Guide to Refinancing

Use this quick mortgage refinancing guide to understand and compare your refinancing options, estimated costs, and how to prepare to refinance your existing home loan.

There is a lot of discussion around interest rates. They’re currently near historic lows, so there’s a lot of excitement in the market. At roughly 4% for a 30-year mortgage, today’s rates are a bargain by historical standards. So, homeowners who are paying upwards of 6% in interest may be missing out on hundreds of dollars in monthly savings.

Use this quick mortgage refinancing guide to learn reasons to refinance and what’s involved to ensure the process goes smoothly.

Is refinancing appropriate for me?

The answer to this question will differ for everyone. So, we suggest you do your research and be upfront with your chosen lender to be sure you’re making the right decision. If you’re unsure of what questions to ask, be sure to visit our blog post: 10 Mortgage Questions you Should be Asking your Mortgage Lender.

A general rule is that refinancing becomes worth your while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. You also want to consider how long you plan to stay in the house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. An easy way to figure that out, though, is to determine your breakeven point.

You can also run your numbers through our refinance calculator, to see what your savings may be.

Refinancing may make sense for homeowners who:

  • Want to get out of a high-interest rate loan to take advantage of lower rates
  • Have an ARM and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan
  • Want to take advantage of their high home equity

What are my options when refinancing?

There are three refinance categories to consider: rate-and-term, limited cash-out, and cash-out.

  • Rate-and-term refinance
  • Choose this option to change your mortgage rate, your loan term, or both. They often carry lower interest rates than cash-out refinances.
  • Limited cash-out
  • Benefits are similar to the rate-and-term refinance, except the closing cost is added to your loan balance.
  • Cash-out refinance
    Convert a portion of your equity into cash, and use that cash to pay closing costs. Increasing home values tend to be the reason for the interest in a cash-out refinance. It’s an easy way to access money to cover other costs.

What are the costs of refinancing?

Fees vary based on your lender. The main disadvantage of refinancing is that transaction fees can add up quickly. Check out these examples of refinancing expenses:

  • Mortgage application fee
    The application fee is something that some lenders will charge to cover your loan processing and credit check.
  • Loan origination fee
    The origination fee is charged for the lender’s work in evaluating and preparing your mortgage loan, often including the underwriting and funding of your loan.
  • Appraisal fee
    Many lenders charge upfront appraisal fees, so it’s important to shop around. An appraisal is a service that estimates the value of your home. It’s a necessary step in the mortgage process that helps determine your loan amount.
  • Title search and title insurance
    The search charge will cover the cost of examining the public record to research the deed of your home, ensuring no one else has a claim on the property. And, title insurance provides protection to the homeowner if someone sues and says they have a claim against the home from before the homeowner purchased it.
  • Mortgage insurance
    Depending on your loan program and your down payment amount, you may be required to pay mortgage insurance. Mortgage insurance protects a lender in the event you default on your mortgage.

Overall, the industry generally says a homeowner should plan on paying an average of 3% to 6% of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist. But, don’t forget your lender is on your side — they want to help you make an informed decision on the solution that best fits your financial needs.

What do I need in order to refinance?

Expect to provide paperwork and to answer questions. The more prepared you are, the easier it is to get you closed — fast. Here’s how we do it at American Financing:

Apply in person, over the phone, or pre-qualify online in as little as 10 minutes. With your approval, we’ll begin income verification and a credit check. After reviewing loan options, we’ll present a mortgage program that makes sense for you.

From there, we’ll collect your financial documents, which you can share via our secure online portal.

Expect to share:

  • W2 statements
  • your credit card report
  • Federal tax returns
  • recent pay stubs
  • copy of driver’s license
  • assets
  • statements of outstanding debt (car loans, credit cards, student loans, etc.)
  • if necessary, any other documents to process your loan

Depending on your loan program and type of refinance, you may need an appraisal. Otherwise, once conditions are satisfied, we’ll prepare documents for signing so we can get your loan closed!

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