There are many reasons for refinancing a mortgage — the most common being interest rate reduction, lowering payments, converting adjustable loans to fixed loans, cashing out home equity, payoff acceleration and dropping mortgage insurance coverage. The first step, then, is determining whether refinancing a home will help the consumer achieve his or her goal.
#1: Goal Determination
Refinancing can involve some compromise — obtaining the lowest rate means paying higher fees, for example. Lowering the payment can involve stretching out the remaining balance over a longer term, which could mean higher interest expense over the life of the loan. Accelerating the mortgage payoff means accepting higher monthly payments. The first step, then, is determining the goal of the refinance and if it can be achieved under current market conditions. For example, if a homeowner wishes to obtain a lower rate, he or she can compare the current rate to real-time rates from competing lenders with LendingTree’s LoanExplorer tool.
#2: Lender Selection
There are several ways to find mortgage lenders, but the most efficient method is by obtaining quotes online. This allows the borrower to request and receive information quickly. That’s vital because mortgage rates change continually as financial markets move. Quotes received hours apart may not be useful if bond prices are changing quickly. The homeowner should check pricing and then interview several lenders with competitive rates.
#3: Program Choice
Most refinancing goals can be met with more than one program, and a knowledgable loan professional can help borrowers winnow out the most appropriate program for their needs. For example, homeowners desiring smaller payments can achieve them by finding a lower interest rate, stretching out their remaining balance over a longer term or choosing an interest-only loan. The loan officer should assess the borrower’s risk aversion, expected tenure in the home, and plans like retirement or starting a family.
#4: Refinance Application
Refinancing a mortgage involves a mortgage application. Today, most loan officers or processors interview applicants and complete the forms for them. Applicants should provide statements from bank and investment accounts, their most recent two pay stubs and W-2s (for salaried employees) or tax returns (for income from commissions, self-employment or investments). A mortgage underwriter (human or automatic) may request additional documents like divorce decrees, business licenses or letters explaining credit issues. Credit reports are pulled and unless the refinance is a streamline product, the property is appraised. The efficiency of the lender and experience of the loan officer are crucial, so borrowers should interview lenders and check their reputations. LendingTree provides ratings and reviews of lender partners to help customers find the right company for the job.
#5: Lock and Close
The final step is locking in a mortgage refinance rate and closing the loan. Locking a rate can be done at any time during the refinance process. Until the interest rate is locked, borrowers are said to be “floating” their mortgages. Once a rate is locked, it is guaranteed until the lock expires — unless there are “material” changes to the application, such as the borrower choosing a different program or the home appraising for less than expected. Borrowers who are floating their mortgages can check current mortgage rates before deciding to lock or continue floating. At closing, the final costs of the refinance are reconciled to the costs disclosed when the loan was locked. The actual costs cannot exceed the disclosed costs by more than allowed by law or the lender has to absorb the excess.
Closing a refinance differs from closing a purchase. If refinancing a primary residence, there is a three business day rescission period after the borrower signs the final documents. This is a cooling off period in which the borrower can back out of the refinance for any reason. Once that period expires, the refinance loan is funded and the old loan is paid off.