Considering a Mortgage Refinance? Learn more about the process, what to look for, how to be an Educated Shopper.
Step One: Goal Determination
A Mortgage Refinance can involve some compromise — obtaining the lowest rate means paying higher fees, for example. Lowering the payment can involve stretching out the remaining balance over a longer term, which could mean higher interest expense over the life of the loan. Accelerating the mortgage payoff means accepting higher monthly payments.
The first step, then, is determining the goal of the refinance and if it can be achieved under current market conditions.
Step Two: Review Your Current Credit Report
Your credit score can impact refinancing in a few ways. A low credit score
can prevent you from being approved for a new loan. Even if your score is not
so low as to get you turned down, having relatively weak credit can increase
the cost of refinancing by causing you to have to pay a higher interest
rate
Your credit score indicates to lenders how risky it is to lend you money, and
the more risk a lender takes, the more that lender will charge you to
compensate for that risk. Reviewing your credit report with us can allow
us to identify problems that can be readily fixed, if needed. Clearing up any
mistakes in your credit history, or catching up on any payments you may have
inadvertently missed, can allow you to improve your credit score to obtain the
best rates possible. That improvement in credit score can lower your costs, or
even make the difference between approval and rejection.
Step Three: Understand Your Home’s Current Value
A big factor in refinancing is how much equity you have in your home. Equity
is the difference between the current value of the property and how much you
still owe on your mortgage. The bigger the equity cushion, the better your
refinancing options are likely to be.
If you have 20 percent or more of the home’s value in equity, you are eligible
for a cash out refinance in Texas. If you have a bit less equity than
that, you are still eligible for a refinance, however you may not take any cash
out of your home with the refinance. This is a Texas law that applies to
all lenders/properties located in the state of Texas.
Since real estate values change all the time, you need to make an up-to-date estimate of your home’s value. Contact us for estimates of your property’s market value.
Step Four: Obtain a Mortgage Coach Analysis
A Mortgage Coach Analysis is an excellent tool for comparing your current loan with possible refinance opportunities. The two key things to look at when reviewing this comparison is how refinancing would affect your monthly payment and how it would change your net worth in the long run.
Often, the size of your monthly payment is the most obvious thing people look at when refinancing, and being able to afford those payments is essential. A Mortgage Coach Analysis can help highlight trade-offs like this, as well as show you how any long-term savings from refinancing might compare with your closing costs.
Step Five: Lender Selection
There are several ways to find mortgage lenders, but the most efficient
method is by obtaining quotes online. Remember when comparing lender’s rates,
that mortgage rates change continually as financial markets move. Much
like the stock market we are all familiar with.
Quotes received hours apart may not be useful if bond prices are changing
quickly. The homeowner should check pricing and then interview several lenders
with competitive rates.
Step Six: Program Choice
Most mortgage refinancing goals can be met with more than one program, and a knowledgeable loan professional can help borrowers determine the most appropriate program for their specific needs.
For example, homeowners desiring smaller payments can achieve them by finding a lower interest rate, stretching out their remaining balance over a longer term or choosing an interest-only loan.
The loan officer should assess the borrower’s risk aversion, expected tenure in the home, and plans like retirement or starting a family.
Step Seven: Know Fees and Additional Costs
While mortgage rate comparisons tend to be the focal point of shopping for a mortgage refinance loan, it is important to take a careful look at other fees and costs. These can represent a significant amount of money, and might even make the difference in determining whether or not refinancing is cost-effective. These comparisons are complicated by the fact that lenders have a variety of ways of distributing the cost of refinancing between interest rates and fees.
Get a complete, written list of projected costs from your lender before
committing. Some of the things you should be looking for include fees for
things like the application, underwriting, processing, loan origination points,
and various legal and administrative fees. These fees and costs generally
add up to a significant amount, so they should not be overlooked as part of your
refinancing decision.
Also, don’t be fooled by so-called “no-cost” refinancing programs. These
generally involve adding the upfront costs to the amount you are borrowing.
That might mean less expense on the front end, but it is likely to cost you
more in the long run because you will be paying interest on those costs.
These fees and costs generally add up to a significant amount, so they should not be overlooked as part of your refinancing decision. Also, don’t be fooled by so-called “no-cost” refinancing programs. These generally involve adding the upfront costs to the amount you are borrowing. That might mean less expense on the front end, but it is likely to cost you more in the long run because you will be paying interest on those costs.
Step Eight: Refinance Application
A Mortgage Refinance involves a mortgage application. Today, most loan officers or processors interview applicants and complete the forms for them. Applicants should provide statements from bank and investment accounts, their most recent two pay stubs and W-2’s (for salaried employees) or tax returns (for income from commissions, self-employment or investments).
A mortgage underwriter (human or automatic) may request additional documents like divorce decrees, business licenses or letters explaining credit issues. Credit reports are pulled and unless the refinance is a streamline product, the property is appraised.
The efficiency of the lender and experience of the loan officer are crucial, so borrowers should interview lenders and check their reputations. Check out past client reviews of The Patton Team.
Step Nine: Lock
The final step is locking in a mortgage refinance rate and closing the loan.
Locking a rate can be done at any time during the refinance process.
Until the interest rate is locked, borrowers are said to be “floating” their
mortgages. Once a rate is locked, it is guaranteed until the lock expires —
unless there are “material” changes to the application, such as the borrower
choosing a different program or the home appraising for less than expected.
Borrowers who are floating their mortgages can check current mortgage rates
before deciding to lock or continue floating.
Step Ten: Closing
At closing, the final costs of the refinance are reconciled to the costs disclosed when the loan was locked. The actual costs cannot exceed the disclosed costs by more than allowed by law or the lender has to absorb the excess.
Closing a refinance differs from closing a purchase. If refinancing a primary residence, there is a three business day rescission period after the borrower signs the final documents. This is a cooling off period in which the borrower can back out of the refinance for any reason. Once that period expires, the refinance loan is funded and the old loan is paid off.
Stay Educated!
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