Mortgage Refinance
You’ve probably heard it often -- another friend or neighbor has refinanced and is enjoying lower monthly mortgage payments. You may have read headlines that talk about home mortgage interest rates reaching historical lows. So, you ask, is now the best time to refinance my home mortgage?
Mortgage refinancing is essentially paying off your existing home mortgage and taking out a new one. This section discusses the basics of refinancing, such as the reasons for mortgage refinancing and the steps involved. It also discusses your home mortgage financing options. After you understand these home refinancing basics, a FreeLoanComparison.com lender partners can discuss the details further and help you get the mortgage refinancing process started.
Why Refinance?
Homeowners choose to refinance for a wide variety of reasons. Some of the most popular ones are to:
- obtain a lower home mortgage interest rate,
- build equity faster,
- change loan type,
- take advantage of an improved credit rating, or
- draw on equity already built in the home.
Obtaining a lower mortgage interest rate can lower your monthly mortgage payment and is the most common reason homeowners refinance. Building equity faster is also a popular reason because owning a home can be one of the safest and most profitable investments you can make.
Mortgage Refinance - Obtain a Lower Mortgage Interest Rate
When you refinance to lower your mortgage interest rate, you can significantly reduce your monthly home mortgage payment, so long as you don’t increase your mortgage principal amount (as in a cash-out refinance).
It’s important, however, to evaluate how long you plan to remain in your home. If you plan to stay in your home for several years, evaluate whether the cost savings resulting from a lower mortgage interest rate outweigh your home mortgage refinancing fees. If you plan to sell your home in the near future, refinancing your home may not be your best option.
Mortgage Refinance - Build Equity Faster
You may want to build equity in your home more quickly than when you first obtained your home mortgage. In this case, ask your
FreeLoanComparison.com lender partners about a home mortgage with a shorter mortgage term. For example, if you have a 30-year mortgage, you may want to refinance to a 10-, 15-, or 20-year mortgage and build equity faster.
This approach typically makes sense for homeowners who can afford an increase in their monthly mortgage payment. Each month, a certain part of the monthly payment goes toward the interest expense on the loan; the remainder is applied to the principal (some is also usually apportioned to escrow and taxes). Generally, the shorter a loan term, the higher the payment, but a greater percentage of that monthly payment is applied to the principal.
Refinance - To Change Loan Type
You may have selected an adjustable-rate mortgage (ARM) when mortgage interest rates were higher than mortgage rates today. To ensure you had the lowest monthly mortgage payment possible, you probably found the ARM most attractive because it had a lower home mortgage interest rate than a fixed-rate loan in the early years.
When mortgage interest rates drop, however, home refinancing to a fixed-rate loan can guarantee a lower mortgage rate for the life of the loan -- as opposed to the mortgage rate on an ARM, which can adjust yearly or even twice a year, depending on the type of ARM you select.
Your mortgage lender can also provide information about ARMs with a "conversion period," which allows you to convert from an ARM to a fixed-rate mortgage, without refinancing.
Refinance To Demonstrate Improved Credit
Today there are many ways for borrowers with bad credit to get a mortgage. Typically, they may have to take out a home mortgage with a higher mortgage interest rate than borrowers with a better credit history. But over time, these homeowners can improve their credit rating and choose to refinance to obtain a new mortgage loan with different mortgage terms and a lower mortgage rate.
Mortgage refinancing may save you a significant amount each month, if you are now in a high mortgage interest rate loan that was the only type of mortgage loan offered to you because of your past credit. In addition, while you are working on your credit, you can ask your mortgage lender about less-than-perfect-credit type mortgages, which offer a competitive mortgage rate for those with less-than-perfect credit -- plus the incentive of a future mortgage rate reduction.
Refinance To Draw on Home Equity
If you’re looking to tap into the home equity you’ve built in your home, ask your FreeLoanComparison.com mortgage lender partners about a cash-out refinance. With this option, you receive cash at closing. Homeowners generally choose this type of mortgage refinancing to pay for their children’s education, make home improvements, debt consolidation, or other needs.
A mortgage lender will typically require a homeowner to have at least five percent equity accumulated in the property for this type of home loan refinancing. Home equity is the difference between what the property is worth and the amount still owed on the home mortgage. For example, if the house is valued at $100,000 and the mortgage balance is $90,000, the equity is $10,000 (10 percent of house value).
If you are considering a cash-out refinance for the added flexibility it may provide in helping you manage your expenses, first consider whether you will be getting your debt under control or increasing it.
Mortgage Refinance Eligibility
To help determine if you’re ready to refinance, ask yourself these questions:
- How long do I plan to remain in my home?
- How many years remain on my existing mortgage?
- Can I afford the costs involved?
- Will I save money over the life of my loan?
These questions are good starting points to determine your personal eligibility, prior to discussing options with your FreeLoanComparison.com mortgage lender partners. Your mortgage lender, however, will evaluate your financial eligibility based on income, current mortgage information, property value, and other information.
Mortgage Refinance Requirements & Costs
Because home mortgage refinancing involves many of the same steps that you followed to get your current home mortgage, you may already know what to expect. You may, however, face a few additional steps and different types of mortgage expenses.
Required Information
Similar to the traditional mortgage process, a mortgage lender will require you to complete a mortgage loan application. The application assesses your financial situation, credit history, the property value, the amount of equity in your home, and other data.
The mortgage lender will require:
Information about your present mortgage will also be required, such as:
Mortgage Refinancing - Time and Cost
Some of the types of mortgage fees you paid during the closing on your original mortgage will be charged during a home refinance. These may include an application fee, title search and title insurance fees, appraisal costs, loan origination fee, discount points, prepayment penalties, and if applicable, legal service fees.
Sometimes a new appraisal will not be necessary, and some mortgage refinancing fees and closing costs may be waived. If you home mortgage refinance through your original FreeLoanComparison.com mortgage lender partners, some fees can be negotiated -- such as title search, application fee, and credit report review. Sometimes, a new mortgage lender may also be willing to negotiate those refinancing fees. And, in some cases, a mortgage lender may offer "no-cost" refinancing, which means most of the up-front processing and closing fees are not required. In these cases, however, the mortgage lender will typically charge a higher mortgage rate.
Refinancing with a mortgage lender who uses automated underwriting may result in faster processing time. Automated underwriting allows a mortgage lender to provide a loan approval decision in minutes. Most FreeLoanComparison.com mortgage lender partners use automated underwriting(AU), which can save you time and money. For example, with AU, your mortgage lender may not need to order an appraisal on your property and may require fewer pieces of information from you at your loan application.
Refinance Mortgage Solutions
Choosing a mortgage depends on your wants and needs. Regardless of your reason for refinancing -- be it to lower monthly payments or build equity faster -- you should contact several mortgage lenders. Starting here with FreeLoanComparison.com which will direct you to several mortgage lenders to compare mortgage types, mortgage rates, and mortgage terms. Keep in mind mortgage lenders will likely vary in their mortgage costs and mortgage fees. FreeLoanComparison.com will help you locate a mortgage lender, and learn more about the variety of mortgage products and costs associated with refinaning you home.
Mortgage lenders offer a wide range of low mortgage rates and mortgage terms. You can lower your mortgage rate by paying discount points. A mortgage lender may offer, for example, a 6.75 percent mortgage with one point, or a 7 percent mortgage with no points. Typically, the lower the mortgage interest rate, the lower the monthly mortgage interest payment (depending on the mortgage term), but to keep up-front mortgage costs down, you may choose a higher mortgage interest rate with a no points option. In addition, many mortgage lenders may allow you to finance mortgage points and mortgage closing costs as part of the total home loan amount -- called a no-cost refinance.
The type of home mortgage you select primarily depends on how long you plan to live in your home, your reasons for mortgage refinancing, and the amount of monthly mortgage payment you can comfortably afford.
Fixed-Rate Mortgages
Home mortgage refinancing into a fixed-rate mortgage provides the peace of mind of knowing what the mortgage payment will be for the life of the loan (excluding property tax fluctuations). A fixed-rate home mortgage has the same interest rate for the life of the home loan. Loan terms will vary among mortgage lenders, but generally, fixed-rate mortgages offer payment terms of 15, 20, and 30 years.
A FreeLoanComparison.com lender partners can provide information about the many options for a fixed-rate mortgage. A biweekly mortgage allows you to accumulate equity more quickly because payments are made every two weeks. Another type of fixed-rate mortgage is a balloon mortgage. These loans offer lower interest rates for shorter-term financing, usually for seven years. At the end of the term, they require either another refinance or a lump-sum payment of the loan. Balloons are not a common option for refinancing.
For homeowners looking to leverage their mortgage to expand
purchasing power, a Interest-Only mortgage offers the benefit of a low, fixed-rate monthly
payment. For the first 15 years, only interest, and possibly escrow payments of taxes and insurance, are made every month. The
mortgage payment adjusts at the start of year 16 to cover principal
as well as remaining mortgage interest and, again, escrow payments
if necessary or desirable, due on the loan for the remaining
15 years.
Adjustable-Rate Mortgages
Homeowners often choose to refinance to adjustable-rate mortgages (ARMs) when mortgage interest rates are high, or when they want to refinance a higher fixed-rate mortgage for a lower-rate ARM. Loan terms will vary among mortgage lenders, but generally, adjustable-rate mortgages offer rate adjustment terms of one, three, five, seven, and sometimes ten years.
ARMs are tied to a financial index, which is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Financial indexes fluctuate, so homeowners often choose to change from one type of ARM to another, or refinance with the same type of ARM, to get a lower rate. Although an ARM usually offers a lower initial rate, mortgage payments can change periodically (usually once or twice a year). Mortgage interest rate changes typically are subject to a limit or cap for each adjustment and for the life of the loan.
A unique type of adjustable-rate mortgage is the Two-Step Mortgage. This ARM adjusts only once, either at the fifth or seventh year of the loan; then the interest rate remains the same for the remaining 25 or 23 years of the mortgage term.
FreeLoanComparison.com does not lend money directly to consumers. Instead, we work with mortgage lenders to make sure they have money to lend. Mortgage lenders who work with FreeLoanComparison.com have a broad array of mortgages to offer consumers.
For more helpful mortgage tips on mortgage refinancing, home loans, reverse mortgages or a home equity line of credit, contact FreeLoanComparison.com today!
Last update: November 14, 2008
