Frequently asked questions from home refinance clients.
Should I refinance?
Whether or not you should refinance your mortgage really depends on why you're considering it. The most common type of refinance is a rate and term refinance, and the primary reason people rate and term refinance is to save on their interest rate and monthly payments. For this type of refinance, you should compare the monthly savings against the closing costs for the mortgage and then calculate a break-even point -- the number of months of payment savings required to recoup the closing costs. If you're going to own the property for at least that long, it makes sense to refinance into the better rate. Another reason rate and term refinances are done is to move away from an adjustable rate mortgage and into a fixed rate mortgage. This choice is about peace of mind, and if you're owning the property for the long run that is probably a situation where refinancing is a good idea as well. Finally, for a cash out mortgage, you may be pulling funds for remodeling or to consolidate debts. For remodeling, cash out refinancing usually makes sense because you're not only getting a better rate than you would on a signature loan or a home improvement loan, but you're also investing the money right back into the property. For debt consolidation, applying a better rate to outstanding debts will save you money and of course the monthly obligations across all debts can drop dramatically.
What documents do I need to get prequalified for a refinance?
Standard documentation for getting prequalified for a refinance includes most recent 30 days paystubs, most recent 60 days bank statements, and most recent 2 years tax returns / W-2s / 1099s. Also helpful is a copy of the most recent mortgage statement, the homeowner's insurance bill, and an estimate of the property's value. Once your loan originator learns more about your situation, they may request other documentation to support certain aspects of the loan file.
I have a second mortgage / home equity line of credit. Can I still refinance?
In many cases yes, you can refinance if you have a home equity loan or a HELOC. In most cases, the two loans are combined into one cash out refinance, or possibly a rate and term refinance if the second loan was used to purchase the property. If you prefer to keep your second mortgage, we can look into a request for resubordination -- where the second loan holder agrees to resume the second lien position after the existing first mortgage is paid off through refinancing. Most second mortgage lenders will work with you on this for a fee provided the loan still meets their risk parameters for their mortgage.
What is the rule of thumb on rates for when a refinance makes sense?
Each person's situation is unique, so applying a rule to when refinancing makes sense isn't really effective. In general, you should be looking to save at least .500% in rate on a refinance -- but even then only if the costs are low. As we noted above, though, there are situations where even a higher interest rate than you currently have can make good financial sense. The best way to assess when refinancing makes sense is to lay out your situation with a loan originator, see what your options are, and then work from there to the decision.
What happens at closing?
Your loan typically will close at a title company with an escrow officer, where you will review and sign your loan documents. If you have funds due at closing, you will settle via cashier's check or bank wire that you've arranged with the title company ahead of time. If you're taking cash out, a cashier's check or direct deposit will be yours once the loan records. Once you have signed documents, the title company will record the sale at the state recorder's office -- the following business day for investment properties, or after the legally required 3 day right of rescission for primary residence refinances.
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