Get The Best Loan Terms
If you are like most people, you will need to get a loan when you buy a home. Because you borrow money, you will naturally have to pay the mortgage lender’s loan terms.
Sometimes, the loan terms on the mortgage you receive aren’t the best.
Many home buyers do not realize that the interest you pay and other fees can vary substantially depending on which bank you use.
Nobody wants to overpay on their mortgage. To avoid spending too much, shopping around when looking for a loan is worthwhile. It pays to consider the big picture before you go to a particular lender.
Only by considering all the essential factors – including interest rate, points, and fees – can you determine what makes a loan the best for you.
It is considerable if you stop and look at what less desirable terms can cost you over the length of the loan.
Understanding how to get the best mortgage interest rates becomes critical for maximizing your long-term financial picture.
Getting the best mortgage terms possible is naturally appealing to most people.
When you don’t have the greatest home loan terms or have other needs, it makes sense to refinance your mortgage.
Shopping around becomes critical to get the best interest rates. I’ve refinanced my homes numerous times over the years. By refinancing you can improve your loan terms substantially, saving thousands of dollars.
We will examine what you should know about refinancing the mortgage on your house.
What Does Home Loan Refinancing Mean?
Refinancing a home loan replaces an existing mortgage with a new one, typically with more favorable terms. Homeowners may choose to refinance for various reasons, such as to lower their monthly mortgage payments, reduce the interest rate on their loan, or access the equity in their home.
Refinancing can be a strategic financial move, allowing homeowners to take advantage of changing market conditions and improve their financial situation.
How Does Refinancing a Property Work?
Refinancing is frequently less complex than buying a house, yet it involves many similar steps. It can be challenging to estimate the duration of your refinance, but the standard timeline is 30-45 days.
Let’s examine the refinance process in more detail.
Apply for the Mortgage
The initial step in this procedure involves evaluating the various types of refinance to identify the most suitable option for your needs.
When you seek to refinance, your lender will request the information you provided when you initially purchased the home. They will assess your income, assets, debt, and credit score to ascertain if you satisfy the refinancing criteria and can repay the loan.
Some of the documents your mortgage lender might need include the following:
- Two most recent bank statements
- Two most recent W-2s
- Two most recent bank pay stubs
If you are self-employed, you may be requested to provide additional income documentation. It is advisable to have your tax returns easily accessible for the previous couple of years. See all the mortgage documents you may need.
You are not obligated to refinance with your current lender. Opting for a different lender will result in the new lender paying off your current loan, concluding your association with the old lender.
Take the opportunity to explore and compare the current mortgage interest rates, availability, and client satisfaction scores of different lenders.
Picking the best mortgage lender is wise to get the best loan package.
Float or Lock Your Rate
Rate locks typically last from 15 to 60 days and are influenced by factors such as location, loan type, and lender. Opting for a shorter rate lock period may result in a better rate, as the lender doesn’t need to hedge against the market for as long.
You can also float your rate, which involves not locking it in before finalizing the loan. While this may lead to a lower rate, it also carries the risk of a higher mortgage rate.
An Appraisal is Done Like a Purchase
Similar to purchasing your home, obtaining an appraisal is necessary when refinancing. Your lender will initiate the appraisal process, a professional appraiser will assess your property, and you will be provided with an estimation of your home’s value.
To prepare for the appraisal, ensuring your home is well-presented is essential. Take the time to tidy up and address any minor repairs to create a positive impression.
Additionally, consider compiling a list of any improvements you have made to the home during your ownership.
See what an appraiser looks for so you understand the process better. Keep your fingers crossed that the appraiser believes the value is more than what you would like to refinance.
If the appraisal comes back lower than expected, you may challenge it. Appraisal gaps are not that common but do happen. The cost of an appraisal is usually part of your overall closing costs.
Submission to Underwriting
After you have submitted your refinance loan application, your lender initiates the underwriting process. This involves verifying your financial information and ensuring the accuracy of all the documents you have provided.
Your lender needs to verify the details of the property. This verification process involves an appraisal to assess the value of the home. The refinance appraisal plays a significant role in the process as it dictates your options.
When refinancing to access cash, the value of your home plays a crucial role in determining the amount of money you can receive.
Similarly, if you aim to reduce your mortgage payment, the value of your home may affect your ability to eliminate private mortgage insurance (PMI) or qualify for specific loan options.
Time For Your Closing
After the underwriting process and home appraisal are finished, the next step is closing your loan. Before closing, your lender will provide you with a Closing Disclosure document. This document will contain all the final figures for your loan.
The closing process for a refinance is typically quicker than closing a home purchase. The closing involves the presence of the individuals on the loan and title and a representative from the lender or title company.
Upon closing, you will review the loan specifics and complete the signing of your loan documents. This is when any closing costs not included in your loan will be settled. If your lender owes you money, such as in the case of a cash-out refinance, you will receive the funds following the closing.
After closing on your loan, there is a brief window before it becomes finalized. Should an unforeseen situation arise and you need to cancel your refinance, you can exercise your right of rescission within the 3-day grace period.
What Are The Benefits of Refinancing a Home Loan?
Refinancing a home loan can offer several benefits to homeowners, providing an opportunity to save money and improve financial circumstances.Click To TweetGet a Lower Interest Rate
One of the primary advantages of refinancing is the ability to secure a lower interest rate. Homeowners can reduce their monthly payments by obtaining a new loan with a lower interest rate than the original mortgage. It potentially saves a significant amount of money over the life of the loan.
This can free up funds for other expenses or long-term savings goals.
Change Your Loan Terms
In addition to lowering interest rates, refinancing can allow homeowners to change the terms of their mortgage. For example, individuals may switch from an adjustable to a fixed-rate mortgage to gain more stability and predictability in their monthly payments.
Some homeowners may also opt to shorten their loan term. Doing so potentially allows them to pay off their mortgage more quickly and save on interest costs over time.
On the other hand, extending the loan term through refinancing can reduce monthly payments, providing relief for those experiencing financial strain.
Tap Into Your Home’s Equity
Refinancing can also be a way to tap into the equity built up in the home. Through a cash-out refinance, homeowners can access a portion of their home’s equity as a lump sum. This can be used for various purposes, such as home improvements, debt consolidation, educational expenses, or other significant expenditures.
By leveraging the equity in their home, homeowners can potentially improve their financial situation and invest in their long-term well-being.
The benefits of refinancing a home loan can allow homeowners to save money. Borrowers can adjust their mortgage terms to suit their needs better and access their home’s equity for critical financial goals.
Get Rid of Private Mortgage Insurance
Besides VA loans, borrowers typically incur private mortgage insurance (PMI) when you finance over 80% of your home’s value. Refinancing your mortgage in this scenario could provide a chance to eliminate this cost.
This opportunity is open to borrowers with a loan-to-value (LTV) ratio of less than 80%, resulting from a decreased loan amount, a higher home value, or both.
Things To Consider About Your House Loan
There are several aspects to refinancing a home mortgage loan that you need to look at, including:
Interest Rate
You will hear about the interest rate most, and for good reason. The interest rate is the primary driving force in the costs of taking out a loan.
It makes sense to look for the lowest interest rate and improve your credit score to get an even better one. Having an excellent credit score will help you do just that.
You should be going for the lowest interest rate you can find. However, there are other costs that you should also look at, like all the various fees lenders may charge.
While getting a low-interest rate is essential, if the other charges involved with getting this low rate are exorbitant, it can make the whole deal less desirable, especially if you will only be in the home for a short period.
Fees With The Mortgage
The lender will always charge fees for various things as part of refinancing the loan. Other parties may also charge fees, depending on the sale. When you get an estimate for a loan, you should ask the lender to separate the bank fees from the third-party fees so you can get a clearer picture of who is charging you what.
The costs charged in a loan can change the overall attractiveness, even if the interest rate is lower. This is something that should always be considered.
Down Payment Requirements For Mortgage Types
There will almost always need to be some form of down payment. The required down payment can vary, though. The amount of the down payment can also affect the other costs of the loan.
The most common types of loans for purchasing homes include conventional, FHA, VA, and USDA. They can also be used for home refinancings.
Each of these types of loan programs has varying amounts of down payment requirements. Finding the correct type of mortgage could depend on many factors associated with these loan products.
Conventional Loan
Conventional loans – generally speaking, the minimum down payment with a conventional loan is 5%. This is not to say that most buyers don’t put more money down. They do.
FHA Loan
FHA loans – these types of mortgages are prevalent because you are only required to put down 3.5% as a down payment. A FHA loan can be attractive for a borrower with a good income but not a lot of money saved for a down payment.
USDA Loan
USDA loans – are used in areas that are considered “rural.” There are maximum population requirements to take advantage of this loan product. You must also meet specific income guidelines. This, however, is one of only a few actual no-down payment loan programs.
VA Loan
VA loans – VA loans stand for Veterans Administration and are loan products specifically for veterans or those who have served our country in the military. The attraction of a VA loan is also the fact it is a no-down payment loan product.
The Points You Pay
There are two types of points in a mortgage – origination and discount. Your lender may charge origination points for giving you the loan. You may buy discount points for your loan.
Each discount point you buy is worth 0.25 percent, so if you bought four points, you would drop the interest rate by a point.
Buying points may be a way to pay less for your mortgage, but not always. Have the lenders talk about the points in dollars so you can get a clear picture of the benefits they will offer you over the life of the loan.
Sometimes, it makes sense to pay points; other times, it does not. A mortgage point is one percent of the amount you are mortgaging. For example, if you are mortgaging $350,000, one point would equal $3500.
You essentially buy down your loan rate when you pay points with your mortgage. The more points you generally pay, the more attractive rate you will receive.
The way to figure out if you should be paying points or not is by projecting how long you will stay in the home. You need to calculate the difference in mortgage payments between paying and not paying points.
There will be a certain length of time whereby the difference in these two situations will be made up by how long you remain at the property. The longer you stay in your home, the more it makes sense to pay points.
What Are The Closing Costs
Closing costs can undoubtedly make or break the overall mortgage costs. Given the variable nature of closing costs, it is crucial to understand precisely what you are paying.
When factored into the loan, it can change what you are paying compared to other loan programs where the closing fees are not as high.
When refinancing a home, asking the lenders you are considering to break down all the costs can be advantageous. You will want to make an apples-to-apples comparison.
Mortgage Insurance Expenses
When refinancing a house, you should find out from the lender if private mortgage insurance is required on the loan so you can factor in all of your costs.
In most circumstances, mortgage insurance will be necessary when you are not putting 20 percent down.
These mortgage insurance premiums can be expensive, so it is an excellent financial idea if you can avoid paying them.
Getting The Best Mortgage
Although you may be limited on just how much you can save on your mortgage, there are things you can do to minimize excess expenses. Some of these include:
Pay Attention to Your Credit Score
Your credit score can surprisingly affect the final amount you pay for your mortgage. You should pay careful attention to it as you consider refinancing a loan.
If there are relatively easy ways to boost your score a little – like settling collection debts and paying down credit cards – you should seriously consider doing those first if you want the lowest mortgage rate.
This is one of the things discussed at length in how to get a mortgage, including cleaning up any mistakes on your credit report.
You can talk to a financial adviser or a non-profit debt counselor about your options to repair your credit.
You could also ask the lender how much of a difference a better score would make for your loan.
Repairing your credit is a viable way to lower a mortgage cost. However, only you can determine if the payoff is worth the extra work and putting off buying a home.
Getting a Detailed Good Loan Estimate
Each lender you talk to will give you a loan estimate that lists all the loan terms.
The different interest rates, fees, and other costs are located here.
You can compare these estimates to determine which lender gives you the terms that benefit you most.
When you go to each lender for an estimate, the loan agent usually provides the necessary information. But if you require more details or information presented in a certain way, you can ask for it.
As stated before, you can ask for lender’s fees and third-party fees to be differentiated. You can also request that points be described in dollar amounts.
Feel Free To Negotiate With The Lender
You can usually negotiate the terms of the mortgage offer, especially the fees that the lender charges. It’s possible you like most loan terms, but not all. You can always request an adjustment and should not be afraid if you want the best deal.
Many people believe you can’t negotiate with banks. That’s not the case. Last month, I went to a bank in Milford, Massachusetts, where I do some banking. I wanted to move money from a checking account into a certificate of deposit.
Another lending institution was offering a significantly higher rate. I told them I would be moving my money to another lender. Instead, they asked me if I would keep the money in the bank if they matched the CD rate.
I said yes, and they did. The same can be true when refinancing a mortgage on your property.
Determine What Is Most Important To You
Each borrower has different priorities and different goals. If there are terms that you like about a loan that works for your needs, then go ahead and prioritize them.
Most people are focused on paying as little as possible. This is a reasonable goal, but paying more for terms that fit your needs is OK.
For example, you may get a variable-rate mortgage with better terms than a fixed rate. This could be perfect for the buyer who knows they will not stay in a home for an extended period.
When purchasing a property, balancing the expected time frame in a home vs. the rate and terms should always be considered. Not too long ago, I had a client buying real estate in Medway, MA, but I knew they would not stay for an extended period. They chose a mortgage program that fixed the rate for seven years but then turned it into a variable rate.
The terms and conditions of the loan were better than a thirty-year fixed loan. The buyer was not worried because they believed they would be gone by then.
Pros and Cons of Refinancing a Home Mortgage
Pros
- Lower interest rates: Refinancing can secure a lower interest rate on your mortgage. It will save you money over the long term.
- Lower monthly payments: By extending the loan term or securing a lower interest rate, you may be able to reduce your monthly mortgage payments.
- Access to equity: Refinancing can allow you to tap into the equity in your home, providing funds for home improvements, debt consolidation, or other expenses.
- Consolidation of debts: Refinancing can consolidate high-interest debt, such as credit cards or personal loans, into a single, lower-interest mortgage.
- Paying off your mortgage faster: You can refinance your mortgage into a new loan with a shorter term. For example, going from a 30-year loan to a 15-year. By shortening your loan term, you will build more equity in the home faster. You’ll also pay off the loan more quickly. This will allow you to own your home free and clear earlier and enjoy benefits such as saving money on interest and having more disposable income each month once you no longer have a mortgage payment.
Cons
- Closing costs: Refinancing typically involves closing costs. They can add up to thousands of dollars and may negate the potential savings from a lower interest rate.
- Extended loan term: Extending the term of your mortgage through refinancing can result in paying more in interest over the life of the loan, even with a lower interest rate.
- Risk of reset: Refinancing from a fixed-rate mortgage to an adjustable-rate mortgage (ARM) can expose you to interest rate fluctuations and potential payment increases in the future.
- Impact on credit: Multiple credit inquiries and a new loan can temporarily lower your credit score. It can affect your ability to secure favorable rates on other loans or lines of credit.
- A reduction in home equity: A cash-out refinance enables you to access funds by borrowing against the equity in your home. This means you are utilizing your home’s equity, reducing its value. For instance, if you have $75,000 equity in your home and opt for a $30,000 cash-out refinance, you will be left with $45,000 equity.
Conclusion
There can be many benefits to refinancing your home loan. However, getting the best loan terms for your needs requires careful research. Spend adequate doing your due diligence before committing to a lender.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on refinancing a home. He is an expert in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.
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