STEP 1: WHAT YOU SHOULD KNOW
REFINANCING
It’s important to periodically review the terms of your mortgage loan in comparison to what’s currently available in the lending market. Depending on your circumstances and goals, it may be a good time to refinance your loan.
We’ve prepared the following overview to help you evaluate whether it makes sense to refinance your mortgage loan, and what you can expect during the refinancing process. If you have any questions along the way, please feel free to contact one of our mortgage experts or visit the Learning Center on our website.
Should I Refinance?
Not sure if refinancing is right for you? Learn about the important issues you should consider and discuss with your lender before you make the big decision. Most Common Reasons for Refinancing
Get a lower interest rate. Lowering your rate by as little as 1% can make a substantial difference in interest paid over the life of the loan.
Switch from an adjustable-rate mortgage to gain the budgetary security of a fixed-rate mortgage.
Switch from a balloon mortgage before the entire balance of the loan becomes due.
Consolidate first and second mortgages into a single mortgage with a lower interest rate.
Pay off your mortgage faster by shortening the term of your loan.
Gain access to your home’s equity to fund important family expenditures, pay off high-interest credit cards or reduce other debts.
Refinancing BasicsSome homeowners may not fully understand what the refinancing process entails. When you refinance your home, you are applying for a new mortgage and using the loan you receive to pay off your current mortgage.
Often, you will go through most of the same steps you went through when you received your home’s current mortgage, including the loan application process, credit checks, appraisals and the closing. That means you’ll also face most of the fees and upfront costs you paid during the original mortgage process.
In most cases, homeowners will see the greatest benefits from refinancing if they plan to stay in their home for many years to come. In addition, homeowners who have already built some equity in their current home also often see the biggest advantages from refinancing.
Refinancing Costs and Fees
Because the refinancing process is essentially applying for a mortgage all over again, you may be required to pay the same fees for application and processing services that you paid when you received your current mortgage. Some of these fees may include:
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Title search and title insurance costs
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Application fee
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Appraisal fee
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Loan processing fees
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Points
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Closing agent fees
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Early repayment penalties
It’s very important to carefully consider the costs associated with the refinancing process, as it is possible for the fees to reach an amount that cancel out the long-term benefits of receiving a lower interest rate. Sometimes refinancing is not the best answer. It could make sense to wait if you have a prepayment penalty clause within your current mortgage that is still in effect. Or it may be possible to meet your financial goals in other ways, such as keeping your existing mortgage in place and getting a home equity line of credit or a second mortgage. By talking with an experienced mortgage specialist, you can determine what makes the best sense for your situation and expectations.
Learn About Available Loans
When you’re ready to refinance, a variety of loans are available. It’s important to select a loan that’s perfectly tailored to your circumstances and goals. Following is a brief overview of mortgage loan types. To learn more about each of these options, visit the Learning Center on our website or contact a Cobalt Mortgage expert.
Home Affordable Refinance Program (HARP)
The Home Affordable Refinance Program (HARP) is designed to assist homeowners with good credit standing, to refinance their mortgages – even if they owe more than the home’s current value.
Fixed-Rate Mortgage
Fixed-rate mortgages feature a fixed percentage rate and loan amount, so the monthly payment is the same every month for the entire length of the loan. Because of the loan’s stability, it is a common type of mortgage used for refinancing.
Adjustable-Rate Mortgage
Adjustable-rate mortgages (ARMs) have a variable interest rate and monthly payments that are recalculated on a regular basis to reflect changes in the market interest rate
The initial rate on an ARM is fixed for a specified period. The shorter the initial fixed period, the lower the initial rate can be. The lower rate reflects the fact that the lender assumes less risk of potential increases in the market interest rate, and the borrower isn’t paying for interest rate protection that he or she doesn’t need. This translates into a lower monthly payment than for a similar-term fixed-rate mortgage.
FHA Loan
The Federal Housing Administration (FHA) offers FHA-backed loans that are designed to help increase home ownership by low- and moderate-income families and first-time homebuyers. Because the FHA insures the loan, the lender can offer greater flexibility in lending guidelines. Available for single- and multi-family homes, FHA loan financing options include traditional fixed-rate products, adjustable-rate mortgages and temporary interest rate buy-downs.
VA Loan
The U.S. Department of Veterans Affairs (VA) offers VA-backed loans to veterans, active-duty personnel, reservists/National Guard members and some surviving spouses. When the loan is approved, the VA will guarantee part of it. The amount of the VA’s guarantee usually depends on the size of the loan.
Conforming Mortgage
A conforming mortgage loan, often called a conventional loan, is a mortgage that is equal to or less than the loan limit set annually by Fannie Mae or Freddie Mac, the government-sponsored agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders. The current conforming loan limit for a single-family home or condominium in most areas of the country is $417,000, with higher limits allowed for designated high-priced markets.
Jumbo Mortgage
Jumbo mortgage loans, often called nonconforming loans, are designed for homebuyers who need to finance especially large purchases. A loan is considered jumbo if it exceeds the conforming loan limit, which in most areas of the country is $417,000, as defined annually by the government-sponsored agencies Fannie Mae and Freddie Mac. A variety of jumbo loan options are available, such as 30-year fixed mortgages, adjustable-rate mortgages, VA loans and FHA loans.
Reverse Mortgage
A reverse mortgage enables homeowners age 62 and older to convert part of the equity in their primary residence into tax-free cash without having to sell their home or give up title. It is a low-interest loan that uses a home’s equity as collateral. It is called a reverse mortgage because rather than make monthly payments to a lender, the lender makes monthly payments to the homeowner.
Loan Processing and Underwritting
Loan processing and underwriting is a team effort, and we will keep you up to date during every step of the process. Following is an overview of what to expect.
Once your loan application has been completed, your loan officer will work with a dedicated loan processor who organizes all of the paperwork into one file. Your loan processor will make sure that the required documentation is in good order. If there are any missing documents, or any other information needs to be verified, your loan processor will contact you so everything can proceed smoothly.
You decide when to lock in your interest rate. This “rate lock” is an interest rate guarantee the lender makes to you for an agreed-upon time in order to protect you against interest rate fluctuations.
A real estate appraisal will be ordered when the home or property will be used as collateral for a loan. This professional written analysis of the fair market value of the home or property provides an estimate of the likely price the asset would bring if sold in a competitive real estate market.
A home inspection is recommended to evaluate the general quality of the home, such as its structural condition and remaining life of major components including the roof, plumbing, heating and electrical wiring. The buyer can often use the inspector’s findings to negotiate the final purchase price or other terms with the seller.
A title report is ordered. This important review of the property deed and other government records is done by a professional title company to determine whether the seller has a legitimate saleable interest in the property. It also summarizes whether any restrictions or allowances pertain to the use of the land, outlines the status of property taxes and other public or private assessments, and identifies whether any judgments or liens exist on the property that must be satisfied before the home or property can be sold.
Underwriting is initiated when the loan processor has verified that all paperwork has been completed. The team’s underwriter checks to make sure that the facts in the applicant’s loan file correspond with the guidelines of the loan being offered. The underwriter also reviews details such as income, credit score, source of down payment and the appraised value of the home or property. If any information is missing, the underwriter may conditionally approve the loan with the stipulation that the information must be attained and approved before the loan can be funded.
The loan processor resumes oversight of the loan file to track the receipt and condition of any pending documents, and works with the title company to get all of the paperwork in order for the loan settlement.
Certain types of insurance will be required. Title insurance is needed to protect the lender’s financial interest in the property if there are defects in property title, liens or other matters. Homeowners insurance is necessary to cover physical damage to the property. Depending on the home’s location, the buyer may also need to secure flood and/or earthquake insurance. If the down payment is less than 20% of the purchase price or appraised value, private mortgage insurance (PMI) may be required.
Loan Closing and Funding
When the loan is approved by the underwriter and all final documentation has been secured, the loan is ready to close.
The loan money is placed in an escrow account by the lender so that it is available for the settlement. An escrow account is a special third-party account that holds money safely while the title is being transferred from the seller to the buyer.
A final good faith estimate of settlement costs is provided by the lender to the borrower to make sure there is full understanding of the various settlement costs associated with the loan. Closing costs often include such items as loan origination fees, credit reports, appraisal fees, inspection fees, title insurance, prepaid tax and insurance payments, discount points and recording fees.
At the time of settlement the escrow company presents all of the loan closing documents for the borrowers to sign, which is often done in the presence of a notary public. If a down payment or closing cost payment is required, the buyer will bring a cashier’s check. This settlement process, called closing, is the final step before the transfer of money and keys occurs. The loan will normally close shortly after the loan documents have been signed. When this happens, you officially own your new home or property.