Guide to Refinancing Your Mortgage

Use this quick mortgage refinancing guide to understand 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, current rates (2017) 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.

Is refinancing appropriate for me?

The answer to this question will differ for everyone. Maybe you'd like to access cash, consolidate debt, or even eliminate private mortgage insurance. All are incredible benefits, but not all may make sense for you. So, we suggest you do your research and be upfront with your chosen lender to be sure you're making the right decision when refinancing your mortgage.

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.

Why should I refinance my mortgage?

Refinancing may make sense for homeowners who:

  • Want to take advantage of lower rates
  • Want to move from an ARM to a fixed-rate 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.

Is it important to shop for interest rates?

Borrowers who shop interest rates may see substantial differences. Depending on the lender, they could vary by more than half a percent. But there's more to refinancing your mortgage than interest rates. There are also points to consider. The more points you pay, the lower your interest rate. Let's not forget about costs and fees. Sometimes you can find a better deal from a lender who does not have the lowest advertised rate. So, be sure to take costs, rates, and points into equal consideration before choosing a lender.

What are the costs of refinancing?

Costs to refinance vary based on your lender, and they can add up quickly. Here are a few examples of refinancing expenses:

  • Mortgage application fee
    The application fee is something that some lenders 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 loan, often including its underwriting and funding. It is typically included in the total loan amount to avoid any upfront, out of pocket costs. Expect to pay around 1-1.5% of your principal balance to pay for these charges.
  • Appraisal fee
    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. The fees are charged by the Appraisal Management Company (AMC) or appraiser and not by the lender. To pay for the appraisal fees, over 90% of lenders require their borrowers make a one-time, upfront check or online payment. This protects lenders from borrowers who start the process, complete the appraisal, and afterward either change their mind or do not qualify for the loan.
  • Title search and title insurance
    The search charge covers 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, 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.

Person researching credit score

Expect to share:

  • W2 statements
  • your credit 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!

Ready to refinance?

Interested in refinancing your mortgage? Your next step should be a 10-minute call to an American Financing dedicated mortgage consultant. There are never any upfront fees to consider. Plus, we have access to every loan in the industry, so you can feel confident your refinance needs are being met quickly and are in line with your budget. Call (800) 910-4055, or schedule an appointment online so we can have a mortgage consultant call you!

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