See How Easily You Can Refinance Your Mortgage the Second Time Around

See How Easily You Can Refinance Your Mortgage the Second Time Around-150x150Refinancing can save you lots of money, especially right now with interest rates near record lows. But refinancing can quickly turn ugly if you don’t pay attention to every detail. Most times, refinancing your mortgage looks great at first glance, but you need to know when to refinance and how often.

Lately, interest rates have started to increase again, but rates were at record lows recently. Many home owners have taken advantage of the new interest rates and refinanced their mortgages. But some have been doing it again and again without seriously taking into account the negative aspects of refinancing multiple times.

Reasons for Refinancing a Second Time

Generally, home owners are advised to not refinance more often than every 3 years because the cost of refinancing is high and can quickly become a burden, making loans actually cost more than if they had stayed with the initial interest rates. The truth is that if you can refinance for a much lower interest rate and plan on living in the home for a long time, then refinancing should be considered, even if it hasn’t been 3 years since you last did it. Here are a few reasons why refinancing a second time is an attractive option.

  • First, and most important, the more you can lower your interest rate, the more sense it will make to refinance again. Lowering your interest rate by, for example, 1 percent will result in great savings, which will far exceed the refinancing cost. Interest rates are on the rise right now, but they are still low, so refinancing again might still make sense. Before refinancing a second time, you must make sure that what you save in interest costs will exceed the cost of the refinance; otherwise, you will be losing money.
  • Refinancing again can also help you remove a borrower from your mortgage. If, for example, you bought the home together with a friend or family member and one or both parties no longer wants to have their name on the mortgage, this can be rectified by refinancing. Most lenders will also require you to refinance if you want to remove your spouse from the mortgage after divorce.
  • Refinancing for a second time before the recommended 3 years also makes sense if your financial situation changes. For example, if your income decreases, you might not be able to pay your mortgage anymore because the monthly payments are too large, so refinancing into a mortgage with longer terms will lower your payments. Changes in your financial situation can also mean that your credit score has improved, which will help you qualify for a better interest rate.
  • A cash-out refinance can make sense, even if you just recently refinanced. This kind of refinance occurs when you take out a larger mortgage than the one you have now and receive the difference as cash. A cash-out refinance can provide money you might need for repairs, improvements, medical bills, or school tuition, but you need to understand that this will lower the equity in your home, so you will receive significantly less money if you decide to sell your home (Read: Is Cash-Out Refinancing a Good Idea?).

Refinancing your mortgage the second time around should not pose any difficulties, unless your credit score has gone down or you  are facing other financial issues. You must keep in mind before starting the process that refinancing is expensive. Many home owners are so blinded by the new lower interest rate that they forget to take the refinancing cost into account and end up actually paying more than they did for their initial loan.

Quick Tips on Mortgage Refinancing

Quick Tips on Mortgage Refinancing- 150x150Refinancing can be a great way of reducing your interest rates and monthly mortgage payments. With refinance rates on the rise but still near record lows, now may still be the most opportune time to refinance, as rates are predicted to continue to increase in the future. Unless you’re a few years from paying off your mortgage, by refinancing you can lower your monthly payments and free up cash that can be invested or used to remodel and repair your home.

Refinancing also has its negative sides, like being a fairly expensive process, but it is up to you to take a close look at your financial situation and decide if refinancing is worth the cost, and if it will, indeed, save you money over time. Here are a few quick tips for those who are considering refinancing their mortgage:

Quick Tips

  • Check your credit score. Before applying for refinancing, make sure that your credit score is in great shape. Refinancing takes a lot of work and time, and all this would be wasted if you get rejected because your credit score is not good enough.
  • Don’t rely on the advertised interest rates. Lenders will usually advertise their best interest rates in order to attract more customers. The truth is that the rate that you will get will probably not be the one that you have seen advertised. Your interest rate will depend on many factors, such as the size of the mortgage loan, mortgage points, if the rate is locked in and many others.
  • Know what you want. Carefully weigh in on all of your options before contacting a lender to refinance your mortgage loan. Knowing what type of a loan you want, like a 15-year or 30-year mortgage, can make it easier for the loan officer to find a better rate for you. Also, it’s recommended that you know how much you are willing to spend on points in order to get a lower interest rate.
  • Contact your current lender first. If you are a good borrower, pay your mortgage on time and have good credit, chances are that your lender will do anything in his power to keep you as a customer. Your lender may even offer to waive some of the refinancing costs, like appraisal and inspection fees.
  • Shop around for a refinance. Closing costs and interest rates vary from one lender to another, so it doesn’t hurt to shop around a little. You might actually be pleasantly surprised and find a lender that will give you a much better rate than the others or waive some of the closing fees, making refinancing cheaper than you thought it would be.
  • Try to avoid “no cost” refinancing. “No cost” doesn’t actually mean free. The closing costs are bundled into the mortgage, which means that you’ll be paying interest rate on that amount, making the closing costs more expensive than they would have been if you paid them beforehand.
  • Save money by avoiding tax and insurance escrow services. Having a little discipline and paying your property taxes and insurance on time will save you money over using an escrow service that charges for something that you can easily do yourself.
  • Make sure you don’t have a prepayment penalty on your mortgage. Chances are you will find refinancing options that save you money, but it may all be for nothing if you haven’t been paying attention to your current mortgage contract. A prepayment penalty can make refinancing turn from a money saver to something that will end up costing you more than your original mortgage.

Whether refinancing is a good idea or not is up to you, as it largely depends on many factors. Refinancing can be a good choice for some, helping them save some money on their mortgage. Between the closing costs and all of the requirements, refinancing can turn out to be a bad choice for others, which can result in wasted time and money. At the end of the day, it is up to you to evaluate your situation and budget, and decide if mortgage refinancing is your best choice.

When is the Right Time to Refinance?

When is the Right Time to Refinance- 150x150For most homeowners faced with the constant ups and downs of the housing and credit markets, knowing exactly when to consider refinancing existing mortgages can seem much like a roll of the dice. Crunching a few numbers into online mortgage calculators is a good way to get a sense of where things stand on a preliminary basis, but examination of the long-term effects need to be evaluated. Factoring each of the motivations behind the decision involves weighing both sides of the equation – the potential savings and the realistic expenses – to determine the feasibility of the refinancing plan.

Closing Costs Vs. Monthly Savings

Common sense dictates current interest rates are the primary factor behind most refinancing decisions. Usually, when the prevailing rate drops by at least one percent, most mortgage advice will steer homeowners towards refinancing as it is worth the effort. The bottom line is best evaluated in regards to what effect the refinancing formula has on the monthly payment when compared to the associated mortgage closing costs. By performing a simple comparison, and using an average closing cost of around $3,000 for a typical home loan, assume the monthly repayment figure to be in the neighborhood of $1,800. Refinancing may reduce this number by approximately $200 each month, which appears to be acceptable, especially when applied to budget savings.

Up-Front Cost Vs. Long-Term Gain

However, the real benefit can only be factored in by determining the length of time the homeowner plans on staying in the residence. If the refinancing option has any value, it is advisable to take the numbers one step further. Use the $3,000 closing cost, and divide it by the projected monthly mortgage savings estimate of $200. The answer yields a 15 month duration before the effect of refinancing produces a positive influence on the result. If the homeowner relocates before the 15 months is up, there is no monetary benefit to the refinancing decision. Only if the homeowner stays in the residence beyond this ‘cut-off’ date will refinancing options begin to make any economic sense.

Things to Remember Before Refinancing a Mortgage

Things to Remember Before Refinancing a Mortgage- 150x150The option of refinancing a home mortgage requires serious analysis. It is a financial mechanism that allows a homeowner to pay off their existing or original home loan by renegotiating a new mortgage with better terms, ultimately providing budget-saving benefits. It can potentially allow a homeowner to save significant amounts of money in interest payments over the long-haul, or it can boost the equity time-table as well. The refinancing option can also be less than favorable if it is not approached with a good plan and sound motivations for doing so before signing the bottom line.

Evaluate All Costs

While most lenders would be happy to discuss refinancing, there are costs involved that might not be presented as clearly as they should be in the initial discussions. It is advisable to request a complete list of all costs and fees, especially hidden ‘third party’ or ‘padded’ fees for services. In addition, there may be prepayment penalties on the original mortgage that can be quite steep, but must be factored in. These costs could negate the refinancing benefits.

Switching Loan Types

The primary motivation for refinancing is usually the interest rates applied to the original loan. If the original loan was an adjustable rate loan type (ARM), the best advice is to switch to a fixed rate mortgage to stabilize the monthly payment. At the very least, the previous ARM interest rate was set higher than the current mortgage rates, so renegotiating for a lower rate with either loan type is usually advantageous.

Seek Multiple Loan Offers

The best advice is to shop around for the best available offers, either from local lending sources or those found online. Refinancing can be expensive if it is not researched adequately. However, there are often many fees in the lending and closing process that can be negotiable and the competition for business in the current market is in the borrower’s favor. While the lenders are out to make a profit, the goal in mortgage refinancing is to make owning a home more cost-effective for the homeowner.

Refinancing Loan Types and Closing Costs

Refinancing Loan Types and Closing Costs- 150x150With the economy having a favorable effect on interest rates, many homeowners are considering the viability of refinancing existing mortgages to take full advantage of this downward trend. Depending on which type of mortgage program the original loan was (fixed-rate loan, adjustable-rate, interest-only, or hybrid ARM), refinancing is proving to be a favorable option. Careful consideration needs to be applied to the feasibility of refinancing because each has an array of advantages and disadvantages. Whether the focus is on extending the loan term, cutting down on monthly payment amounts, or accessing the equity, there are both short-term and long-term benefits and consequences to be evaluated.

 

Lengthening the Term and Lowering Payments

Lowering the interest rate can be the primary focus, but it is not the only factor. It is important the borrower understands the complete package and ramifications of refinancing. This includes understanding that to extend a loan term means more overall interest is paid out in the long run and that the loan type chosen can decrease or increase monthly payments. There are other ‘hidden’ costs involved with refinancing as well, such as a reevaluation of tax liability, along with the property insurance coverage, and whether or not the new loan will require private mortgage insurance. Make use of online mortgage calculators to establish which refinancing scenario works best for your budget.

Factoring in Closing Costs

Another consideration are the refinancing closing costs. If a borrower is fortunate enough to refinance their old loan with the original lender by simply renegotiating loan terms, then the majority of closing costs may not be a factor. If that will not be the case, then the closing costs will become a major part of the equation. Typical closing costs can run from 3% to 5% of the loan value, which can be anywhere from $3,000 to $11,000 on a $200,000 loan, depending on how many points the lender chooses to apply to the loan package.

Practical Advice on Refinancing Your Mortgage

Practical Advice for Mortgage Refinancing- 150x150Any approach to refinancing mortgages needs to be timely, sensible, rational, and most importantly, affordable. While refinancing can certainly create great savings benefits in the long run, it must still balance itself out against time, effort, and costs involved. This is especially true when the bottom line is weighed against the long-term financial goals and the short-term practicalities for maintaining a sound household budget.

Interest Rate Factors

There is no factor more important when making a refinancing decision than interest rates. The refinancing interest rate determines the economic feasibility of the entire process, especially over the length of the loan term. If the current mortgage rates are at least two percentage points below the existing mortgage rate, then refinancing may be well worth the trouble and short-term expense, and could save the homeowner thousands of dollars over the term of the mortgage.

Calculate Monthly Savings

Having a lower interest rate is the most important factor in making a refinancing decision because of its significant lowering effect on your monthly mortgage payments. By reducing monthly mortgage payments by just $200, refinancing can save a homeowner over $24,000 in the first decade of the new loan, adding considerable flexibility to budgets for other debt obligations.

Evaluate Up-Front Costs

Since the refinance option is in reality a completely new loan, there will be initial costs involved that are almost identical to the original loan process, from the loan origination fees all the way to the closing costs. In some cases, to minimize up-front expenses, the closing costs can be added into the loan itself, although interest rates will now be added to the closing costs. In other scenarios, if the lender for the original loan is willing to discuss the refinancing effort, there might be reduced or eliminated expenses during the new loan’s closing process. If a borrower’s financial condition is in good standing, and their credit rating remains high, there may be additional terms or conditions the lender may adjust more favorably, such as even lower rates and points, or be willing to negotiate closing fees.

Multiple Mortgage Refinancing

Multiple Mortgage Refinancing- 150x150With the economy showing signs of improvement, there are many homeowners wondering if they may have jumped the gun in terms of refinancing. Whether they opted to do so before the present decline in interest rates began, or are considering the feasibility now before the rates begin climbing again, it boils down to whether it makes sense financially to do so. While there is no limitation on how many times a homeowner may get a refinance loan, there are still some factors to consider that may tip the scales one way or the other. It also depends on finding a lender offering an affordable loan package, as well as meeting a new set of approval standards and mortgage loan credit requirements.

Factoring in Prepayment Fees

One major consideration is the possibility of a prepayment clause written into the original loan agreement. This stipulates that should the original mortgage be paid down before a specific date or time frame, a substantial amount of money must be paid to the lender as a penalty. These fees are generally based on a certain percentage of the original mortgage amount, and are put in place to ensure refinance lenders hold specific profit margins. The technique is designed to discourage a borrower from considering refinance options too often. If the original loan did not carry this penalty, it was more than likely offset by a higher interest rate applied.

Factoring in New Closing Costs

Should the borrower be fortunate enough to renegotiate the original mortgage with the same lender, there may be certain benefits to be had. Otherwise, the same expenditures will still apply to the new refinancing process, just as they were for the original loan. These costs include the origination, appraisal, title search, recording, and attorney fees. These closing costs can run from 3% to 5% of the total loan amount, which can become quite costly in terms of repetitive refinancing. However, if a borrower wants to do mortgage refinancing with no closing costs, it is possible to roll these closing costs into the loan itself, but interest will be added to this amount over the loan duration.

Mortgage Refinancing Factors to Consider

Mortgage Refinancing Factors to Consider- 150x150Everyone has an idea about what mortgage refinancing entails. But, for those who don’t, here it is in a nut-shell. The mortgage refinancing process can provide a homeowner with a few cost-saving options to improve their cash flow, or make their current mortgage a little easier to manage. Homeowners can use cash from the new loan for various purposes or they can simply borrow enough to rewrite the first mortgage into one with much better terms. Here are a few factors to consider before making this option a reality.

Financial Motivations

The most important reason behind exploring the refinancing option and mortgage refinancing rates is to take advantage of current mortgage interest rates. A lower interest rate will have a dramatic effect on the monthly payment obligation, which can be a huge benefit to any household budget. Over time, this will also reduce the overall cost of the loan by a substantial amount. By doing a little math, you see that a $200 reduction in the monthly payment puts $24,000 dollars back into a homeowner’s budget over the course of just ten years.

Mortgage Type – Fixed or Adjustable

Another option in refinancing is to consider switching the type of mortgage loan to save money. In this case, an adjustable rate mortgage with a higher ‘adjusted’ rate can be re-worked as a fixed-rate mortgage to stabilize the monthly payments. On the other hand, an adjustable rate mortgage loan (ARM) usually begins with a much lower interest rate, which may work to the homeowner’s benefit in the short-term, if remaining in the home only until the rate ‘adjusts’ back up is part of the strategy.

Naturally, there are certain fees and closing costs to consider, but in some cases, a lender will offer the option of adding these costs into the new loan. Bear in mind, that closing costs for refinancing can be in the range of 3% to 5% of the loan amount. But if the lender of the original loan is willing to renegotiate, there are a few ways to cut down on the closing costs as well.

Documentation Required for Mortgage Refinancing

Documentation Required for Mortgage Refinancing-150x150Once the homeowner has investigated all of the available lending options and has selected the lending institution offering the most affordable refinancing options, all of the documents the lender will require need to be put together to start the refinance process. This will be the relevant information regarding not only the property to be refinanced, but all the documentation regarding the borrower’s financial circumstances as well. Some will come from the borrower’s own files and records, most pertaining to the existing mortgage, and the rest will be requested from various agencies by the lender with the borrower’s authorization.

Having all of the required documentation on hand prior to negotiating with a lender is necessary to move the entire refinancing process forward with minimum delay. Generally, most of this documentation is the same as what is provided at the time of the original mortgage loan application process, but if a certain amount of time has transpired since then, lenders will want to rebuild the application file from scratch in order to re-verify the information.

Assets, Income, and Employment Records

Every refinance lender will request income verification from the borrower in order to proceed. Such documents may include wage payment stubs going back a few months, W-2 forms and tax returns for the preceding two years, as well as employer references and contact information to verify employment and job stability for at least two years. If a borrower is self-employed, they will have to provide tax returns for the two preceding years, along with profit and loss statements.

Any other forms of income sources will also be needed for verification, including pension, dividends, rental income, as well as child support documentation and alimony. A borrower will also need to supply bank statements for any checking or savings accounts, IRAs and 401Ks, possibly even records for mutual funds, stocks, bonds and other securities. Borrowers in possession of substantial stock portfolios, savings or other investments present far less risk to the lender, indicating an ability to maintain mortgage payments if they are temporarily unemployed.

Homeowner Insurance Policy, Title, and Deed

In addition, the existing homeowner’s insurance documents will need to be brought in to verify that the existing policy is in effect and that there is adequate coverage on the residence. Along with this will be copies of the recorded deed on file, the abstract, the land survey, current title report, and the required title insurance documentation for the necessary legal descriptions of the property and its owners. Most of these documents will be readily available from the original loan provider, which can speed up the entire process should that same lender be considered for the new refinancing.

Liabilities and Credit History

Last but not least, the lender will request to gain access to the borrower’s credit reports via written authorization from the borrower. This will give the lender a complete credit history of payment records and total amount of liabilities the borrower has under current obligation, their credit scores, and to evaluate what type of refinancing program they are qualified to apply for. There are also certain lenders who provide a fast-tracked refinance process for borrowers with significant equity in their home and top-tier credit ratings.

New Appraisal

Because the original appraisal done on the existing property will have gone beyond the required 90 day time-frame to still be valid, some mortgage refinance requirements will stipulate that a new property appraisal needs to be performed in order to confirm the current market value of the property for the lender. This of course will establish the amount of funds the lender will endorse for approval. Generally, this appraisal is ordered by the lender through a contracted agency after the loan application has been submitted, and the expense is paid by the borrower when the appraisal is completed.

Whatever the financial necessities or motivations for seeking refinancing on an existing mortgage are, whether it be cutting the monthly expenditures, extending the loan term, changing the loan type, or just freeing up that equity, this information is a valuable tool for reaching that goal. Regardless of which lender is selected to begin the negotiations, the refinancing process can be expedited by putting together the necessary documentation beforehand. In the end, saving both time and money will be the most desirable outcome, for both the lender and the homeowner, if all the pieces of the refinancing puzzle are in the same box.

Is Putting Money Down Required in Mortgage Refinancing?

Is Putting Cash Down Required for Refinancing- 150x150When the refinancing issue is brought to the homeowner’s table, especially when current mortgage interest rates make the option a very favorable consideration, there are the usual ‘costs’ to be factored into the feasibility equation. In the case of refinancing, one of the variables being eliminated is the need for putting down payments into the process, as was required for the original home purchase. Bringing money to the lender’s table in a mortgage refinance is an exception to the normal procedure, and not a standard requirement, which makes the entire concept very appealing for a number of reasons. The only time it might be necessary would be if there is a lack of sufficient equity in the home, or if there is a debt pay-off needed to qualify for the financing.

Money Down is an Option

The basic premise in refinancing is to accomplish a few strategic and money-saving goals. The decision is based on what type of loan package was negotiated at the time of purchase, and what the interest rates were set at by the lender at the time. Therefore, the tactic is to either lower the interest rate, change types of mortgage loans, change the length of the loan term, or tap into the equity resource for cash. There is also the choice of folding the closing costs of the new loan right into the loan itself, which makes the ‘money down’ issue even more attractive. This choice, however, means increasing the overall loan amount, as well as paying more interest in the long run.

More Money Down = Lower Interest Rate

Naturally, when a homeowner chooses to apply any amount of funding toward the refinancing process, if only to lower the loan principle, it will of course reduce monthly mortgage payments. If enough money is brought to the table, there is a good chance the lender will lower the interest rate. This is because the lower loan amount is compared to the current value of the home itself. More funds brought to the closing may also eliminate the need for private mortgage insurance.