Securing a mortgage is no easy feat, especially for first-time homebuyers serving in the military. Later, when the time is right, you might consider refinancing your mortgage to reduce interest payments or the length of the loan. The refinancing process can be just as stressful as your original loan if you’re not aware of the process or haven’t adequately prepared.
Your initial terms of the home loan were calculated against your financial situation and the national interest rate at the moment of application. But what if those terms have changed from many years ago? It might be beneficial to investigate a refinance of your loan, especially now.
A years-long trend of unprecedented low interest rates has pushed even more homeowners into examining the benefits of refinancing. So much so, that it’s been challenging to find lenders with the capacity to take on new clients and execute their transactions without lengthy delays. The rush is on because experts predict that during the second half of 2021, these interest rates will begin to increase.
It takes some mathematical sleuthing to see if the fees involved are less than the ultimate savings. But with the help of a refinancing calculator and professional guidance, refinancing just might be worth the hassle.
What Is Refinancing?
Refinancing sounds like simply applying to change the terms of a loan in your favor, but actually, the initial loan is paid in full and a new, second loan with better terms is acquired. Because it’s actually a new loan application, the refinancing process requires the borrower to collect all of the essential financial documents needed, similar to the original loan, plus an appraisal for the property’s current value.
To apply, you’ll need to round up the latest versions of:
- Financial assets such as retirement and savings accounts
- Verifiable employment and income histories
- Credit scores and reports
- A recent home appraisal
Take a look at the pros and cons of refinancing in our post, Should You Refinance Your Mortgage?
When Is the Best Time to Refinance?
As a starting point, most lenders require the original mortgage to be held for at least 12 months, but there are some variations. If dropping interest rates catch your eye, begin to assess credit history and scores to correct any errors. This is also true for other financial accounts if there have been changes in income.
If you’re considering refinancing, it is not the time to cosign a loan for a family member, buy a car, or make any purchase that will change your financial situation. These debt -inducing transactions reduce your ability to qualify for the lowest interest rates.
Knowing the tipping point or your break-even numbers will help you gauge the best time for you to refinance. This is a tricky feat to accomplish without thorough preparation and a professional mortgage lender’s help.
How Do You Prepare for Refinancing?
Preparation is more than just gathering documents. Here’s where the math sleuthing begins. Finding an easy to use online refinance calculator helps to keep the numbers in perspective. You should also feel comfortable shopping for and understanding the new loan terms, including interest rates and associated fees. It’s common to receive favorable refinancing terms from the lender who offered the initial mortgage because they’d rather maintain you as a customer than lose you altogether.
After contacting possible lenders (compare multiple offers side by side to choose the best option), they will provide a loan estimate with the terms, projected monthly payments, closing costs, and other necessary fees. Save early to pay cash for the fees; this helps to lower the overall payment.
The following scenarios are typical money savings vs. costs decisions to consider before starting the refinancing process.
Is there a clause in your loan that penalizes prepayment of the mortgage? The penalties vary, so verify how much it will cost you to pay early.
Consider future tax returns. If you claim your mortgage interest on a tax return, a refinanced rate equals less mortgage interest as a deduction.
Even at a lower rate and smaller payment, a refinanced loan probably translates to a longer term. This means you’ll be paying interest a lot longer than the initial mortgage required. Keep in mind loans are designed to have the most interest added in the early payments. Later into the life of the loan, payments are pushed more into principal.
The new loan will be laden with fees: application, appraisal, title searches, legal, origination, and insurance fees are all possibilities. Adding these up will help determine if the refinancing process is profitable.
In December 2020, the Federal Housing Finance Agency tacked on a 0.5 percent “adverse market” fee on most mortgage refinances. Each refinanced loan valued at $125,000 or more and ultimately ends up under Fannie Mae and Freddie Mac’s ownership is affected. This group ends up to be a large number of homeowners because two-thirds of mortgages are under Fannie and Freddie’s umbrella.
There are a couple of important exceptions to note: VA and FHA loans are exempt, as are jumbo mortgages (mortgages worth $510,400 in typical markets and $765,600 or more in more expensive regions).
5 Reasons Borrowers Refinance
More often than not, borrowers hope to refinance their loan to capture a lower interest rate, likely saving thousands of dollars in interest over the years, as well as possibly shortening the length of their loan. But there are other reasons, including tapping into equity for home improvement projects and discontinuing private mortgage insurance (PMI).
Ultimately, the overall goal is to lower mortgage payments while at the same time offsetting potential refinancing fees in the shortest amount of time possible.
Veteran’s United Home Loans provides a tool that allows you to choose the reason you may want to refinance: lower payments, change loan terms, take cash out of the home, and consolidate debts.
1. If yours is an Adjustable Rate Mortgage (ARM) and is scheduled to increase, it’s an ideal time to refinance at a fixed rate because the rates are historically low. It is also possible to refinance an existing ARM for a new one with better terms.
2. Most mortgages are structured for a 30-year term, but a good refinance option could include a reduction in the length of payback from 30 years to 15 years.
3. Cash-back refinancing is available by withdrawing equity (the difference between the amount of the loan owed and the value of the property.) This is a logical option if the equity is significant or the loan is paid in full. Homeowners use this money for many reasons, including down payments on another house, home improvements, and credit card debt.
4. Cash-in refinancing is different because it allows the borrower to achieve a lower interest rate, a shorter loan term, or the option to put more money down during the refinancing to avoid mortgage insurance.
5. If the equity in your home has reached 20 percent, some lenders will release you from PMI.
Refinancing your mortgage isn’t a one-size-fits-all and completed in one day kind of deal. By collecting the necessary information well in advance and continuously monitoring the housing finance markets, and even maintaining an open relationship with a lender, the benefits of a refinanced deal could handsomely outweigh the annoyance of the process.
By Dawn M. Smith