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Financing a home isn’t as straightforward as some people may think it is. That’s because one part of financing a home can be refinancing it. However, a lot of people don’t know too much when it comes to refinancing. This can be an important part of financing because it can lead to benefits like a lower monthly payment, better loan terms, and more! Before we get into the benefits of a home refinance, you should know the basics to get you started.

What is a Mortgage Refinance?

Let’s start at square one. A mortgage refinance refers to replacing your original mortgage with a new one through paying off the original mortgage. There are a variety of different types of refinancing options available. Some options include:

• Rate-and-Term Refinance
• Cash-Out Refinance
• Cash-In Refinance
• Streamline Refinance

Rate-and-Term Refinance

This is a popular refinancing opportunity that people choose. With this option, people can refinance in order to get better loan terms and a better interest rate. This is what typically comes to mind when people picture a standard refinance.

Cash-Out Refinance

Another popular refinancing option is a cash-out refinance. This is popular because it gives homeowners the opportunity to make use out of their home’s equity. With a standard refinance (like a rate-and-term refinance), the new loan amount accounts for any remaining loan balance that the borrower owes the lender. However, with a cash-out refinance, an individual will borrow more than the remaining loan balance. The additional money that the borrower will receive comes from the amount of equity that’s available to tap into. It’s important to keep in mind that every lender is different so there may be limits that you face when accessing your equity.

Cash-In Refinance

Picture this refinance as the opposite of a cash-out refinance. Instead of getting additional funds from your home (like with a cash-out refinance), you would put in additional funds towards paying off the lender (with a cash-in refinance). Doing this can improve the Loan-to-Value (LTV) ratio of the borrower!

Streamline Refinance

There are plenty of different types of mortgages that you could have. If your mortgage is an FHA loan, you could be eligible for this type of refinance. The benefit of this type of refinance is that it is easier to qualify for and can give qualifying borrowers the opportunity to refinance their home when they may normally struggle with being eligible for other types of refinances.

Reasons That People Refinance Their Mortgage

There are a variety of different reasons as to why someone would choose to refinance their mortgage. The exact reason will depend on the situation that a person is dealing with. This includes:

• Improving Loan Terms
• Changing the Type of Mortgage
• Getting Rid of Private Mortgage Insurance (PMI)
• Getting Funds

Improving Loan Terms

Through refinancing your home, you could get a better interest rate (also known as your mortgage rate) or even better loan terms. For example, let’s say when you purchased your home, you had an interest rate of 4.6%. At the time you decide to refinance, you may be able to get an interest rate of 3.4%. Reducing your interest rate can save you over the course of your loan!

Besides getting a better interest rate, you could also improve your loan terms. For example, let’s say when you first got your mortgage, you chose a 30-year loan. After 7 years (when there are 23 years remaining), you decide to refinance into a 15-year mortgage. This saves you 7 years of dealing with a mortgage!

Changing the Type of Mortgage

There are 2 main types of mortgages. There is a fixed-rate mortgage and an adjustable-rate mortgage (ARM). Those that have an ARM, will see their interest rate changing consistently. On the other hand, a fixed rate mortgage has the same interest rate over the course of the loan term. Individuals that have an ARM may opt to switch to a fixed-rate mortgage to better budget since the amount of interest always stays the same so it is easy to account for.

Getting Rid of Private Mortgage Insurance (PMI)

Some loans require homeowners to have PMI. By law, lenders will cancel a borrower’s PMI once their LTV is at least 78% of the home’s original value. Borrowers may also be able to get rid of their PMI if they have 20% equity in the home. Either way, homeowners may refinance to get rid of PMI!

Getting Funds

Depending on the type of refinance, you may be able to access funds from your home equity. The funds you get from your home can be used for a variety of needs like home improvements, dealing with debt, and more. In fact, you can do anything you want with the funds that come from a cash-out refinance (but you should choose to manage them responsibility!).

How Much Does it Cost to Refinance Your Mortgage?

Sadly, a mortgage refinance doesn’t come at no cost. Instead, there are a variety of fees and expenses that a homeowner can expect to deal with. Typically, during the close of a refinance, a person can expect to pay between 2% to 5% of the home’s value. On average, people can expect to pay >$5,000. Some fees that you may have to deal with include:

• Legal fees
• Recording fees
• Appraisal fees
• Title insurance fees
• Underwriting fees

Pros and Cons of Refinancing Your Mortgage

To summarize, there are some basic pros and cons that come along with a mortgage refinance. Some of the pros include:

• Improving Loan Terms
• Changing the Type of Mortgage
• Getting Rid of Private Mortgage Insurance (PMI)
• Getting Funds

On the other hand, there are some drawbacks that can come along with a mortgage refinance. This includes:

• Paying Closing Costs
• Less Equity in the Home if You Tap Into It
• Borrower’s Remorse
• Dealing with the Refinance Process

How to Qualify for a Mortgage Refinance?

After learning the basics about a mortgage refinance, you may be interested in getting one (or at least learning more from a professional). Not everyone can qualify for a mortgage refinance which is why it is important to understand some qualifications. However, it is important to keep in mind that every lender is different. That means the specific eligibility criteria that borrowers must meet will vary depending on the lender. However, there are some general qualifications that borrowers must have which include:

• Be in Good Credit Standing
• Have the Minimum Required Equity in the Home
• Debt-to-Income Ratio (DTI)

Be in Good Credit Standing

We know we are going to sound like a broken record but the exact requirements will vary depending on the lender! However, minimum credit requirements will generally be between 580 to 680. A good rule of thumb is that the better the credit score then the better the loan terms. For example, even though a lender may accept a borrower with a credit score of 580, a person with a credit score of 635 can have better loan terms.

Have the Minimum Required Equity in the Home

Not every loan has the same home equity requirements. That is why you should anticipate needing the market value of your home to be more than your mortgage balance by at least 3% to 20%.

Debt-to-Income Ratio (DTI)

This ratio takes into consideration your debt (which is how much money you owe) versus your income (which is the amount of money you make). People that have a high DTI may be seen as high risk to lenders which can lead to a denial of a refinance!

Refinancing Your Mortgage in 6 Steps

The process of refinancing a mortgage generally takes between 35 days to 50 days. You can break down the process of refinancing your mortgage into 6 steps:

1. Keep the Basics in Mind
2. Compare Lenders
3. Fill Out an Application
4. Review Your Loan Estimate
5. Appraisal, Underwriting, and Inspection
6. Close on Your Loan

Step #1: Keep the Basics in Mind

You want to keep in mind everything we talked about in this article. Knowing the basics, and the different types of refinances can help you when it comes time to find the best refinance for your situation. However, you may also benefit from getting in touch with a professional to talk about mortgage refinances so you can better understand them more in-depth.

Step #2: Compare Lenders

Now that you have a good understanding of mortgage refinances, you will want to compare your lending options. Not every lender is the same! That means some lenders have more favorable opportunities for your specific situation than others. When looking at different lenders you want to consider their:

• Interest rate
• Loan term
• Communication style
• Customer reviews
• BBB rating
• Customer service
• Refinance process overall

Step #3: Fill Out an Application

After comparing lenders, ideally you have one that you want to go with! Once you know which lender you want to go with, it’s time to fill out and submit an application. Generally, the application process will take a few hours. However, with proper preparation, you can make the process shorter! You should expect to provide documents when handling your application. Some documents you will likely need to provide include the following:

• Income verification documents: bank statements, pay stubs, etc.
• Insurance documents: proof of homeowner’s insurance, proof of title insurance, etc.
• Proof of identity: driver’s license, birth certificate, Social Security number, etc.

Step #4: Review Your Loan Estimate

You can expect lenders to have a loan estimate to you within 3 business days after you submit your application. This is not a denial or approval. Instead, it is information that details your loan if your application is approved. Some details you can expect to see when you get your loan estimate includes:

• Monthly payment
• Closing costs
• Estimated interest rate, insurance costs, and taxes
• Penalties (if applicable)

This will also give you a chance to see if you actually want to move forward with this lender given the terms they provide!

Step #5: Appraisal, Underwriting, and Inspection

There are instances where a loan will require a home appraisal. A good rule of thumb to keep in mind is that older homes will generally require new home appraisals. That’s because there is a higher chance that the value of the home changed over time. A home appraisal will see how much the home is worth (which can impact the loan terms).

Once you get your home appraised, it’s time to begin the underwriting step. Typically, this is what takes the longest when refinancing. You can expect underwriting to take between five to eight days. However, it can even take a few weeks to finalize! All you have to do is wait. During the underwriting process, the lender will review the details of your financial situation to make sure that you can handle the financial responsibility of the new mortgage.

After the underwriting process is done, you will need to review the closing disclosure that you receive. This disclosure details the closing costs and loan information. You will want to make sure you agree with the terms on this disclosure!

Step #6: Close on Your Loan

Once you do a deep review of your closing disclosure and you agree with everything, it is time to finalize the refinance process and close on your loan. The closing meeting usually takes a few hours because your lender will go over the contract terms and conditions before you sign!

Bottom Line

Handling financing of your home may not be as simple as you think. That’s because one part of financing can include refinancing. Refinancing refers to the process of replacing your existing loan with a new one. There are plenty of different types of refinances to consider. Some options are:

• Rate-and-Term Refinance
• Cash-Out Refinance
• Cash-In Refinance
• Streamline Refinance

The right finance for you will depend on your current situation. Some benefits that come along with refinancing your mortgage include the following:

• Improving Loan Terms
• Changing the Type of Mortgage
• Getting Rid of Private Mortgage Insurance (PMI)
• Getting Funds

Not everyone can qualify for a mortgage refinance. The exact eligibility criteria will vary depending on the lender. However, some important factors include:

• Be in Good Credit Standing
• Have the Minimum Required Equity in the Home
• Debt-to-Income Ratio (DTI)

Overall the time it takes to refinance your mortgage usually takes between 35 days to 50 days. The process can be broken down into 6 steps:

1. Keep the Basics in Mind
2. Compare Lenders
3. Fill Out an Application
4. Review Your Loan Estimate
5. Appraisal, Underwriting, and Inspection
6. Close on Your Loan

If you have any questions, you will want to reach out to a professional. They can provide more information on what a refinance is, what the best option would be for your current financial situation, and more.