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Is Refinancing the Right Choice?
As no two cases are alike, the answer to this question is different for everyone. Therefore, it’s important for borrowers to do their research and be honest with their lender. Generally, refinancing is worthwhile if the mortgage’s current interest rate is a minimum of two percent higher than the prevailing rate. Borrowers should also think about how long they’ll stay in the home. Experts say that it can take at least three years to see the savings that come with a lower rate. Refinancing is good for homeowners who:
- Want to exit a high-rate loan
- Have an adjustable-rate mortgage and want to switch to a fixed-rate loan for budgeting purposes
- Want to access their home equity
Refinancing Options
There are three different refinancing categories: cash-out, limited cash-out, and rate-and-term, which are explained below.
- A cash-out refinance converts some of the owner’s equity into funds that can be spent on closing costs. As home values rise, more people become interested in cash-out refinancing.
- Limited cash-out refinances are similar to rate-and-term refinances, but closing costs are rolled into the loan balance.
- Rate-and-term refinances allow borrowers to change their mortgage’s interest rate, its term, or both. These refinances often come at lower rates than those found in cash-out Loan Refinancing.
Mortgage application fees, which some lenders charge to cover the credit check and loan processing expenses.
Loan origination fees, which are charged by lenders for their work in preparing and evaluating the loan. This typically includes the funding and underwriting of the loan.
Appraisal fees: Many of today’s lenders charge appraisal fees upfront, and again, it’s essential to compare prices. Appraisals are a way to estimate a home’s value, and they’re a necessary step in the lending process as they help to determine the loan amount.
Title insurance and title search charges, which cover the expense of examining public records to research the home’s deed. Title insurance offers the homeowner protection if someone alleges that they have a previous claim on the home.
Mortgage insurance: Depending on the loan program and the amount of the down payment, a borrower may have to purchase mortgage insurance. This type of coverage protects the lender in the event that the borrower defaults on the loan.
On average, a homeowner should expect to pay three to six percent of the outstanding loan amount in refinancing expenses, along with prepayment penalties and the cost of paying off the second mortgage (if applicable). However, borrowers should remember that their lender is on their side, in that they want to help them make an informed choice and find the solution that fits their financial needs.
What’s Needed to Refinance a Home Loan?
During the Conventional Refinancing process, the homeowner should expect to answer questions and provide a great deal of paperwork. The more prepared a homeowner is, the easier the closing process will be. Borrowers can expect to provide:
- W-2 forms
- Credit histories
- Tax returns
- Pay stubs
- A copy of their driver’s license
- A list of assets
- Statements of outstanding debts like credit cards, car loans, student loans, and more
- Other supporting documents
Depending on the loan program and refinance type, the borrower may need to have an appraisal done. Otherwise, once all terms are satisfied, the lender will prepare the right documents and get the loan closed.