You successfully made it through the prequalifying and qualification challenges of getting a mortgage and buying a home. Fast forward several years and you may now be considering refinancing for various reasons.
What does it mean to refinance your mortgage?
Refinancing your mortgage means you will be obtaining a new loan to replace the loan you currently have on your home. There are many reasons people decide to refinance, including lower interest rates, debt consolidation, home improvements, decreasing monthly housing costs, removing an individual from a property title or accelerating the payoff of your mortgage.
Determine the refinancing you want
There are several choices to make, depending on what you are looking to achieve. Below are some of the main types and reasons for refinancing.
Cash-out refinance: Owning a home is similar to having a savings plan, one that you consistently contribute to each month. When you do a cash-out refinance, you have the opportunity to take the equity you have in your home as a cash payout by refinancing your mortgage.
With this type of refinancing, you replace your current mortgage with a new one at a higher amount than what you owe and take the overage as a cash payout.
- Rate refinance: If interest rates are lower now than they were when you initially took out a mortgage, you can refinance at a lower interest rate and save money.
- Term refinance: By refinancing your mortgage for a longer term, you can lower your monthly payments. For instance, if you have 20 years remaining on your mortgage, you can refinance to a 25-year mortgage.
- ARM to fixed refinance: While the interest rates with an ARM or adjustable-rate mortgage were likely lower than their fixed-rate counterpart when you took out your mortgage, they may now be higher. Refinancing allows you to switch from an ARM to a fixed-rate mortgage with a set interest rate.
- FHA to conventional refinance: FHA mortgages are common among individuals unable to secure a conventional mortgage due to income, credit score or ability to come up with the traditional 20% down payment. FHA loans also include mortgage insurance premiums. Once you have 20% equity in your home, you may be able to refinance your FHA loan to a conventional loan, eliminating the need for mortgage insurance and lowering your monthly payments.
Know the costs associated with refinancing
While refinancing may make sense for you on paper, there are risks and costs involved. Identifying the costs associated with a refinance is an essential step in the process.
Just like with your original mortgage, there are fees associated with refinancing your home. Identifying these fees helps determine if refinancing your home justifies the costs that go along with it.
- Mortgage application fee: Generally around $250 to $500, this is the fee associated with applying for the new loan.
- Appraisal fee: Ranging from $300 to $600, most lenders ask for a home appraisal to determine the value. This will let them know if there is enough value in the home, and if you have enough equity to qualify for the new loan.
- Document preparation and loan origination fee: This fee is usually around 1% of the total amount of your loan. For example, if you are looking to refinance $150,000, the origination fee will be approximately $1,500.
- Flood certification fee: Flood certification runs around $50 to $150 and is mandatory in some locations.
- Title search fee: Generally, this is around $200 to $400, and many lenders require a title search before refinancing approval.
- Title insurance fee: Ranging from $400 to $800, both the homeowner and lender most likely will need to have title insurance to cover any errors or problems that may occur during the transferring of the title.
- Recording fee: Usually an additional $25 to $250, many counties and cities charge a recording fee to cover administrative costs associated with handling the loan paperwork.
Additional costs that may occur
While some costs in the form of fees are apparent, there are other less obvious costs associated with refinancing your home.
- Extending the term: While lowering the monthly payments by extending the term of your mortgage will cost less now, it can ultimately cost you more due to the additional interest you will pay over the life of the loan.
- Debt consolidation: Doing a cash-out refinance can allow you to consolidate your debts and pay off credit cards. However, if you start accumulating a balance again on the cards you are paying off, you will once again find yourself in financial trouble.
Know your credit score
Knowing your credit score allows you to begin repairing it when necessary. To refinance your mortgage, your credit score will need to be good to excellent, generally 700 or better. Requesting a credit report from one of the major credit bureaus or through Chase Credit Journey, which is free for Chase customers, will show you your credit score, along with the information that creditors are reporting to it.
The steps to repairing your credit score aren’t tricky, but they do take time, commitment and often require you to reevaluate how you are using your credit and your spending habits.
Focusing on these five factors can help put you in a good position for refinancing.
- Payment history (35% of your total credit score) - Accounts that are 30, 60, 90 or more days overdue hurt your credit score. Create reminders when payments such as credit cards, utilities, phone bills and rent are due to help keep you current. If you are behind on accounts, work to bring them current as soon as possible.
- Debt usage (30% of your total credit score) - Keeping the balances on your credit cards low helps with your credit utilization and debt usage ratio. Those looking to achieve a good credit score should aim to use less than 30% of their available credit, while 10% is best.
- Credit age (15% of your total credit score) - While closing old, unused accounts can be tempting, keeping them open and in good standing can help in establishing a positive credit history. Keeping paid-in-full, closed or unused credit cards on your credit report assists in lengthening your credit history and positively impacting your overall score.
- Credit mix (10% of your total credit score) - Try to maintain a mix of revolving credit accounts and installment loans. Having just one or the other can negatively impact your credit score.
- New lines of credit or credit inquiries (10% of your total credit score) - Applying for loans and credit cards often can result in lenders seeing you as a higher credit risk. Credit applications place a hard inquiry on your file, and having several hard inquiries in a short time can result in serious damage to your credit score.
Occasionally, it is better to wait and apply for a loan once your credit score is higher, as this can make you eligible for lower interest rates and put you in an overall better position financially.
Contact mortgage lenders
Just like you did when you were shopping for your original mortgage, search out a mortgage lender that best meets your individual needs. Talk with potential lenders about your plans, what options your income, credit score and equity position give you, and what loan programs are available to you.
Apply for the loan
Complete the loan application and submit any paperwork the lender is requesting including W-2s, pay stubs, tax returns, statements for investment accounts and statements for various bank accounts. This is also the time you will decide when you want to lock in your interest rate.
Get a home appraisal
The lending organization will request an appraisal of your home to determine the current value. The appraisal amount can decide what terms you qualify for in regard to your new loan. For instance, the appraisal may find that the value of your house is more or less than you initially thought, potentially changing the terms of your loan.
Close the loan
The last step is for your file to go to the underwriter one last time. This may result in the underwriting team requesting additional information. You may be asked for new information or what you’ve already included, but in a different format.
This process generally takes a week or two. Once it’s complete, you will sign documents for the new loan. The lender will pay off your current mortgage, and you will receive the new mortgage. If you are doing a cash-out refinance, you will also be getting your money at this time.
The refinance process generally takes just as much time and energy as the original mortgage. Chase can help you navigate the refinancing process, helping you understand the steps you need to consider while anticipating any potential barriers that could delay the process.