order a credit report when you begin the refinance process, it’s helpful to know what yours says ahead of time. You can visit www.annualcreditreport.com for a free copy of your credit report.

Review your credit report thoroughly and address any errors or issues immediately. If you have or have had severe credit problems, your lender may be able to find alternative financing solutions for you. Although programs exist for a variety of borrowers, the better your credit score, the more options will be available. It’s critical that you keep score on your credit as it helps determine whether or not you receive a loan.

Calculate your Debt-to-Income Ratio (DTI)

In many cases, lenders will review your debt-to-income ratio (DTI) to determine your ability to repay the money borrowed for your new mortgage. Your DTI can impact whether you qualify for certain products and rates. You can calculate your general DTI by adding up your monthly debts and dividing it by your gross monthly income. According to Credit.com, a DTI equal to or less than 36% is ideal, 18% is considered excellent, and 45% is perceived as the max for lenders looking to approve loans.

Check Your Current Mortgage Payment

Understanding how your monthly mortgage payment fits into your overall budget will help you weigh your options. For instance, if your goal is to get a lower monthly payment, it’s essential to know how much smaller the payment must be for the refinance to be worthwhile. If you want to take cash out or shorten your loan term, you should know how much room you have in your budget for a higher monthly payment. You should also check to see if your mortgage carries a prepayment penalty. By understanding the penalty, if any, you will be able to factor that into your decision.

Remember Every Property and Situation is Unique

Many small steps may occur within the five main stages, and even a minor issue could temporarily put the process on hold. Things may have changed since you initially financed your home, and the documentation needed today may be more extensive. Lenders must take steps to satisfy guidelines that are designed to protect you. Preparation is key and it’s imperative that you work with your lender to ensure all your documents are in order.

Research the Current Value of Your Home

Before refinancing, it’s a good idea to research an estimate of your home’s current value. You cannot borrow more than the home is worth, so an appraised value that comes back lower than expected can impact your refinance – especially if you’re looking to remove mortgage insurance or take cash out. An excellent way to estimate the current value of your home ahead of an appraisal is to check the sale prices of similar homes close by—the more recent the sale, the better. Knowing the value of your home can also tell you how much equity you have. To figure this out, simply subtract your current mortgage balance from the estimated cost of your home.

It’s critical that you also remember to think about fees like application fees, origination fees, appraisal fees, and closing costs. The total costs for refinancing your home also plays a significant impact on whether or not you should refinance your home.

Establish Your Goals

It could be time to refinance if your adjustable-rate mortgage payment is increasing. Your current interest rate is higher than today’s rate and you want a lower payment. You want to “cash out” the equity in your home to use for expenses such as college tuition, a vacation property, or home improvements.

Refinancing your home opens a new door to things you can do with the money you will be saving. Below are a few options:

• Build an emergency fund. If your income is interrupted or if a need arises, this fund lets you avoid interest costs from borrowing or tax consequences from cashing out investments.
• Pay off your debt. Paying off high rate credit cards or other debts will help free up your cash flow so you can invest it for growth.
• Invest, invest, invest. Max out your 401K contribution. Even a partial match from your employer yields an amazing, instant rate of return. Do you have kids? Start or ramp up a college savings plan. Tuition costs are rising faster than inflation. Invest now to beat the trend.
• Make sure you are protected. Do you have sufficient life, disability, and property insurance? Doing everything else right matters little if tragedy strikes and you lose it all due to lack of coverage. Why not set up a review with your insurance pro today? Call if you need a referral to someone who can help.
• Pay off your loan faster. This is not always the best thing to do with your cash, but for some, peace of mind has the best rate of return.

The Refinance Process

The steps you must take to refinance a mortgage will be similar to the ones you took to get your current loan:

• Step 1: Start with the Basics Establish your goals for refinancing, then examine your current financial situation to decide if a refinance makes sense for you. An expert from First Heritage Mortgage can work with you to make sure you’re considering the right things when making this decision.
• Step 2: Application Once we determine that a refinance is right for you, it’s time to start the application. Much like your original mortgage application, we will request general information as well as documentation of your income and assets.
• Step 3: Processing We will collect property information with an appraisal, title reports, and proof of insurance. A credit report will be requested, and we will verify your income and assets.
• Step 4: Underwriting & Approval Our underwriters will make sure all loan guidelines are met by confirming the information we’ve provided. A checklist of factors must be satisfied in order to obtain approval. You may be asked to provide additional documentation during this time. It’s important to respond to all requests quickly, or “conditions” may be put on the approval, preventing you from moving forward.
• Step 5: Closing & Funding After all conditions for approval have been satisfied, your loan is cleared to close. We will compile your closing package, and then your closing will be scheduled and completed. On loans for primary residences, a three (3) day rescission, or waiting period, must occur between the closing and funding of the new loan. After the rescission period, your former loan will be paid off and your new mortgage will start. 

Refinance Do’s and Don’ts

Several actions can impact the mortgage approval process. Use our tips below to help keep your loan approval and closing date on track.

• Do continue to make your regular payments. However, if you have a payment due just prior to your scheduled closing, please consult with your mortgage professional first. It may be best to pay at the closing rather than risk having the payment and payoff letter cross in the mail.
• Do prepare your home for the appraisal. The appraiser will take photos inside and out. While a messy house is not worth less than a clean one, first impressions can make an impact with an appraiser.
• Do keep your pay stubs and bank statements available. Underwriters may request the latest documentation available before loan approval or as a condition of loan commitment.
• Understand that things have changed. Underwriters require more documentation than in the past. Even if requests seem intrusive or unnecessary, please remember that if they didn’t need it, they wouldn’t ask. 
• Don’t apply for new credit. Changes in credit can cause delays, change the terms of your financing or even prevent closing.
• Don’t change jobs during the process. Probationary periods, career, or even status changes (such as from a salaried to a commissioned position, leave of absence, or new bonus structure) can be subject to stringent rules.
• Don’t make undocumented deposits. Primarily large but sometimes even small deposits must be sourced unless they are identified. Make copies of checks and deposit slips. Keep your deposits separate and small. Avoid depositing cash.
• Don’t start any home improvement projects. Anything that can disrupt the functionality of the home can be an issue if undertaken before the appraisal. Delay projects that require a building permit, involve a bathroom or kitchen renovation, or create structural changes.

What Are My Refinance Options?

When it comes to refinancing, there are a few options that target a specific type of refinance. Of course, you have your common refinance with intentions to acquire a rate that’s is lower than your current one.  As discussed earlier, you have cash-out refinances which allow you to convert your equity into cash. In addition, there is the VA streamline refinance. This option is also known as the Interest Rate Reduction Refinance Loan (IRRRL), which helps those with Veteran Affair loans refinance into a lower interest rate and lower their monthly mortgage payment.

There are several reasons to consider refinancing your home. If you want to do a little more research before you make your decision, don’t ever be afraid to ask questions! If you’re uncertain about what you need or what you should do, we’re here to help you through the process. If you want more details, download our free refinance guide or contact One of Our Loan Officers Today!