Browsing Category

refinance

5 Rampant Mortgage Myths You’ll Hear These Days—Completely Debunked

August 14, 2020

Woman looking at financial papers

urbazon / Getty Images

These days, things are changing so fast, it’s tough to keep up. That’s especially true in the mortgage industry, where interest rates and the overall home loan landscape are shifting with such head-spinning speed, it’s easy for outdated information to circulate, leading home buyers and homeowners astray.

You may have heard, for instance, that everyone can score a record-low interest rate, or that refinancing is a no-brainer, or that mortgage forbearance means you don’t have to pay back your loan, ever. Sorry, but none of these rumors is true—and falling for them could cost you dearly.

To help home buyers and homeowners separate fact from fiction, we asked experts to highlight some rampant mortgage mistruths out there today. Whether you’re looking to buy or refinance, these are some reality checks you’ll be glad to know.

Myth No. 1: Everyone qualifies for low interest rates

There’s a lot of buzz about record-low mortgage interest rates lately. Most recently, a 30-year fixed-rate mortgage dropped to 2.88% for the week of Aug. 6, according to Freddie Mac.

This is great news for borrowers, but here’s the rub: “Not everyone will qualify for the lowest rates,” explains Danielle Hale, chief economist at realtor.com®.

So who stands to get the best rates? Namely, borrowers with a good credit score, Hale says. Most lenders require a minimum credit score of about 620. Some lenders might require an even higher threshold (more on that later).

Your credit score isn’t the only factor affecting what interest rate you get. It also depends on the size of your down payment, type of home, type of loan, and much more. So, keep your expectations in check, and make sure to shop around to increase the odds you’ll get a good rate.

Myth No. 2: Getting a mortgage today is easy

Many assume today’s low interest rates mean that getting a mortgage will be a breeze. On the contrary, these low rates mean just about everyone is trying to get a mortgage, or refinance the one they have. This glut of applicants, combined with the uncertain economy, means some lenders may actually tighten loan requirements.

In fact, a realtor.com analysis found that 5% to 20% of potential borrowers may struggle to get a mortgage because of these stricter standards. And getting a mortgage could become even tougher if the recession gets worse.

For example, some lenders may also require higher minimum credit scores and larger down payments. In April, JPMorgan Chase began requiring a 700 minimum credit score and 20% down payment.

Jason Lee, executive vice president and director of capital markets at Flagstar Bank, says some lenders aren’t offering the loans that are considered riskier—such as jumbo loans, which exceed the conforming loan limit (for 2020, that max is $510,400).

“There aren’t as many loan products available,” Lee says.

And even if you do manage to get a loan, it may take longer than you’d typically expect.

“Based on low rates and a high volume of refinances, loans are taking longer to complete from application to closing,” says Staci Titsworth, a regional mortgage manager for PNC Bank.

As such, borrowers should ask their lender how long the process will take to close, and make sure they’re aware of the expiration date on the interest rate they’ve locked in—since with rates this low, they could go up.

“Most lenders are locking in the customer’s interest rate so it’s protected from market fluctuations,” Titsworth adds.

Myth No. 3: Everyone should refinance their mortgage

“With mortgage rates hovering near record lows, a refinance can make sense and can help free up monthly cash flow,” Hale says.

Still, not everyone should refinance. Homeowners should make sure to take a good hard look at their situation to see whether it makes sense for them.

For one, it will depend on your current interest rate. If it’s low already, it may not be worth the trouble—particularly since refinancing comes with fees amounting to around 2% to 6% of your loan amount.

Given these upfront costs, refinancing often makes sense only if you plan to remain in your house for a while.

In general, “refinancing is a good idea for homeowners who plan to live in the same home for several years, because they will reap the monthly savings over a longer time period,” Hale explains.

Myth No. 4: You can apply for a mortgage after you’ve found a home

Many people assume that you can find your dream home first, then apply for the mortgage. But that’s backward—now more than ever. Today, your first stop when shopping for a house should be a mortgage lender or broker, who can get you pre-approved for a home loan.

For “a buyer in a competitive market, it’s typically essential to have pre-approval done in order to submit an offer, so getting it done before you even look at homes is a smart move that will enable a buyer to move fast to put an offer in on the right home,” Hale says.

Mortgage pre-approval is all the more essential in the era of the coronavirus pandemic. Why? Because many home sellers, leery of letting just anyone tour their home, want to know a buyer is serious—and has the cash and financing to make a firm offer. As such, some real estate agents and sellers require a pre-approval letter before a potential buyer can view a home in person.

Nonetheless, according to a realtor.com survey conducted in June of over 2,000 active home shoppers who plan to purchase a home in the next 12 months, only 52% obtained a pre-approval letter before beginning their home search, which means nearly half of home buyers are missing this crucial piece of paperwork.

Aside from getting their foot in the door of homes they want to see, home buyers benefit from pre-approval in other ways. Since pre-approval lets you know exactly how much money a lender will loan you, it also helps you target the right homes within your budget.

After all, as Lee points out, “You don’t want to get your heart set on a home only to find out you can’t afford it.”

Myth No. 5: Mortgage forbearance means you don’t have to pay back your loan

The record unemployment caused by the COVID-19 pandemic means millions of Americans have struggled to pay their mortgages. To get some relief, many have been granted mortgage forbearance.

Nearly 8% of mortgages, or 3.8 million homeowners, were in forbearance as of July 26, according to the Mortgage Bankers Association.

The problem? Many mistakenly assume that mortgage forbearance means you won’t have to pay your loan, period. But forbearance means different things for different homeowners, depending on the terms of the mortgage and what type of arrangement was worked out with the lender.

“Forbearance is not forgiveness,” Lee says. “Rather, it’s a timeout from having to make a mortgage payment where your servicer—the company you send your mortgage payments to—will ensure that negative impacts to your credit report and late fees will not occur. However, because forbearance is not forgiveness, you will need to reach some sort of resolution with your loan servicer about the missed payments.”

The paused payments may be added to the back end of the loan or repaid over time.

“It does not forgive the payments, meaning the borrower still owes the money,” Hale says. “The specifics of when payments need to be made up will vary from borrower to borrower.”

The post 5 Rampant Mortgage Myths You’ll Hear These Days—Completely Debunked appeared first on Real Estate News & Insights | realtor.com®.

What Is an Appraisal Waiver? A Way To Save Cash on a Refinance

June 30, 2020

appraisal waiver

Alina555 / Getty Images

When interest rates dropped to record lows in March, I decided to refinance the mortgage on my house. Yet after applying for a refi with my lender, it sent me an email that left me scratching my head.

“Great news,” it announced. “We got you an appraisal waiver!”

Nice. So what is an appraisal waiver?

Mystified, I dove in to Google to figure out exactly what this meant for me. For one, my lender assured me, it meant keeping $625 in my pocket that I would have otherwise spent on an in-person appraisal.

But why would my lender offer to waive the appraisal? Was it just benevolence, or was something else going on here? I wondered if there was a catch.

So I did some digging, and learned more about this option, the pros and cons, and whether it’s a good idea for me. Here’s the scoop on this confusing home financing concept, broken down into plain English.

What is an appraisal waiver?

An “appraisal waiver,” also known as a property inspection waiver, is a real estate term that simply means you’re not required to have an appraiser assess the value of your home.

When you’re buying or refinancing property, your lender typically appoints an independent appraiser to assess how much the place is worth. An appraiser visits your home, studies it inside and out, analyzes your neighborhood, and reviews nearby home sales among other factors before deciding on your home’s market value.

By having an appraiser estimate how much a home is worth, this helps your lender better understand the transaction’s risk. After all, your home serves as the loan’s collateral, meaning that if you stop paying your mortgage, your lender can foreclose on your property, take it over, and then sell the place to recoup its losses. To your lender, a home appraisal is a safeguard.

With an appraisal waiver, however, your lender calculates your home’s value instead—and rather than an in-person visit, it uses software and algorithms that take into account market conditions, recent nearby home sales, appraisal reports, and other data.

Lender appraisals are typically offered for free, whereas independent home appraisals range in price from $200 to $750, depending on where you live. And since the home buyer or homeowner typically pays the appraisal fee, an appraisal waiver can save them that money.

Why lenders offer appraisal waivers

Appraisal waivers were once rare, but the coronavirus pandemic has made them more popular.

After all, offering an appraisal waiver means lenders can skip sending an appraiser—a living, breathing human being—into a home. In the era of COVID-19, an appraisal waiver is a safer, healthier option that helps limit the potential spread of the virus.

Fannie Mae, one of the government-backed companies that support the mortgage lending industry, even began recommending that lenders offer appraisal waivers whenever appropriate during the pandemic.

How to apply for an appraisal waiver

The guidelines for appraisal waivers are set by Fannie Mae and Freddie Mac, institutions that buy mortgages from banks and lenders. While there are pages and pages of rules and regulations for allowing appraisal waivers, generally speaking, you’re eligible for one if you’re buying or refinancing a single-family home or condo (even if it’s a second home or investment property).

Manufactured homes, co-ops, multiunit properties, and new construction homes generally aren’t eligible.

Want to find out if you qualify for an appraisal waiver? Just ask your lender.

Fannie Mae and Freddie Mac offer special underwriting software that helps lenders ensure they’re meeting these two institutions’ loan requirements. This software evaluates properties by using data from millions of home sales, including appraisal reports. It analyzes your loan, then produces a simple yes or no recommendation for an appraisal waiver.

From there, your lender can choose to offer you the appraisal waiver or require an in-person appraisal.

“Fannie or Freddie might not require one, but the lender will require it to protect themselves based on the loan’s profile,” says Kevin Leibowitz, mortgage broker and founder of Grayton Mortgage.

You also get a say in the matter: Since it’s your home and you’re spending hundreds of thousands of dollars, you can choose to accept the waiver or ask your lender to order an appraisal.

Who should get an appraisal waiver?

While appraisal waivers are growing in popularity, they’re rarely used during the home-buying process and are almost exclusively used with refinancing. This makes sense from the lender’s perspective. During a refinance, you already own the property and are (hopefully) making regular mortgage payments on time, which makes you a safe bet.

Home buyers, on the other hand, are more of a gamble to lenders, and may be less likely to have an appraisal waived. However, if you have a stellar credit score, plenty of money in the bank, rock-solid employment history, and other elements of a strong borrower profile, lenders may offer you the waiver. If you’re a less than ideal borrower or you’re pursuing a riskier financing option (like a cash-out refinance), they may choose to require an appraisal.

Pros and cons of an appraisal waiver

Beyond preventing the spread of coronavirus, appraisal waivers have other perks. Ditching the in-person appraisal means ditching the appraisal fee, which can save homeowners several hundred dollars.

A traditional appraisal also takes time to schedule and perform, which means it takes longer for a loan to close. Closing more quickly means that you can start taking advantage of your refinanced mortgage sooner.

So can a home’s value be accurately calculated without an independent, in-person appraisal? Experts are divided on this issue, although some point out that it’s within a lender’s interests to pinpoint the right price.

“They are lending to you based on what they believe that asset is worth, so they’re going to do everything in their power to get it right,” says Jeremy Sopko, CEO of Nations Lending.

Plus, these days, appraisal software has gotten fairly sophisticated.

“In a waiver situation, lenders truly have it down to a science,” Sopko adds.

An appraisal waiver could also result in a higher estimated home value than a traditional appraisal, which is a good thing for owners who are refinancing. The reason: A traditional appraisal in a volatile housing market creates a lot of uncertainty. As such, there’s a chance the new appraised value of your home will come back lower than you want or, worse, lower than what you paid for your home.

On the flip side, however, there’s certainly a chance a lender’s estimate may come in low. If this happens, though, you can simply request an in-person appraisal with your current lender, or shop around for other lenders who might appraise your home at a higher price.

Plus, your home’s appraised value today may have no bearing on what a potential buyer is willing to pay for it in the future. This value is simply a tool used by lenders to help give context to your loan and help them decide whether it’s a smart choice to loan you money.

As for whether an appraisal waiver is right for you, check out a refinance calculator to get started.

The post What Is an Appraisal Waiver? A Way To Save Cash on a Refinance appeared first on Real Estate News & Insights | realtor.com®.

6 Refinancing Mistakes Homeowners Risk Making Right Now

March 31, 2020

wutwhanfoto/Getty Images

Between low mortgage interest rates and the coronavirus pandemic sending our economy in a tailspin, many people have recently rushed to refinance their mortgages. But as we all know, haste makes waste—and many of those eager homeowners made mistakes that could cost them tons of money in the long run.

So if you’re tempted to jump on the refinance bandwagon, do so with caution. To help clue you in to where the pitfalls lie, here are six mortgage refinancing mistakes to avoid.

Mistake No. 1: Assuming that a federal rate of 0% means you can get a 0% mortgage rate

In an effort to stimulate the economy amid the coronavirus pandemic, the Federal Reserve dropped the federal funds rate to a range between 0% and 0.25%. Many people assumed that this meant that mortgage rates would fall into that range, too. That is not the case, as it happens.

“I think one of the most misunderstood things that people are seeing right now is the news about interest rates going to 0%,” says Ryan Wright at Do Hard Money.

The reason? Wright explains that the Federal Reserve interest rate, the prime rate, and the actual rate someone’s lender will offer are all different.

The federal funds rate, which is what the Fed sets, is the rate that banks pay to borrow from each other. This actually doesn’t directly affect mortgage rates, but it does have a trickle-down effect.

The mortgage rate reports that come out weekly typically compile the average rate for a 30-year loan. But there are a lot of variables, including where you live and what your borrower profile looks like. Prime borrowers, with the best credit score and debt-to-income ratio, get the cheapest rates. Meanwhile, if you aren’t the ideal borrower, your rate is likely to be higher.

Moreover, interest rates have been going up and down in the last few weeks, and are likely to continue in this way before they level out. As a prospective refinancer, it’s important to stay informed, and not to try to refinance with unreasonable expectations.

Mistake No. 2: Jumping on the refinancing trend too late

With so many people refinancing, you might be tempted to do the same. Unfortunately, it may already be too late.

That’s right: Good news travels fast, and with so many people rushing to refinance, lenders have been inundated by the demand, and rates have gone up.

“We are seeing a major influx of refi applications to capture lower interest rates,” Nicole Rueth, a mortgage lender with Fairway Independent Mortgage Corporation explains. But it’s not just homeowners hoping to score a deal during a dip in the economy. Plenty more are visiting lenders to prepare for an uncertain future.

Rueth reports that she’s seen many homeowners who are leveraging equity with cash-out refis, aiming to secure a nest egg to prepare for the ongoing COVID-19 emergency.

And it’s not just Rueth who’s experienced the surge in refinancing. As of March 11, the volume of refinancing applications was up 79% from the previous week and 479% year over year, according to data from the Mortgage Bankers Association.

Since the industry wasn’t prepared to process all these applications, many lenders hiked up rates in an effort to slow business.

“Mortgage rates move according to supply and demand and liquidity in the market,” Mike Zschunke, a real estate specialist in Arizona, says. “The more people that want to refinance or that apply for new mortgages, the higher the rates will go.”

Mistake No. 3: Forgetting about refinancing fees

As stated above, it may be hard to get a good refinance rate, now that so many homeowners have gone running to their lenders. Still, that doesn’t mean it’s impossible to find a better rate than the one you currently have.

But the promise of a lower rate doesn’t necessarily mean you should refinance.

A refinance will come with plenty of fees and closing costs, and sometimes those fees can make your refinance cost even more than you’d save on the lower rate.

“People should know that just because their new interest rate may be lower than their current interest rate, it may not make sense,” says Roger Ma, a certified financial planner. “They need to consider how much longer they’ll be staying or keeping their current place, the upfront closing costs involved, and the ongoing interest savings.”

If you crunch the numbers and realize that, in the long run, a refinance will be worth the costs up front, great!

Just make sure you know what fees you’re facing so you can make an educated decision.

Mistake No. 4: Refinancing too much equity out of your home in a time of uncertainty

There are many reasons to refinance, but if you’re planning to tap into your home equity—to, say, consolidate your debt or pay for home improvements or other expenses—watch out.

“We should be concerned about people refinancing too much equity out of their homes and not being able to afford the mortgage payment,” says Odest Riley Jr. of WLM Financial. “This is especially the case if the COVID-19 virus causes any type of economic downturn, which could tighten up a homeowner’s ability to keep up with their financial obligations.”

So if you’re refinancing—even with a lower interest rate—make sure that your new monthly payments make sense for your budget. Before you make any big decisions, remember that rates are low for a reason, and in this time of national and international financial uncertainty, it may be best to play it safe, financially speaking.

Mistake No. 5: Expecting to lock in your lender’s quoted rates and fees ASAP

Since the rates could go up (or down) while you’re in the process of refinancing, it’s always good practice to lock in your lender’s rate to ensure you’ll be paying what you expect. This lock may cost a fee.

But with all the volatility in the market these days, locking in rates can be especially tricky. It can be difficult to get a lender to look at your application, let alone lock in a rate, before the rates move again.

If you’re lucky enough to lock in a rate that works for you, even if it’s not the best rate you’ve seen, you might want to take the opportunity while you can. Here’s more on when to lock in a mortgage rate.

Mistake No. 6: Shopping for the right loan for too long

With today’s online financial tools, like this mortgage rate comparison tool, there’s no excuse to not get the lowest rate possible. Still, experts warn against falling into a black hole of shopping for the best rate indefinitely, always thinking you can find a better deal.

“I have many clients who are too focused on rates or making a perfect decision on small details of their loan—so much so that they are likely to miss out on an incredible opportunity in an effort to make a perfect decision,” says Todd Huettner with Huettner Capital.

“A few are in a position where they could save thousands of dollars a year—tax-free, no less—by refinancing, but they are waiting to start the process. Many of them will get left behind.”

Plenty of people track rates as they sink, waiting to pounce when rates drop to their absolute lowest, but Huettner says this isn’t the best tactic.

“If you think you can time the bottom, you can’t. You can only get lucky,” says Huettner. “Find a rate that makes sense for you, and jump on it if you get it.” Here’s more info on how to shop for a mortgage.

The post 6 Refinancing Mistakes Homeowners Risk Making Right Now appeared first on Real Estate News & Insights | realtor.com®.

Is It Time to Refinance Your Mortgage?

March 10, 2020

Home for sale in San Francisco

Justin Sullivan/Getty Images

Worries about coronavirus have battered stocks and sent investors fleeing to the safety of U.S. government debt.

On Friday, the yield on the 10-year Treasury note fell below 0.7% for the first time. Earlier this week, the Federal Reserve cut its benchmark rate to a range between 1% and 1.25%.

Mortgage rates are expected to fall along with those yields. The 30-year fixed-rate mortgage averaged 3.29% during the week of March 5, according to Freddie Mac, and the 15-year fixed-rate mortgage dropped to 2.79%.

“Given the movement in Treasury rates right now, they’re probably going to go lower,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. “I think low mortgage rates are going to be around for a while.”

If the yield on the 10-year Treasury declines even further, mortgage rates could drop more, too, though they don’t always move in lockstep with the government benchmark.

“This opens up a whole new world of refinancing for mortgage borrowers,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry research group. “It’s a matter of time in terms of how fast lenders lower their rates to reflect a 10-year [U.S. Treasury note] and it’s also a question of how fast they want to go to that level, but at a minimum, we’re talking mortgage rates at 3.25% if not below 3% in the next few weeks, if everything stays the same—and frankly, that would be a once-in-a-lifetime refinancing opportunity.”

Whether it makes sense to refinance a mortgage now comes down to a host of personal factors. It depends, for example, on the cost of a refi, how long you plan to stay in your home, how much you hope to save, what you think your house is worth—and your view of the world economy.

“Yields have fallen quite steeply and the reason is that there’s concerns about a big slowdown in the global economy, largely because of the coronavirus,” said Kathy Jones, senior vice president and chief fixed income strategist at the Schwab Center for Financial Research.

For those considering a refi now, first look at the difference, or spread, between the current rate and the rate in the market. Then looks at costs, as a refinancing means paying significant closing costs—including title insurance and an appraisal—which can often amount to a few thousand dollars.

If the potential saving from a lower-rate mortgage doesn’t make up for those costs, it may not make sense to refinance just yet. “The old rule of thumb used to be two years,” Mr. Cecala said. “If you can pay it back within two years and you expect to be in the house five years, then why not do it?”

Rates have fallen before, so those who wait to refinance could potentially see even better ones. As the coronavirus continues to develop and its effects are felt around the globe, Mr. Cecala said the mortgage market could see even more changes.

Lauri Droster, branch director at RBC Wealth Management in Madison, Wis., suggests considering a refinance if there’s a difference somewhere between one-half a percentage point or 1 percentage point.

Ms. Droster said it’s easier for people to understand the potential saving when they make it personal. Calculate how refinancing could affect monthly mortgage payments rather than simply looking at the percentage difference and examining it in an abstract way.

“When they see it in real dollars, then they can make that comparison,” she said. “That’s where they can really see what it means, when they can see it in dollars and say, ‘I’m paying $1,500 a month right now for my mortgage and 1% lower is down to $1,200 a month.’”

For those with adjustable-rate mortgages, however, Mr. Cecala recommends borrowers check how often their rate adjusts. Most only do so once every six or 12 months, in which case some homeowners might want to refinance from an ARM to a fixed-rate, he said, to lock into low rates.

“If you’re saying ‘I’m planning on being in this home for the next five years, and I don’t want to worry about what’s happening with interest rates,’ that’s pretty much a no-brainer,” he said.

Those with high loan-to-value ratios, however, may not be able to refinance, despite the fact that they may want to do so. But Sam Khater, chief economist at Freddie Mac, said that with home values steadily rising over the past decade, this circumstance is rare.

Dan Egan, managing director of behavioral finance at Betterment, is himself considering refinancing his house. To him, the move makes sense because he and his wife have decided to also shorten the time period of their loan from a 30-year mortgage to a 15-year mortgage. Their net monthly payments could be higher as a result, but he’d be paying lower interest rates over a shorter time. His tax situation wouldn’t change as “the standard deduction is high enough.”

“My rate was 4% and it was a 30-year mortgage I am six years into, so I’m looking now, especially with the current softening in the stock market. If rates get a little lower, I could be looking at a new mortgage rate of 3.5%,” he said. “The difference between 4% and 3.5% may sound small, unless you’re looking at those interest payments over many years. So for myself, that change would mean saving somewhere around $500 a month, which is significant.”

With the mortgage rates dropping and refinancing interest growing, Mr. Cecala said that the math “gets easier.”

“The more you can adjust the interest rate, the more palatable it is to pick up closing costs,” he said. “If you’re saving $800 a month, you don’t balk at spending $8,000 in closing costs because you’ll make that back within a year.”

When it is worth refinancing

  • Home buyer puts 20% down on a home worth $266,300, the median home price in January.
  • No plans to move soon.
  • Pays a 4% rate, resulting in a monthly payment excluding taxes, fees and insurance of $1,017.09, according to LendingTree.
  • Dropping to a 3.25% rate would decrease the payment from $1,017.09 to $927.16. The homeowner would save around $90 a month, with exclusions.
  • Assuming refinancing costs of $2,000, this homeowner would need to stay in the home for a little less than two years to make it worth the money.

When it isn’t worth refinancing

  • Home buyer puts 20% down on a home worth $266,300, getting a 4% rate on the $213,040 fixed-rate loan.
  • Plans to move within the next two years.
  • Dropping to a 3.65% rate saves $42 a month, with exclusions.
  • With refinancing costs of $2,000, they’d need to stay closer to four years to make refinancing worth the cost.

The post Is It Time to Refinance Your Mortgage? appeared first on Real Estate News & Insights | realtor.com®.

Mortgage Rates Are at 3-Year Lows—Here Are 5 Questions to Ask Yourself Before You Refinance

February 12, 2020

Couple on the sofa

courtneyk/iStock

Mortgage rates are resting near record lows — and that’s spurring a wave of refinancing activity as Americans look to take advantage of the savings a cheaper interest rate could bring.

Refinance loan volume jumped to the highest level since 2013 last week, especially among jumbo mortgage borrowers, on the heels of lower mortgage rates, according to data from the Mortgage Bankers Association. The average interest rate for a 30-year fixed-rate mortgage fell to 3.45% last week, Freddie Mac  reported, the lowest level since October 2016.

More than 11 million homeowners stand save to an average of $268 per month on their mortgages if they were to refinance at today’s rates, real-estate data firm Black Knight reported.

“Almost anybody should be checking if there’s an opportunity to refinance,” said Tendayi Kapfidze, chief economist at LendingTree. “It doesn’t cost anything to talk to a lender and see what rate they might get you in this marketplace.”

But refinancing isn’t foolproof. Taking out a new home loan can cost you thousands of dollars in fees. And making the wrong choices can significantly reduce your potential savings. Here are five questions homeowners should ask themselves before taking the plunge with a mortgage refinance.

How long will I stay in this home?

Mortgages are paid out over the span of many years, and during the initial period most of your payments will go toward the interest rather than the principal owed on the loan.

As a result, time is one of the most significant factors in determining whether a refinance makes financial sense. “You want to keep the loan long enough for the monthly savings to exceed the closing costs — that varies a lot depending on the fees,” said Holden Lewis, mortgage expert at personal-finance website NerdWallet.

Homeowners who are planning to move to a new house in the next five or so years may actually save more by sticking with their existing mortgage rather than refinancing, given the fees you have to pay the lender.

On the flipside, people who are in their forever homes could benefit from taking out a 15-year loan rather than a 30-year loan, Lewis said. The average interest rate on the 15-year fixed-rate mortgage is typically lower than the 30-year loan — it currently stands at 2.97%. So while these loans require larger monthly payments, the aggregate savings are greater.

A 15-year loan also would allow the homeowner to build equity faster, which they could then tap through a home-equity loan further down the road if unexpected expenses arise.

How much will I save?

To save money with a refinance, the general rule of thumb is that the new interest rate needs to be 50 basis points lower than your current one, Kapfidze said. But when looking at the average rates reported by Freddie Mac, it’s important to remember that the rates offered by lenders can be even better.

“Because typically a lot of the rates you see are average rates, it means that half the rates are below that,” Kapfidze said.

Comparison shopping, as a result, is critical in order to score the best deal. Lenders don’t just compete on interest rates. They also can adjust how much you spend in closing costs. Another factor that can shift overall savings is the discount points — these are fees lenders collect at closing in order to reduce the long-term interest rate. If you can pay more at closing, this could bring your interest rate down even further.

Am I paying mortgage insurance?

There are two instances when borrowers must pay mortgage insurance: If they get a Federal Housing Administration (FHA) loan, or if they get a conventional loan with a down payments of less than 20%.

When refinancing, it’s critical to review what type of loan you can get and how much equity you have. “Refinancing when you’re going to have 20% equity or more is going to give you the best deal because you’re not going to have mortgage insurance,” Lewis said.

Getting rid of mortgage insurance will boost your overall savings and can make a refinance worth it even if you’re outside the 50-basis-point threshold.

If you haven’t built much equity in your home through your monthly mortgage payments, but have a chunk of cash in savings, a cash-in refinance can help push you above the 20% mark, Kapfidze said, adding that this could be a decent use of your tax dollars.

Is my financial house in order?

recent study from LendingTree found that one in four mortgage refinance applications is denied. The most common reason applications are denied is that the borrower’s debt-to-income ratio is too high, followed by having poor credit.

Taking steps to improve both your debt-to-income ratio and your credit score ahead of applying for a new home loan will increase the odds of getting improved. “If there’s anything you can do to reduce your non-mortgage debts, that’s going to help,” Kapfdize said. It’s also important to verify that there are no errors on your credit report.

Another reason to review your credit history: Your score has likely improved as you’ve been paying off your mortgage. “Your better credit score will put you into a better rate,” Kapfidze said.

Will my existing lender cut me a deal?

When pursuing a refinance, don’t forget about your existing lender. “If they know you’re shopping around, they should be motivated to give you the best deal,” said Rick Sharga, a mortgage industry veteran and consultant.

Because your existing lender already has your personal information and payment history, refinancing with them can often be an easier process. Additionally, they have a vested interest in keeping your business, which will push them to compete as much as possible with other lenders’ offers.

Another way refinancing with your existing lender can mean better savings is by amortizing the new loan. Your lender will have a sense of how long you’ve had your existing loan for, and as a borrower you will save more by refinancing to a shorter duration than getting a new 30- or 15-year loan and starting from square one.

The post Mortgage Rates Are at 3-Year Lows—Here Are 5 Questions to Ask Yourself Before You Refinance appeared first on Real Estate News & Insights | realtor.com®.

5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home

September 18, 2019

5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home

10255185_880/iStock

Many homeowners with mortgages have considered refinancing at some point or another. Refinancing a mortgage essentially replaces your current mortgage with a new loan. It’s an especially enticing choice for people who want to decrease their interest rate, lower their monthly payments, pay off the loan faster, tap into home equity, or turn an adjustable-rate into a fixed-rate loan.

But hold on. Sherry Graziano, SVP, mortgage transformation officer at SunTrust in Orlando, FL, says that just because rates are at historic lows doesn’t mean that refinancing is the right decision for everyone. “Before beginning conversations with lenders, the homeowner should have a clear financial objective and see refinancing as way to achieve that objective.” 

Once you’ve decided that refinancing is worth exploring, find a mortgage representative who can clarify all the financials and explain all your options. While you’re discussing this, it’s important to ask the right questions—and lots of them.

Ready to refinance your home? Before you jump in and start the refinancing process, here are some questions you should plan to ask your mortgage lender.

1. ‘Does my quote include taxes and insurance?’

When applying for a loan, a lender will provide an estimate that gives a breakdown of all closing costs, the rate, and all other related costs with the loan.

Jeremy Engle, a mortgage lender with Vero Mortgage in Visalia, CA, says the lender’s quote usually includes taxes and insurance. “I ask clients for a current copy of their mortgage statement, and I can pull the figures from that,” he says.

Lenders will typically provide a detailed quote that will break down the new monthly payment, and it should highlight taxes and insurance, according to Graziano. She says homeowners may also want to ask about the associated fees—both the lender’s and other third parties’. “Typical costs may include an appraisal fee, credit report, title insurance, and closing or attorney’s fees,” Graziano says.

2. ‘How much money do I need to bring to closing?’

On average, homeowners can anticipate paying 2% to 3% of the loan amount to refinance a mortgage. So refinancing a $300,000 home loan, for example, could cost $6,000 to $9,000 and would be due at or before closing. Just as with your current home mortgage, the refinancing process will also include closing fees.

Communicate with your lender and ask what you need to bring to the closing table. Closing costs can include a variety of fees—bank, appraisal and attorney fees—for the services and expenses needed to finalize a mortgage.

When it comes to how much to bring to closing, it depends on the loan the borrower is looking to acquire and is unique to each borrower’s financial situation, according to Tarek Hassieb, a licensed real estate broker for Liberty Realty in Hoboken, NJ.

“If they want a lower payment, they’ll bring the appropriate funds to satisfy the payment they feel comfortable with. A borrower can essentially bring zero dollars to closing and add the closing costs to the loan, and bring nothing to the closing table,” says Hassieb.

Graziano says lenders offer different terms and promotions, and it is worth reading through all the documents. 

3. ‘What are my out-of-pocket costs?’

Discuss with your loan officer any additional fees you may be responsible for that are not included in your closing fee estimate. These may be included as separate costs, such as insurance and a property survey. Out-of-pocket costs vary, depending on each buyer’s situation.

“While some homeowners may opt to pay out of pocket for some expenses, many will choose to roll their refinancing costs into the loan,” says Graziano. “Homeowners should be clear about whether or not the lender offers them that option.” 

4. ‘Do I have room to cash out any equity?’

Most lenders prefer to see some equity if you are to qualify for a loan. Usually, the more equity there is in a home, the easier it is to refinance. Experts say at least 20% equity is needed if you don’t want to pay private mortgage insurance. However, even with less, you can still refinance, but the terms may not be as favorable. Hassieb says that since each buyer’s loan may be different, this would be assessed on a case-by-case basis.

5. ‘How long is the term of the loan that you are quoting me?’

When you refinance, you will have a new term and amortization schedule. Each time you refinance your property, the clock is reset for the term length. “The loan would restart to Day One. So consider it a new loan. A borrower can choose a term from 10 years up to 30 years,” says Hassieb.

The cost to refinance a mortgage can vary based on such factors as interest rate, credit score, loan amount, and lender. As a homeowner, if you want to get a better mortgage refinance deal, you should shop around and make lenders compete for your business.

Hassieb says most lenders have an online link to a refinance pre-approval that can help the lender understand the borrowers’ financial situation and help them achieve their financial goals.

The post 5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home appeared first on Real Estate News & Insights | realtor.com®.

Should You Refinance Your Mortgage? A Homeowner’s Guide to HELOCs and More

July 2, 2019

Refinancing a mortgage can be a great way for homeowners to save some money. But beware—make a wrong move when you refinance a loan, and you could easily get in over your head. That’s why we highlight here the right (and wrong) ways to refinance your mortgage loan.

What is home equity?

Your home equity is the current market value of your home, minus the amount you owe on your mortgage. While paying down your mortgage loan will decrease your debt and increase your home equity, the value of your home can rise (or fall) and increase (or decrease) your home equity, too. (Here’s how you can get an estimate of how much your home is worth.)

What is a refi?

When you refinance your mortgage, you’re essentially applying for a new loan. Once again, you’ll be subject to complete documentation and verification of your income, assets, debt-to-income ratio, credit score, and job history. Your real estate property will need to appraise for enough value to support the mortgage refinance, and you’ll have to show that you can afford the new monthly payments on the mortgage.

You will also need to either pay closing costs on the loan, which run anywhere from 2% to 7% of the amount of the mortgage, or opt for a no-cost refinance, where your lender covers the closing costs but you get a slightly higher interest rate on your new loan.

A mortgage refinance can be for the amount you currently owe on your mortgage, or it can be for more or less money. If you have extra cash and want to reduce your mortgage balance, putting money with your refinance is a good idea. The lower your new loan amount, the less you’ll pay in loan origination fees and interest. On the other hand, if you get a cash-out refinance, you can get a check at closing.

Whether you use the same lender for a mortgage refinance is entirely up to you, says Jordan Dobbs, a loan officer at Washington First Mortgage in Rockville, MD. Even if you were happy with your current mortgage lender, it could be beneficial to shop around and compare your loan options with different lenders.

4 reasons refinancing a mortgage can work

There are several things that could prompt you to refinance your loan:

  1. To get a lower interest rate. Many people decide to refinance a mortgage when mortgage rates are lower so that they can lower their monthly payments and, consequently, pay less in interest over the life of the loan. You may also qualify for a lower interest rate now than you did when you took out your mortgage (e.g., if your credit score has improved). If that’s the case, you’d want to look at your potential closing costs and calculate your break-even point to determine whether it makes sense to refinance, since you’re also resetting the clock in terms of the life of your mortgage. You can use realtor.com®’s refinance calculator to crunch the numbers of your own mortgage and see how much you’ll save on your monthly mortgage payments if you refinance at a lower interest rate. (One rule of thumb says that if your interest rate is more than 1% above current mortgage rates, deciding to refinance is a smart move.)
  2. To get a different type of mortgage. Some borrowers want to refinance an adjustable-rate mortgage into a fixed-rate loan, while others want to reduce their loan term from a 30-year loan to a 10-, 15-, or 20-year loan in order to pay it off faster and save money in interest payments over the long haul.
  3. To stop paying private mortgage insurance (PMI). If you didn’t have enough cash to make a 20% down payment when you purchased your home, your lender likely required you to get mortgage insurance—a monthly premium that typically costs between 0.3% and 1.15% of your home loan and is included in your monthly payment. If you refinance to a loan without mortgage insurance, you can save hundreds of dollars each month in your mortgage payment, but you’ll need to have at least 20% equity in your home to qualify, says Dobbs.
  4. To tap into the home’s equity. People also refinance a loan because they want to take cash out of their real estate, which is often done to make home improvements, pay for college, consolidate debt, or make a down payment on a second home. If you decide to go that route, you can choose between a cash-out refi and a home equity line of credit (or HELOC). Be aware that a cash-out refinance increases the size of your loan amount over your previous balance on your original mortgage loan. A one-time mortgage refinance may be a good strategic move if the monthly payment does not adversely affect your cash flow and financial goals. However, repeated mortgage refinances every few years will put you further in debt and extend your loan term, making it difficult to ever pay off your loan balance.

What’s the difference between a home equity loan and a HELOC?

Although these two loan products sound similar, they’re significantly different. With a home equity loan, you decide how much you want to borrow against your real estate and then make monthly payments, similar to a regular mortgage. Thus, with a home equity loan you avoid the temptation to overspend, because you’ll be borrowing a set amount. Also, because the interest rate is usually fixed, you have peace of mind knowing that the payments will remain the same.

A home equity line of credit, or HELOC, meanwhile, functions more like a credit card, because it allows you to borrow up to a certain amount (typically 75% to 85% of the appraised value of the real estate, minus what you still owe) on an as-needed basis over the term of the loan (usually five to 20 years). In fact, your lender will actually issue you a plastic card that you can use to access the money easily. A HELOC works well if you want to borrow money but don’t know exactly how much you’ll need (a common conundrum when making home improvements).

The main drawback to HELOCs? Unlike with home equity loans, interest rates on HELOCs are variable, which means they fluctuate depending on market conditions. And while many lenders offer a low “introduction” rate, it lasts only for a matter of months; after that, the interest rates will adjust—and continue to readjust—which could create problems if you don’t prepare for the potentially higher payments. So be sure to weigh these pros and cons before you start chipping away at the real estate equity you’ve gained.

The post Should You Refinance Your Mortgage? A Homeowner’s Guide to HELOCs and More appeared first on Real Estate News & Insights | realtor.com®.

‘Can I Refinance While Buying a Second Home?’ Here Are the Mortgage Rules

April 3, 2019

Can I Refinance While Buying a Second Home?’ Here Are the Mortgage Rules

relif/iStock

As a buyer and a seller, you may be asking, “Can I refinance while buying a second home?” Maybe you’ve found a property that will be a killer investment at a bargain price. Or perhaps the beach cottage you’ve had your eye on for years just came on the market.

Whatever the reason, if you’re considering applying for another loan while refinancing your current home, the process can be a bit complicated. To give you the full picture, we consulted mortgage experts and broke down the rules.

‘Can I refinance an existing mortgage while buying a second home?’

There’s nothing wrong with refinancing one mortgage at the same time that you are buying an investment property or second home with a mortgage, according to Andrew Weinberg, principal and licensed mortgage broker at Silver Fin Capital Group, in Great Neck, NY.

The key factor to making both the refinance and new purchase work is to ensure you will qualify for the new home loan.

“This means taking into account your current home payment,” says Ralph DiBugnara, president of New York’s Home Qualified and vice president at Cardinal Financial. A mortgage bank can very easily tell you the total payments and loan amounts you’ll be able to carry based on your current income.

In some cases, you may even have to refinance to reduce your current mortgage payment to qualify for the new loan. Or you may need to cash out funds from the refinance to come up with the down payment on the new property.

The only ironclad rule is that you can’t refinance a primary residence while applying for a mortgage on a new primary residence.

Consider working with one lender for both mortgages

The benefit of doing both loans—refinancing and obtaining a new mortgage—is that you can deal with a single loan officer and provide most of your documents (e.g., tax returns, W-2s, pay stubs, bank statements, etc.) only once.

You can also optimize your loan balances and your monthly payment to a degree by doing both loans with the same lender, says DiBugnara.

If you need to work with two different lenders, both need to be aware of the other loan.

When refinancing and buying at the same time isn’t a good idea

You shouldn’t refinance a home you intend to sell in the next six months or so because it’s not cost-efficient.

“The closing costs don’t vary because you intend to pay off your loan in a short period of time,” says Weinberg.

Additionally, most refinances have a clause stating the borrower must stay in the home for at least one year. This means you cannot refinance a primary residence, close on a second home, and then immediately move into it permanently.

The differences between an investment and second home

When applying for your second mortgage, your lender will take into account how you plan on using the property. So it makes a difference if the second home is for investment purposes or is a vacation home for personal use.

“If the home is an investment, you can use proposed rental income as an add-on to your second income when qualifying for the second mortgage,” says DiBugnara.

But if you’re purchasing a vacation home, the new debt will count 100% against your current income and could prevent you from qualifying for a refinance and a second mortgage.

The good news for those looking to buy a beach cottage or winter retreat? Vacation home mortgage rates are typically lower than investment home rates.

“You can also typically put less money down—sometimes just 10%,” says Kylie Pak, owner of RedBrick Properties, in Richmond, VA, who specializes in property investing.

The post ‘Can I Refinance While Buying a Second Home?’ Here Are the Mortgage Rules appeared first on Real Estate News & Insights | realtor.com®.

How Long Does It Take to Refinance a Mortgage?

October 2, 2018

How long does it take to refinance a mortgage? Refinancing should take anywhere from 30 to 45 days on average, although that can stretch to 60 days if you hit any snags along the way. In other words: Don’t expect a refinance to happen overnight!

Although the refinancing process can take awhile, it’s definitely worth considering if you want to take advantage of lower interest rates or withdraw some cash from your home equity (check a refinance calculator to see if refinancing makes sense for you).

Here’s why the process takes so long … plus some things you can do to speed things up.

How long does it take to refinance a mortgage, and why?

The reason refinancing takes anywhere from 30 to 45 days is that it involves a series of procedures. Although it will be a little faster than getting your initial mortgage, it still has many of the same time-consuming steps.

Step 1: Research your options

The timing of this step is completely up to you. Contact multiple lenders and be straightforward about why you’re getting in touch.

“If you are shopping for rates, let the lenders know that upfront and ask for a loan estimate,” advises Laura Nickolay of White Oaks Wealth Advisors, Inc. in Minneapolis. Since interest rates fluctuate a bit daily, you should ask all lenders what their rates are on the same day, just so you can compare apples to apples.

You might want to start with your current lender, since it already has a lot of your information on file. (This could shave off up to a day or two off the processing time.) Your current lender may also be willing to waive the application fee, to preserve your business. You should contact other lenders as well, though, to ensure you’re getting the best rate.

You should also ask potential lenders how long the refinancing process typically takes. Lenders often don’t prioritize refinances because there’s less at stake; if you sense your refinance won’t be a priority with a lender, you may want to look for one that will push things through.

Step 2: Complete the loan application

Once you’ve chosen a lender, you’ll need to complete the application. This can generally be completed in a few hours, especially if you have all the documentation you need on hand. A good loan officer can make a difference at this point, as an experienced pro will know what documents you need to submit with your application to ensure the process goes as quickly as possible.

Step 3: Receive your loan estimate and disclosures

Lenders are required to provide your loan estimate and disclosures within three days of your application. Your estimate will contain your monthly payment information and how much you will need to pay in closing costs.

Step 4: Loan processing

Your lender will inspect all the documents you provided and request any additional documentation required.

Step 5: Appraisal

Not every refinance requires an appraisal, especially if you’ve purchased your home relatively recently. If you do need one, the lender will set it up while processing your loan.

Step 6: Underwriting

This can potentially be the longest step in the refinancing process. According to the Home Buying Institute, underwriting—where all paperwork is fully vetted for accuracy—takes an average of five to eight business days. In some cases, it can stretch on for weeks. Underwriting a refinance also takes longer than an initial mortgage, because it’s a lower priority for lenders.

“Underwriting departments will always review purchase transactions before refinances, simply because the purchase is affecting multiple parties and there is a deadline that needs to be met,” says Troy Owen of Homeowners Financial Group in Bakersfield, CA.

Step 7: Closing

Once underwriting is finished and your loan is approved, you can close on the loan. This typically takes a few hours.

How to speed up a refinance

While lenders are often the holdup with a refi, homeowners can also inadvertently slow things down on their end. Here’s how to keep things moving.

  • Check that your application is complete: If any information is missing from your application, the lender will need to send back the paperwork for you to redo. At a minimum, you will need to provide proof of income, copies of your bank account and investment account statements, and the last two years of tax returns. “Try to get statements that are within the last month or so,” says Jonathan McAlister of Legacy Wealth Management in Memphis, TN. You will also need to provide a copy of your homeowner insurance policy, and you may need to provide a deed of trust and a property survey. Your lender can advise you on exactly which documents are needed.
  • Make yourself available for the appraisal: Since an appraiser may need access to your home in order to make the appraisal, not being available on your end can significantly stall the process, according to Kristen Baker of White Oaks Wealth Advisors, Inc. in Minneapolis, MN. Make sure your lenders have a good contact number for you and know your contact preferences. If you can’t take calls during the day, let them know to text or email you.
  • Respond to questions quickly: If you’re refinancing, chances are good that your lender will come back to you for something, whether it’s a question or an additional signature. The sooner you make yourself available, the faster the process.
  • Know all the costs upfront: There’s more to a refinance than you might expect, and if you’re not aware of all the costs involved, you may end up scrambling for funds. For example, if you weren’t anticipating the closing costs, you may be unpleasantly surprised—they’re similar to the closing costs you dealt with when you originally purchased your home (about 3% to 4% of the total amount being refinanced, depending on location and lender).
  • Check in often: If you’re getting radio silence from your lender, don’t be afraid to follow up. “Lenders will typically put refinances at the bottom of the pile,” says Owen. You know that saying about being the squeaky wheel; sometimes you need to make a little noise to move things along.

 

Curious whether you should refinance your mortgage? Check a refinance calculator to see if this move makes sense for you.

The post How Long Does It Take to Refinance a Mortgage? appeared first on Real Estate News & Insights | realtor.com®.