Last updated on:
Refinancing a home mortgage refers to paying off the existing loan, after which you replace it with a new one. While some people consider it illogical, refinancing has a fair share of its advantages, depending on when it is done and the goal behind it. There are obvious reasons why you would consider refinancing your mortgage. For instance, it can earn you a lower interest rate besides shortening the length of the mortgage.
One can as well opt for refinancing as a way of shifting from an adjustable-rate mortgage to a fixed-rate mortgage. Whatever your reasons may be, there is need to understand the principles of refinancing in order to take a step that will uplift rather than cripple your financial status. This article serves as a complete guide, highlighting the benefits and downsides of refinancing, when to refinance and some of the best mortgage loan providers in America.
What is your goal when refinancing?
Before walking to your mortgage loan provider, it is more reasonable to determine what you want to achieve at the end. Keep it in mind that refinancing will never pay off the existing debt. Instead, it can only lower the interest rate besides treating you to new terms.One of the major reasons why people opt to refinance their mortgage is to reduce the interest rate. However, there are those who desire to adjust the pay-back period, which in turn lowers or increases the monthly fee by a certain margin. Alternatively, you could be opting to refinance your mortgage as a means of debt consolidation. There are instances where you may have a home equity loan as well as a mortgage. In this case, refinancing can be a reasonable step especially if you want to combine the two debts into one fixed-rate mortgage, which as well lowers the monthly payment depending on the new terms.
Adjustable rate mortgages start off at a lower interest rate but with time, the periodic adjustments result in an interest rate that is higher than what is provided in a fixed-rate mortgage. In this case, the most reasonable thing is to shift from an adjustable to a fixed-rate mortgage. It eliminates the fear of further interest rate hikes. Even so, one can as well shift from a fixed-rate mortgage to an adjustable-rate mortgage. This is a sound financial strategy especially in a period of falling interest rates. If the periodic rate adjustments tend towards the lower end, it will help you reduce the monthly payments. This is especially good for a homeowner who does not intend to spend a lot of time in a particular home. Changing to an adjustable-rate mortgage will reduce the interest rate without any fear of hiking again because your stay in that particular house is short-lived.
When to refinance
Having clarified the reasons as to why you want to refinance your mortgage, it is essential to determine whether the period and circumstances create a good environment for you to get a new loan. Ideally, you should be staying in a particular house for a long time in order for this move to be reasonable. Refinancing should never be a blind move but rather a strategic financial approach which takes into account the savings relative to the cost. What is the average closing cost across the lenders? Go through a number of surveys to determine the average closing cost before you opt to refinance. This will inform you whether refinancing saves you some cash or not. However, there are those who simply wish to adjust the repayment period to make the monthly fees affordable. In this case, the closing cost may not be so relevant.
When not to refinance
When you have had the mortgage for too long The repayment process is set in a way that the proportion of your payment which is credited to the principle loan increases each year. This also means that the proportion credited to the interest decreases each year. In essence, most of your payments will be credited to the principle loan, which means it will build your equity with time. If you opt to refinance the mortgage late, however, the repayment process will start all over again and most of the payments will be credited to the interest and not the principle amount. This way, you will not build equity. As such, it is not a good idea to refinance your mortgage long after you have acquired the loan.
When your current mortgage has a prepayment penalty
This is the fee that lenders charge whenever a borrower opts to pay off the mortgage earlier than agreed. If you want to refinance with the same lender, therefore, it is important to know whether this fee will be waived. What amount do you want to save by refinancing? Weigh his against a probable prepayment penalty and determine whether it is a worthwhile move. In most cases, it is not reasonable to refinance a mortgage when there is a prepayment penalty because it could even take a lot of time before you can realize the little saving that you wish to make.
Who is eligible for refinancing?
Not everyone will qualify for a mortgage refinance. However, the process of determining your eligibility is simple since it totally resembles what you went through in the approval process before you got your first mortgage. The lender will take into account your assets and income, the property’s present value, your credit score, other debts and the much that you wish to borrow. If by any chance your credit score has improved over time, it is possible to get a loan with a lower interest rate. If on the other hand it has reduced from what you had at the time you applied for the first mortgage, you will obviously incur a higher interest rate.
The lender will specifically consider the amount you are applying for, in relation to the property’s current value to determine whether the ratio falls within their guidelines. If the ration goes beyond what they consider reasonable, they will either decline your request or offer a loan with less favorable terms.
What will it cost to refinance your mortgage?
Besides prepayment penalties, there are a lot more expenses that you are likely to incur when applying for a mortgage refinance. Refinancing fees often differ from one lender to another and from one state to the next. Some of the typical charges that you will pay include:
Application fee: This is the charge that takes care of your initial request to get the loan processed and credit report assessed as well. Whether the loan is approved or not, you will incur this charge.
Appraisal fee: This fee takes care of the appraisal of your home, in order for the lender to determine whether the amount you are about to borrow is equal to the worth of that particular property. In other cases, lenders will include the appraisal fee as part of the application fee. In either way, always remember that you are entitled to the appraisal report. However, it is something which you ought to ask for.
Homeowners insurance: The lender will require you to have a homeowner’s insurance the moment you settle into the house in question. Sometimes referred to as hazard insurance, the policy basically protects the property against physical damage by agents such as fire, vandalism, wind and many other incidents that will be included in the policy.
Title search and title insurance: Before you qualify for a refinance mortgage, your lender will have to ascertain the authenticity of your property by verifying the documents. This is taken care of by a fee, which goes into perusing property owners to determine whether you are the rightful owner of the home.
Survey fee: Lenders will charge a survey fee, to assess the location of your house and any improvements done on the land. Some will undertake a detailed and complete survey, to ascertain whether the property is on the exact location that you say it is. If the house has been surveyed in the recent past on the other hand, you may be exempted from this fee depending on the lender.
How do you shop for a mortgage refinance?
Contact your present lender This is perhaps one of the best options because you already understand the lender and the associated terms. Depending on the initial terms, the lender may as well offer to reduce or do away with some fees. This includes refinancing fees, title search, survey and inspection fees.
Compare lenders before choosing one It is important to shop around and understand the terms that come with different lenders. Look at their interest rate, terms of repayment, charges included and the process of applying for a loan. By comparing, negotiating and weighing different lenders, you have the opportunity to save a significant amount of cash.
Get references: Do you have friends who have secured a mortgage refinance in the recent past? These can be helpful in suggesting some of the best lenders that they know of. Take advice from a couple of friends and weigh the options that you have before settling on a particular lender.
Use newspapers and online shopping: The internet and local newspapers are handy resources when shopping for a good lender. With these sources, you will get information regarding interest rates and points offered by different lenders. Even so, these details change by the day, a reason why you will be required to update yourself as often as possible.
Be wary of advertisements: Most of the initial information that you receive regarding mortgages will probably come from people such as brokers, builders and real estate agents. While such sources are helpful in terms of information, always remember that they are marketing agents, who are determined to make the mortgage appear as attractive as possible. As such, avoid taking everything they say as the gospel truth. Instead, carry out your own study and ascertain whether such advertisements are true.
Top mortgage lenders in the United States
Bank of America controls 22.19% of the total market share for mortgages, with a $75.1 billion portfolio. This is perhaps the second biggest mortgage giant, after Wells Fargo. Offering thousands of home loans with different terms to different clients each year, you will also benefit from other banking services.
With a portfolio worth $77 billion, Wells Fargo is the biggest private mortgage lender in America. It controls 23.9% of the market share, thanks to a well-distributed network of offices all through the country. With Wells Fargo, you will have competitive interest rates depending on your qualification.
Having a portfolio worth $1.5 trillion, these are two institutions run and regulated by the federal government. They are the largest lending entities in the country, and perhaps the most secure. The loans through these two agencies are guaranteed by the government, which means that underwriting lenders are secure since the agencies do not make the loans directly.
Popularly identified as a branch of GMAC financing, the bank controls a relatively smaller percentage -4.02% of the total mortgage loans offered each year. Mortgages are not GMAC’s mainstream business but it is a major sideline. This implies that the company is concerned with diversity, which in real sense lowers the interest rates a little.
CHASE Slightly higher than Ally Bank, CHASE controls 10.16% of the total mortgage loans offered each year. It may not be one of the oldest or rather developed lenders but thanks to aggressive marketing and their revolving credit lines, the company has soon grown into a major lender in the country. With a total mortgage portfolio of $32.8 billion it is indeed a lending company worth considering.
In summary, there are several lenders in America, which all differ in interest rate and terms of lending. As a smart borrower, there is need to weigh each of these lenders before settling on the most appropriate.
Remember, there is a lot to consider before opting for a mortgage refinance. Ask yourself why you need such an option and whether it is the right time to do mortgage refinancing. Next, weigh the advantages against the downsides of refinancing to consider whether it is worth the risk. Lastly, use the outlined strategies to shop for a good mortgage lender before you get your next loan.