Over the last few months I have taken massive action in making sure that my finances are in check and that every dollar I spend monthly is accounted for. A penny saved is a penny earned. I truly believe in evaluating services and vendors at least annually to make sure that you have your money working for you as efficiently as possible. I have only been in my home for two years but I knew that interest rates had continued to drop in that time period. Because of this, I recently just refinanced my home saving me nearly $350 a month! This is not chump change. I plan to invest the “found money” into a new investment vehicle I have been leveraging over the last few months. There were a few things that I did throughout my refinance process that allowed me to receive the lowest rate possible while bringing minimal money to the closing table. I put together this Ultimate Guide on refinancing your home in order to give you everything needed to get the best mortgage for you and your family with the least amount of headaches.
The Ins and Outs of Refinancing a Home
There’s plenty of literature on borrowing for a home, but not so much on refinancing. In a nutshell, a refinancing is essentially taking out a new loan to replace the existing home loan. However, the process and reasons for doing it are far more involved than just to replace a loan. Some folks refinance to release funds and increase their ability to buy or spend. Others go through the process to reduce how much they have to pay on a home. Still others use the process to free up what is known as equity so they can make big changes on their own or their financial situation. Whichever, the case, refinancing has a lot of benefits and possibilities, but it also comes with a price too. Is the price worth it? That all depends on the deal that you negotiate with the company you decide to refinance through. Generally, if you are able to recoup the closing costs within the first 6-12 months after closing, then you can be very confident you made a great refinance decision.
Reasons to Refinance
As mentioned earlier, the reasons for refinancing vary, but the more common ones tend to be associated with an immediate financial advantage. These include:
• Increasing one’s monthly cash flow – a refinancing can often reshape a mortgage payment due monthly, oftentimes for a lower amount if the new loan is again stretched out for a lengthy period. However, that doesn’t mean the borrower will pay less overall. By extending a home loan longer, the borrower is going to end up paying more for the home than before.
• Paying off and consolidating debt – one of the big advantages of a refinance is that the money made available can be used to pay off other debt. In doing so, by default, that debt becomes consolidated with the refinanced home loan. This can be a big plus for someone who has lots of bills and wants to get them down to a few with more cash flow during the month. It’s a smart move when one already finds himself challenged to make ends meet every month.
• Taking advantage of a lower interest rate – When a home loan was originally borrowed, a specific interest rate was attached to it. If fixed, the rate was set at a certain percentage to be paid back in addition to the loan principal, providing the lender profit in the deal. If a variable rate, the interest rate used can change as the general market becomes cheaper or more expensive to lend in. In most cases the variable interest rate tends to go up over time, making the loan more expensive for the borrower. So a refinance can wipe out this problem with a cheaper interest rate loan or a fixed one instead as a replacement.
• Freeing up funds for a big expenditure – whether its adding a floor to the home or a pool in the backyard, or a buying a new car or paying for the kids to go to college, a home loan refinance can free up significant funds for big expenses. Again, this prolongs a loan from being paid off, but it can create the means for taking care of a big life expense. And, with home improvements, if one is going to live in the home for the next fifteen years or so at least, it may very well be worth the extra loan payment cost enjoying a nicer place.
When to Refinance
The timing of a refinancing can make a big difference, especially in how much the transaction costs as well as whether it will be possible or not. As discussed earlier, equity is what allows a refinancing to be viable. This value is what is built up in a home ownership in two ways: the home value increases over time and the borrower pays down his original loan. Both increase the amount of ownership the borrower has, which can then be translated into hard cash through a refinancing. This is possible because the home becomes the collateral for the new loan based on its new market value and the amount of title actually owned by the borrower.
Of course, a refinancing is not going to work when a borrower has very little equity or the home actually becomes worth less on the market than the original loan made on it. At this point no borrower is going to want to refinance a loan, especially one that involves a cash out of equity when there is no collateral value to protect the new loan from default.
Other bad timing situations can involve refinancing when the borrower already knows that a big change is coming that will affect the title on the home. These typically involve some kind of bad news on the way that would otherwise negate a refinancing. Divorces, a bankruptcy, a negative job change or loss, a tax lien, or similar. Long story short, these are things that a borrower generally should be disclosing to a lender when applying for a refinancing, and the lender is very likely to reject the application because of them. Not disclosing this information could be considered mortgage fraud, which would put the borrower in a lot of hot water.
With that being said, I am a huge advocate of refinancing every time you are able to save money.
Mortgage Refinance Mistakes
The first big mistake many people make is that they don’t stick with their original plan that started the refinancing in the first place. I have seen quite a few people take out additional funds and the cash available suddenly seems to become overpowering and the ability to spend right away tends to become exciting and distracting. As a result, the borrower then ends up with a bigger loan, a longer payment schedule, and not resolution to original goals the refinancing was supposed to take care of in the first place.
The second common mistake is anticipating the refinancing before it’s actually approved and finalized. In these situations the person has already decided how a cash out involved is going to be spent. However, the money is not yet available, so the borrower instead takes “advances” against credit cards or opens up new revolving debt accounts. The big plan is to pay all of these off when the refinancing comes through. However, the borrower forgets that a lender does a double-check on a credit score – once with the application and again with the closing. If the borrower’s report suddenly shows a whole bunch of new revolving debt accounts being opened up, it can very likely sink the refinancing completely. Now the borrower is stuck with the original home loan and a whole bunch of new credit card debt by mistake.
A third foul up can be not doing personal financial research before applying for a refinance. Before ever providing any information with regards to a loan, even a replacement loan, a borrower should always get his own credit report to know where he stands score-wise. However, many folks just go in and apply because they here refinancing is a good idea. Then the lender goes in and runs a credit report and finds the applicant is a horrible choice for a new loan and rejects the package entirely. It’s a lot of work involved just to end up frustrated, and the entire matter can be avoided by just checking a credit report personally first.
Another big one is taking the refinancing application to the same lender who provided the first home loan. While an overall drop in the market can mean that a refinancing from just about anyone will probably be a better interest rate position than before, a borrower’s original lender has no reason to be generous to someone who wants to do a loan replacement on an existing account. Instead, a borrower should be talking to competitors to the original lender who are quite interested in taking away business and creating new accounts. These options frequently provide much better rates than the original lender, and they also tend to be far more agreeable to be able to close the application on a new account.
How to Refinance
The refinancing process is not that much different from a home loan. First, one has to have all the same documentation as before including proof of employment or documentation of income if self-employed, bank accounts and asset records, information for a credit report to be run, and a good idea of what one wants to borrow. Unlike the previous home loan, the borrower also needs to have the appropriate paperwork to document the title to the home, the current loan, and how much is borrowed against it. This can get a bit complicated if the borrower has taken out a second loan as well. Such situations can happen if the borrower had an original mortgage and then used the house to pay for an HVAC upgrade or a backyard home equity line of credit support. In short, the second loan adds to the first and increases the debt against the house. So the lender has to account for all of this when running formulas to determine approval for a refinance.
The refinancing applicant will also have to go through an application phase, just like the original home loan required. This process standardizes the questions and information needed for review. It also triggers all the necessary credit checks and credit history reports for the lender’s review. During the application phase there is also an initial test vetting. If the applicant can’t meet all the basic criteria for a good refinancing, the process is then stopped and the application closed. However, if viable and everything has been verified by the loan officer as accurate and sufficient to meet initial loan criteria, the refinancing package is then sent to an underwriter for review. The applicant waits, just like before when borrowing for the home. After a number of days a final decision is made and the applicant is notified. If good, the old home loan is paid off, the title is transferred as collateral to the new lender, the property paperwork is recorded with the new information, and the borrower is funded the equity cash out if requested.
What to Look for in a Refinance Vendor
It would be a fundamental mistake to assume all refinancing lenders are the same. There are generally three kinds: institutional large banks, small community banks, and everyone else. The first two lender groups tend to be tried and true. They compete against each other regularly and provide the large majority of refinancing loans. However, they also tend to be on the more conservative side of what gets approved, and they demand the most documentation and criteria to be met before financing.
The third group is the one to watch out for. When described as everyone else, this can include everyone from lenders who dabble on the edge with refinancing to brokers and cash loan operations that want to get into the mortgage business. Most of these characters tend to charge far higher interest rates but they also tend to have far more relaxed criteria for refinancing approval. As a result, these lenders tend to be attractive to folks who need cash but would not quite qualify for a bank type refinancing due to existing financial problems.
The significantly problematic lenders are the ones who look for homeowners who are financially challenged but have a significant amount of equity in the home. In some cases, some homeowners are close to being completely paid off but now need financial help. These lenders look for such cases to maximize loan accounts created by such transactions, especially on homes situated well in their real estate markets. If the borrower defaults, the home is a very viable collateral for recovery. If the account remains paid, then the lender enjoys profit very quickly with a healthy loan. Either way is a win.
Again, the lure of refinancing tends to be the ability to get at a large amount of money very quickly. However, a borrower really shouldn’t engage with a refinancing lender unless he has a clear plan what he’s after. Then, when determined, the borrower needs to stick with the plan and not deviate from it. A refinancing will always cost more than the original home loan, but it can be useful for dealing with big financial changes or adjustments to get ahead again.
The absolute best way to refinance your mortgage in 2016 is through Lending Tree. I was able to find a great small bank that I never otherwise would have known about. They were willing to work with me and gave me a great deal.
Lending Tree: The Best Way To Refinance
If you are not familiar with Lending Tree than let me walk you through the process. When you go to Lendingtree.com you are going to be asked a series of questions. After you answer these questions, lendingtree then pushes out your information to a number of different companies so they can send you quotes. The best part is that it will not affect your credit one way or another.
I immediately received a number of preliminary quotes via email and phone and the process was underway. Do not be shy and do not be afraid to pin your top 2 companies against each other and have them compete for your business. Do NOT go with the first quote you receive. If you have any additional questions feel free to drop a line below or email me directly. I hope that you fall in love with refinancing your home the same way I have.