By: Yara Zakharia, Esq.According to the Mortgage Bankers Association, the average American household undertakes mortgage refinancing every four years. When borrowers refinance mortgage, they are in effect substituting a new home loan for an existing one. Some or all of the proceeds of the new mortgage are applied towards payment of the current loan secured against the same property. The popularity of mortgage refinancing can be attributed to the fact that it usually generates substantial savings and offers significant financial advantages. Nevertheless, lay persons should not venture into this new territory without familiarizing themselves with the steps to refinancing a mortgage.
Through mortgage refinancing, homeowners can achieve numerous objectives and reap multiple benefits including the following:
1. Lower monthly mortgage payments
If the refinancing mortgage rate is lower than that of the current loan, borrowers will benefit from lower monthly payments.
2. Reduced interest over the course of the loan
By refinancing their home loan at a lower interest rate, homeowners will pay less interest over the term of the mortgage.
3. New mortgage terms to suit their current lifestyle
4. Consumer debt consolidation
By refinancing high-interest consumer debt such as credit card debt, personal loans, and auto loans into a mortgage, borrowers will only pay the low interest rate associated with the consolidated loan. Consequently, they will reduce considerably their monthly payments and save an important sum on interest charges.
5. Access to spare cash through a cash-out refinancing
A cash-out refinancing enables borrowers to tap into their home equity and obtain extra cash to achieve financial goals. Homeowners can refinance their property for an amount exceeding their existing mortgage balance and cash-out the difference. Common uses of the funds include 1) financing a college education, 2) payment of high-interest debt, and 3) home renovation.
6. Shorter mortgage term
By refinancing a home loan at an attractive rate of interest, homeowners can pay off their mortgage more expeditiously and thus save thousands on interest charges.
Homeowners seeking to refinance their mortgage should have a solid grasp of the process, which consists of the following steps:
1. Ascertaining the property's current market value
Mortgage lenders determine the valuation of the borrower's property and decide whether it qualifies for mortgage refinancing, and if so, in what amount.
2. Deciding whether to refinance
Borrowers should ask themselves what they hope to achieve through refinancing and whether it could be of advantageous to them. First, they should review their budget to ensure that they can afford the new mortgage. Homeowners benefit from refinancing if the new loan boasts a more favorable rate of interest than the old one. Secondly, consumers should find out whether the amount saved on interest fees is equal to the amount of fees that are collected during refinancing. If the new creditor chooses to advance a sum sufficient to pay off the current mortgage, then the borrower can proceed with the refinancing.
3. Selecting a qualified and trustworthy mortgage broker
It is important that borrowers do business with a broker who is competent in mortgage refinancing and has their best interests in mind. Preferably, the broker should carry professional indemnity insurance and be a member of the American Association of Residential Mortgage Regulators (AARMR) and/or the National Association of Mortgage Brokers (NAMB).
4. Researching the loan options
Consumers should understand the nuances (i.e. features, interest rates, fees) of the different types of mortgages since each serves a distinct purpose. Refinancing to an adjustable rate mortgage (ARM) is advisable if the rate of interest falls or remains low. Fixed-rate mortgages offer steady monthly payments and simplify budgeting for borrowers. Refinancing to a balloon loan can be a financially-sound move since the rate of interest on this mortgage is nearly as low as that on an ARM. With a home equity loan, a borrower can expect fixed monthly payments since the annual percentage rate (ARM) does not fluctuate. A line of credit allows homeowners to draw on their mortgage balance at a lower rate of interest than consumer credit and to repay it at their own convenience.
When shopping for a loan, borrowers should focus on the product's flexibility and on the availability of an option to pay off the mortgage in a shorter term.
5. Comparison-shopping for the top rates from a wide variety of lenders and for mortgage deals that best match the borrowers' needs and circumstances
6. Requesting mortgage quotes from online lenders
Generally, visitors are required to enter the following fields: (1) loan type, (2) home description, and (3) credit rating.
7. Verifying borrower's credit history and employment
Lenders will perform a credit check and inform homeowners of the interest rates they qualify for on the basis of their credit. Borrowers will also be required to submit documents attesting to their income and employment (i.e. recent pay stubs, bankruptcy papers, rent, bank statements, tax returns).
8. Ordering an appraisal and submitting property-related documents (i.e. title insurance) to the lender
9. Examining borrower's debt-to-income ratio
The debt-to-income ratio is another factor that creditors utilize in deciding whether or not to refinance the applicant's mortgage. As a rule of thumb, homeowners should not allocate more than 36% of their gross income on revolving and housing debt.
10. Completing the refinancing mortgage application
11. Mailing disclosures and the Good Faith Estimate by the lender
Within 24 hours of obtaining the borrower's mortgage refinancing application, creditors must provide the client with a copy of the Good Faith Estimate, a form which itemizes the fees associated with the mortgage (i.e. Yield Spread Premium, loan origination fees).
12. Submitting documentation to the underwriter who ensures that the borrower has satisfied all requirements
13. Preparing the closing documents and sending them to the title company
14. Signing of the closing documents by buyers and sellers at the title company, which in turn forwards them to the underwriter for final authorization and recording
15. Disbursing the funds
To determine whether they stand to benefit from home loan refinancing, prospective borrowers may avail themselves of a mortgage refinancing calculator. This tool is designed to compute the savings derived from mortgage refinancing. Typically, homeowners are simply required to enter (1) the number of payments remaining, (2) their current loan balance, (3) the term of the new loan, and (4) the refinancing mortgage rate.
