Our Home Refinancing Guide

Reasons to Refinance

The first step in deciding whether you should refinance is to establish your goals. The most common reasons for refinancing a mortgage are to take cash out, get a lower payment or shorten your mortgage term.

Take Cash Out

Refinancing your mortgage is a great way to use the equity you have in your home. With a cash-out refinance, you refinance for a higher loan amount than what you owe and pocket the difference. Any proceeds you receive are tax-free.

Many homeowners use cash from their home to pay off high-interest credit card debt and student loan debt. You can also take cash out to finance home improvements, education or whatever you need. Since mortgage interest rates are typically lower than interest rates on other debts, a cash-out refinance can be a great way to consolidate or pay off debt. Additionally, mortgage interest is tax-deductible, but the interest on other debts usually isn’t.

You may be able to take cash from your home if you’ve been paying on the loan long enough to build equity. Additionally, you may be able to do a cash-out refinance if your property value has increased; a higher value on your home means your lender can give you more money to finance it.

Get a Lower Payment

A lower mortgage payment means more room in your budget for other things. There are a few ways you can lower your payment by refinancing.

First, you may be able to refinance with a lower rate. If rates now are lower than they were when you bought your home, it’s worth talking to your lender to see what your interest rate could be. Getting a lower rate means lowering the interest portion of your monthly payment – and big interest savings in the long run.

Second, you could refinance to get rid of mortgage insurance – a monthly fee you pay to protect your lender in the event that you default on the loan. Mortgage insurance is usually only required when you put down less than 20%. You could save hundreds of dollars a month by refinancing to stop paying monthly mortgage insurance.

Third, you can get a lower payment by changing your mortgage term. Lengthening your term stretches out your payments over more years, which makes each payment smaller.

There may be other ways you can get a lower payment, so it’s always worth checking with your lender to see how they can help you get a payment that fits your current budget.

Shorten Your Mortgage Term

Shortening your mortgage term is a great way to save money on interest. Often, shortening your term means you’ll receive a better interest rate. A better interest rate and fewer years of payments mean big interest savings in the long run.

So how does this work? Let’s look at an example. Say your loan amount is $200,000. If you got a 30-year loan with a 3.5% interest rate, you would pay approximately $123,000 in interest over the life of the loan. However, if you cut your term in half, you would pay about $57,000 in interest over the life of the loan. That’s a difference of $66,000 – and it doesn’t even account for the fact that the shorter term would provide you with a lower interest rate (and more savings).

An important thing to know about shortening your term is that it may increase your monthly mortgage payment. However, less of your payment will go toward interest, and more of it will go toward paying down your loan balance. This allows you to build equity and pay off your home faster.

Things You Need to Evaluate Before Refinancing

Once you have a clear goal in mind, you’ll want to evaluate your financial situation. There are four keys things to look at: your credit score, your monthly mortgage payment, the value of your home and your debt-to-income ratio (DTI).

Your Credit Score

There are many online resources that make it easy for you to find out your credit score for free. Knowing your credit score will help you understand what mortgage refinance options you could be eligible for.

Your Monthly Mortgage Payment

Knowing how your monthly mortgage payment fits into your budget will help you evaluate your options. If you’re taking cash out or shortening your term, for instance, it’s a good idea to know how much wiggle room you have in your budget for a higher monthly payment. If your goal is to get a lower monthly payment, it’s important to decide how much you need to lower your payment for the refinance to be worthwhile.

The Value of Your Home

Before you refinance, you’ll want to do a bit of research to estimate how much your house is worth. Your lender can’t lend you more than the home is worth, so an appraisal value that comes back lower than expected can impact your ability to refinance – especially if you’re looking to take cash out or remove mortgage insurance.

The best way to estimate your home value is to check the sale prices of similar homes near you. The more recent the sale, the better.

Knowing the value of your home can tell you how much equity you have. To figure this out, just subtract your current mortgage balance from the estimated value of your home.

Once you’ve identified your refinance goal, it’s time to figure out which kind of loan can help you get there. Let’s talk about which loan features are best for helping you lower your payment, take cash out or shorten your mortgage term.

Lower Payment

Looking to get more flexibility in your monthly budget? Here are a few different ways to lower your mortgage payment.

Lower Your Interest Rate

If you’re interested in getting the lowest rates available, you might want to consider an adjustable rate mortgage (ARM). ARM rates are typically lower than fixed rates because of the risk that your rate could increase after the initial fixed-rate period is over. However, if you’re planning to move or refinance in the next 5 to 10 years, an ARM could be a good option for you.

Keep in mind that refinancing with a lower interest rate doesn’t guarantee that your payment will be lower. A lower rate will shrink the interest portion of your monthly payment, but many factors – such as your term, taxes and insurance – affect how much you’re required to pay each month.

Change Your Mortgage Term

If having a lower payment is more important to you than paying off your loan quickly, then changing your mortgage term could be right for you. Lengthening your mortgage term allows you to stretch your payments out, which makes each payment smaller. Going from a 15-year term to a 30-year term, for instance, is a great way to lower your payment.

Choosing a Lender

Refinancing your mortgage is a big financial decision. Preparing yourself with the right knowledge, proper documents and right lender can make your mortgage refinance go as smoothly as possible.

Here are some questions you should ask when picking a lender to handle your refinance:

• Will you service my loan after closing, or will you sell my loan to another company? Not every lender services their loans after closing. F5 Mortgage services 98% of their loans to make sure you’re satisfied from the day you apply to the day your loan is paid off.
• What’s your availability? It’s important to have someone on hand to answer your questions – even outside of typical business hours.
• What are your rates and fees? Rates and fees can vary quite a bit from lender to lender. You can shop around to determine which rates and fees fit your situation best, but keep in mind that the lowest rate doesn’t always make for the best mortgage experience.
• What is your client satisfaction rating? Thirty years is a long time to deal with any company; looking at feedback from other clients can help you determine whether you’ve found a company you can work with for a long time.
• Can I complete the process online, or will I have to drive to a branch? The ability to submit documents online can make all the difference if you’re short on time. Make sure to pick a lender who makes your mortgage experience as effortless as possible.
• How much time will the process take? If it’s important for you to close fast, you’ll need to find a lender who makes your loan a priority.

Documents Your Lender Will Probably Ask For

It’s important to prepare your financial documents before applying so you can close your mortgage quickly. Here are some of the things your mortgage lender will probably request:

• Your two most recent pay stubs
• Your two most recent W-2s
• The most recent two months of bank statements

If your spouse or someone else will be on the loan with you, they’ll need to provide these documents too so your lender can get the whole picture of your financial situation.

If you’re self-employed, you’ll have to provide a few more documents to demonstrate your income. Some lenders will ask to see your entire tax return so they can see the exact amount of cash in and cash out.

The Costs of a Refinance

These are some common fees you might have to pay for:

• Application fee: This fee will be due even if your loan is denied.
• Appraisal fee: You’ll likely have to get an appraisal so your lender has an accurate and updated value for your property. In some cases, such as with a streamline refinance, your lender may be able to waive the appraisal.
• Inspection fee: Certain inspections may be required based on the type of loan you’re getting.
• Attorney review and closing fee: This fee covers the costs of the lawyer who conducts the closing for the lender.
• Title search and insurance: A title search is often required to make sure your home has no liens and that you are the rightful owner. You’ll also pay for title insurance, a one-time cost that protects you and your lender against any problems with the title that were caused by a previous property owner.

When you apply to refinance, you’ll receive a Loan Estimate that provides an estimate of the fees and costs of your loan. Prior to closing, your lender will send you a Closing Disclosure, which details your final numbers and lets you see exactly what you’re paying for.

The Length of the Refinance Process

A typical refinance will take anywhere from 30 to 45 days, but there are many variables that can lengthen the process. Any third parties that are involved in the mortgage transaction can create a potential delay. Your lender works with a variety of third parties – such as appraisers, inspectors and title companies – to get your loan closed, so keep in mind that delays may occur as your lender works to get information from these third parties.

Your refinance process could also be longer or shorter depending on how complicated your situation is. Mistakes on your credit report, for instance, can hold up the process. And any financial or other life changes on your part can also lengthen the process. For example, changing jobs or opening new lines of credit while undergoing a refinance could pose problems for your closing date. However, keeping your lender in the loop can help keep the process on track.

Locking Your Rate

Once you’ve completed your mortgage application, you’ll have the option to lock your mortgage rate. Mortgage rates change daily, and locking your rate protects you against the rate going up significantly before you close.

Most lenders allow you to lock your rate for 30, 45 or 60 days, but keep in mind that you may have to pay a fee if you need to extend the timeframe beyond what was originally agreed upon.

The Underwriting Process

After all your documents are submitted, your lender will work on underwriting your loan. This is where the underwriter checks all the details on your mortgage application and supporting documentation to make sure everything’s accurate and fulfills the necessary guidelines. Your application not only has to meet the criteria set by your lender, but also the investor of your loan – the institution that gives your lender the funds for your mortgage.

Underwriting your loan typically takes a week or two, but any third parties involved in the underwriting process – such as the appraiser – can slow this down.

How the Appraisal Can Impact Your Refinance

Just like when you bought your home, you’ll need an appraisal to confirm the value of your property. The appraiser will inspect your home and compare it to similar, recently sold homes in your area to determine an opinion of value.

In some cases, your lender won’t require an appraisal for your refinance. For instance, if your home has been appraised in the last 120 days, you may be able to have the appraisal waived.

Low Home Appraisal

Lenders usually can’t finance more than the appraised value of your home, so a low appraisal can be quite problematic for a refinance. These are some options you might have if your appraisal comes back low:

• Decrease the amount of the refinance: In some cases, you might have to bring cash to the table to cover the difference between the loan amount and property value. In other cases, such as with a cash-out refinance, you might be able to just lower the loan amount.
• Cancel the refinance: A low home value might mean that refinancing isn’t right for you at this time.

The best-case scenario is that your appraisal comes back higher than or on par with what you expected. If you cancel the refinance as a result of a low appraisal value, you may still have to pay the appraisal fees and any other required lender fees. That’s why doing your research upfront to estimate your property value is so important.

Once the underwriter approves all the required paperwork, your refinance is nearly complete. Your lender will then get in touch with you to schedule your closing and review your final mortgage numbers.

Closing your refinance will be very similar to the closing you experienced when you bought your home. Since you already own the home, you won’t be dealing with a real estate agent or seller.

What to Bring to Closing

Here are some of the items you’ll need to bring to closing:

• Identification such as a driver’s license, government-issued photo ID or passport
• A cashier’s check to cover your closing costs (if applicable)
• Your Closing Disclosure, which you can use to double-check the final paperwork
• A list of key contacts, like your agent or lawyer, in case any questions come up

Who Should Attend Closing

Anyone who’s going to be on the loan will need to attend closing. It’s possible to close on your mortgage if you aren’t able to make it in person, but you’ll need to grant someone power of attorney. You can also expect a representative from the title company to be at closing, and some states require a witness to be present as well.

Refinance Closing Costs

Whether you pay closing costs and how much you pay depends on your loan. For example, closing costs can often be rolled into conventional loans, while FHA loans will require you to pay those costs upfront.

Before you close, your lender will provide you with a Closing Disclosure that will give you a line-by-line breakdown of any fees you’ll have to pay at closing, as well as your loan and payment details. You’ll have at least three days to review the Closing Disclosure before closing. This gives you the opportunity to back out if you’re not comfortable with the final numbers. However, you should keep in mind that you’ll likely still have to pay for services you’ve already received (such as an appraisal or credit report).

Now that all the paperwork is complete, you can start benefiting from your refinanced mortgage. Whether you’re getting a lower payment, a shorter term or cash out, here’s what you can expect after closing.

What Happens to Your Escrow Account

If you had an escrow account on your old loan, that money could come back to you in one of these ways:

• You could receive a check for your escrow funds from the lender of your old loan. If you’re receiving these funds by check, you can expect to get them within 30 days.
• Your escrow funds will be used as part of the payoff for your old loan. This means a couple of things. First, it will reduce the total amount that needs to be paid off. Second, if you’re getting an escrow account on your new loan, your old escrow funds can be transferred to your new loan.

Your lender will ask which of these options you prefer; however, we recommend that you allow your escrow funds to be used as part of the payoff for your old loan. This will speed up your loan process and minimize the amount of money that you’ll be required to bring to closing.

Making Additional Payments

You can save on interest and reduce the length of your loan by making additional payments or paying extra on your monthly payment. Making just one extra payment a year allows you to save a significant amount on interest over the life of your loan.