What is a Refinance Loan?

When to refinance your mortgage 

If refinancing lowers your mortgage payment, shortens the duration of your loan, or helps you develop equity faster, it can be a smart financial decision. It can also be a useful tool for getting debt under control if utilized correctly. Take a close look at your financial condition before refinancing and ask yourself, “How long do I plan to stay in this house?” How much money would refinancing save me?

Keep in mind that refinancing costs anywhere from 3% to 5% of the loan balance. With the savings gained by a lower interest rate or a shorter term, it takes years to recoup that cost. If you don’t plan on staying in your house for more than a few years, the expense of refinancing may outweigh any possible savings.

It’s also important to keep in mind that a smart homeowner is continually seeking for methods to minimize debt, develop equity, save money, and pay off their mortgage. Taking cash out of your equity when you refinance does nothing to assist you reach any of those objectives.

When deciding whether or not to refinance, there are many aspects to consider. Take into account market developments (including current interest rates), as well as your own financial situation (especially your credit score). When calculating your break-even point after refinancing expenses, it’s a good idea to use a mortgage refinance calculator.

You should also be aware of the differences between refinancing and other mortgage options such as loan modification and second mortgages. The primary distinction between a refinance and a loan modification is that a refinance provides you with a new mortgage, whereas a loan modification alters your present conditions. A key contrast between getting a second mortgage and refinancing is that the new mortgage you get via refinancing replaces the old one. Before selecting what to do, think about what works best for you.

It’s vital to keep in mind that a modification should only be considered if you can’t refinance and require long-term payment relief. Your credit score will almost always suffer as a result of the modification.

Refinance calculators

Types of refinancing loans

Rate and term refinancing

A rate and amoritzation term refinance allows homeowners to adjust the mortgage rate, term, or both for their existing loans. The length of the loan is referred to as the loan term.

A homeowner, for example, might refinance:

• A 30-year fixed-rate mortgage was converted into a 15-year fixed-rate mortgage.
• A 30-year fixed-rate mortgage with a 5% interest rate has been replaced with a new 30-year fixed-rate mortgage with a 3% interest rate.
• From a 5% interest rate on a 30-year fixed loan to a 3% interest rate on a 15-year fixed loan.

A rate and term refinance loan is intended to save money. This can be accomplished by lowering your monthly payment or paying less interest overall, due to a lower mortgage rate or a shorter loan term.

Your monthly payments will be greater if you refinance into a shorter loan term. This is due to the fact that you are repaying the same amount of money in a shorter period of time.

However, because you’re avoiding years of interest payments, you will end up saving more money in the long run. In a lowering mortgage rate environment, the majority of refinances are rate-and-term refinances.

Cash-out refinancing 

The goal of a cash-out refinance is to take advantage of the equity in your home.

The percentage of your home that you own is referred to as home equity. For example, if your house is worth $300,000 but you owe $200,000 on your mortgage, you have $100,000 in equity.

Equity, on the other hand, isn’t the same as cash. You must take out a loan against the value of your property to get it. A cash-out refinance can help in this situation. Keep in mind that with a rate and term refinance, your new loan balance is the same as what you owe on the house now, and it’s utilized to pay down your previous mortgage. A cash-out refinance differs from a traditional refinance in that the new loan sum is higher than what you now owe.

Your existing mortgage is paid off with the new loan, and the money “left over” is the amount you’re cashing out.

Here’s how cash-out refinancing works in practice:

• $300,000 is the estimated value of the house.
• $150,000 is the current loan balance.
• $200,000 is the new loan balance.
• $50,000 in cash was received at the closing (minus closing costs)

The “additional” sum is paid as cash at closing because the homeowner owes only the original amount to the bank. The cash-out is directed to creditors such as credit card companies and student loan administrators in the case of a debt consolidation refinance. When the second mortgage was not taken out at the time of purchase, cash-out mortgages can be utilized to consolidate first and second mortgages. The new loan may also have a cheaper interest rate or a shorter loan term than the old loan in a cash-out refinance. The main purpose, though, is to obtain cash, thus a lower interest rate isn’t necessary. Because cash-out mortgages pose a greater risk to a bank than a rate-and-term refinance, mortgage lenders must adhere to stricter approval criteria.

A cash-out refinance, for example, may be limited to a smaller loan size than a rate and term refinance, or it may demand higher credit ratings at the time of application.   Most cash out refinance loan programs additionally demand that Borrowers leave at least 15% to 20% of their home’s equity untouched. That means you’ll only be allowed to extract a percentage of your home equity, not all of it.

Cash-in refinancing 

A cash-in refinance is one in which the homeowner brings cash to the closing table to pay off the loan debt and reduce the amount owed to the bank. This could be a lower mortgage rate, a shorter loan term, or a combination of the two.

Homeowners prefer the cash-in mortgage refinance process for a variety of reasons.The most prevalent motivation is to take advantage of reduced interest rates, which are only accessible at lower loan-to-value ratios (LTVs). LTV refers to the size of the loan in relation to the value of the house. A loan with an LTV of 80%, for example, will typically have a higher interest rate than a loan with an LTV of 75%. Another popular motivation for a cash-in refinance is to avoid paying mortgage insurance premiums (MIP). Private mortgage insurance (PMI) is no longer required when your conventional loan is paid down to 80% LTV or less.

This law does not apply to FHA loans, which are required to pay mortgage insurance premiums (MIP) for the duration of the loan. Through the refinance procedure, a homeowner could swap an existing FHA loan with a Conventional loan. This method could help you save even more money month-to-month by eliminating mortgage insurance premiums.

Streamline refinancing

Your income, assets, and credit history are usually verified with standard refinances. However, some refinance options allow you to skip this step.

Streamline refinances are the name for these products. They’re streamlined since the underwriting standards have been simplified and made to be as quick as possible.  With a Streamline refinance, mortgage Lenders forego a significant portion of their “standard” refinance approval process.

Appraisals, income verification, and credit checks are frequently waived. If your current mortgage is guaranteed by the federal government, such as FHA, VA, or USDA loans, you may be eligible for a Streamline Refinance loan. Although different Lenders may have different requirements (which may include appraisals and credit approval), the following are the general standards for Streamline refinancing.

Refinancing pros and cons

For many homeowners, refinancing is a way to cut their interest rate, access their home equity, and much more. However, there are various aspects to consider when refinancing your house, so it’s critical to completely comprehend the process and choose whether refinancing is beneficial for you.

Pros

You’ll almost certainly be able to lock in a reduced interest rate. Between the time you bought your first property and now, many things have changed: your financial situation, the state of the market, and the value of your home. Lower monthly payments and more of your contributions go toward paying off your loan’s principal with a lower interest rate on your mortgage.

This is an excellent opportunity to go from a 30-year to a 15-year term. Refinancing at a shorter term not only shortens the duration of your loan, but it also saves you money on interest. Plus, even if your monthly payments increase, paying off your loan faster means you’ll be debt-free sooner.

You might be able to pull cash out of the equity you’ve built. As you’ve owned your home, made improvements on it, and paid off your mortgage over the years, you’ve built up a stockpile of equity tied to your home. Refinancing can provide access to some of that equity, giving you a safety net of money.

Cons

The savings may be small depending on your existing rates. You may not notice a significant difference in your interest rate or monthly payments if your financial condition hasn’t altered substantially since you first took out the loan. There are fees frequently associated with refinancing, so consider how much you’re willing to spend versus how much money you’ll save.

Refinancing takes time. Refinancing your home is not a task that can be completed in a single day.  Going through the loan process typically takes 30 days or more.  Additionally, the collection of documents and supplying documents to the underwriter can be frustrating.  Be prepared to allocate some time to get through the process.

There are fees associated with refinancing. Refinancing comes with its own set of fees. It’s critical to assess your financial situation and determine whether or not a refinance is the best option for you, as well as how much money you’ll save.  Make sure you understand what the break even point is to determine if a refinance is worthwhile.

Refinance loan rates

Refinance rates fluctuate based on a variety of factors, including the economy, Treasury bond yields, and demand. Lenders from across the country contribute weekday mortgage rates to our comprehensive national survey of the most up-to-date rates. The table of interest rates below is updated on a daily basis. Use them as a starting point for what’s out there, but keep in mind that your rate will vary according your credentials and the Lender you choose.

What are typical closing costs on a refinance?

Closing expenses for a mortgage refinance normally run from 2% to 5% of the loan amount, depending on the size and type of loan. According to 2019 statistics from ClosingCorp, a real estate analytics and technology organization, the national average closing costs for a refinance are $5,749 with taxes and $3,339 without taxes.

What are the steps in a refinance?

Here are the steps for refinancing a home:

1. Examine a variety of Lenders. It’s critical to conduct your homework before making any major financial choice.
2. Fill out your loan application.
3. Request a loan estimate.
4. Obtain an underwriting approval
5. Examine your closing disclosure.
6. Close on the loan.

Is it hard to get approved for refinance?

Depending on the loan type, a credit score of 620 or better can be an approvable score for a mortgage refinance. Lenders use this information to determine if you’ll be able to afford your mortgage payments. The maximum DTI you can have to get approved for mortgage refinancing is 45% in most circumstances, but can be as high as 55% on some loan types.  When it comes to refinancing your mortgage, you’ll almost always need a lot of papers to prove your income, assets, employment, credit, and property. Before speaking with a Lender, it’s a good idea to acquire the following documents.

Documents required for refinancing your home.

Employment information:

• Pay stubs from the last two months.
• W-2 forms from the last two years.
• Tax returns from the last two years.
• Proof of self-employment is required if you are self-employed (e.g., business license, proof of liability insurance, accountant letter).

Credit information:

• Statement of the most recent mortgage
• Most current vehicle loan, student loan, or personal loan billing statements.

Property information:

• Information on a homeowner’s insurance policy.
• Representative of the homeowners’ association’s name and contact information (if applicable).

Asset information:

• Bank statements from the last two months.
• Two most recent investment or retirement income statements (if using accounts for loan qualification).

Business income (if applicable):

• Tax returns on business income from the previous two years.
• Financial statements for a business.

How hard is it to refinance a house?

Although it includes many of the same stages as buying a property, the refinancing process is generally less complicated. It’s difficult to say how long your refinance will take, but the average timeframe is 30 to 45 days.

The first step in this procedure is to look into the many types of refinances available to see which one is ideal for you. Your Lender will ask for the same information you supplied them when you bought the house when you apply for a refinance. They’ll look at your income, assets, debt, and credit score to see if you qualify for a refinance and can afford to repay the loan.

If you’re married, your Lender will also need your spouse’s documents. If you’re self-employed, you may be requested to provide additional income documentation. It’s also a good idea to have the last couple of years’ tax returns available.

You don’t have to keep your present Lender if you want to refinance. If you switch Lenders, the new Lender pays off your current debt, thereby ending your relationship with the previous one. Don’t be afraid to shop around and evaluate current rates, availability, and client satisfaction rankings from different Lenders.

Refinance Loan FQAs

Is it worth refinancing for 1%?

Refinancing to save 1% is usually worthwhile. A one-percentage-point rate reduction is considerable, and in most circumstances, it will result in significant monthly savings. On a $250,000 loan, for example, lowering your rate by 1% (from 3.75 percent to 2.75 percent) may save you $250 each month.

Is it worth refinancing to save $200 a month?

In general, a refinance is profitable if you plan to stay in your house long enough to reach the “break-even point” — the point at which your savings outweigh the refinance closing fees. Consider this scenario: you’ll save $200 per month by refinancing, and your closing fees will be roughly $4,000.  In this scenario, you will recoup the closing costs in 20 months, which would be worthwhile as long as you plan on staying in the house longer than that time frame.

Does refinancing increase your loan?

Refinancing will increase your loan amount unless you plan on bringing the closing costs to the closing table.  Depending on the loan term you select, it can increase or reduce the number of years until your loan is paid off.  Keep in mind, when refinancing, your old loan will be replaced with a new loan with different terms and a new escrow account.

Can You Rent Your House After Refinancing?

Typically, there is a provision that requires you to live in the house for at least 12 months after closing.

What Happens to Your Original Loan When You Refinance?

When you refinance a mortgage, your current mortgage is paid off by the new lender. When rates are dropping, refinancing is a great idea to reduce your loan’s interest rate and make it more affordable.

Does Refinancing Mean Starting Over?

When you refinance, you determine the loan term. So, you can extend or shorten the number of years you select to repay the mortgage. The equity in the house gained through appreciation or debt reduction remains yours. So, it is not starting over.

Do You Have to Pay Taxes On A Cash-Out Refinance?

The money you get through a cash-out refinance isn’t counted as income. As a result, you won’t have to pay taxes on that money.

Is Refinancing Expensive?

The average cost of refinancing a mortgage in the United States is $4,345. Depending on the lender and the location of the mortgaged property, these expenses may vary. In addition, the amount you borrow will influence the refinance cost. By lowering your interest rate or lengthening your loan term, refinancing can lower your monthly mortgage.

What Credit Score Do You Need To Refinance?

A credit score of at least 580 is normally required to refinance, but typically requires significantly higher. However, if you want to withdraw cash, you’ll need a credit score of 620 or better.

Does Refinancing A Loan Hurt Your Credit Score?

Not unless you have had multiple inquiries from multiple industries over a short period of time. The new debt may have a small impact on your credit but it is not substantial and will recover quickly with on-time payments.