Mortgage Refinancing Starter Kit
With mortgage rates still so low, millions of homeowners have decided to refinance in order to trim their housing costs. But knowing when and how to refinance is a much more difficult decision than deciding you want a lower monthly payment. This refinance package will help you decide whether a refinance is right for you, what steps you should take to prepare for your refinance and how to choose the right lender, product and term.
Stage 1: DECIDE
Deciding if you should refinance
The decision to refinance your mortgage always depends on your personal and financial situation. This chapter discusses the multitude of factors you need to consider to decide if a refinance is right for you.
Tools and Resources:
Stage 2: PREPARE
Preparing for your refinance
Once you've made the decision to refinance, it’s time to prepare your finances. That means raising your credit score and compiling all the documentation required to refinance a mortgage in today’s demanding marketplace. This chapter offers tips for boosting your credit score, gathering paperwork and documentation in order to avoid any last-minute snags.
Tools and Resources:
Stage 3: CHOOSE
Choosing a lender
The most important aspect of refinancing is choosing the right refinance. Is a refinance that saves you over $100 a month worth it if it’s costing you thousands over the life of your loan? What if your refinance actually increases your monthly payment? This chapter will help you understand what to look for in a lender or mortgage broker, how to pick the proper product and term, as well as how to compare and lock in the best refinance mortgage rates.
Tools and Resources:
Tools for decision-making
Refinancing your home loan is all about the bottom line: What’s it going to cost and does it make financial sense for you? Here are a number of tools and resources to help you calculate the cost of your refinance over the short and long term. Or, if you’re not ready to refinance this moment, we offer a number of data-driven resources to help you track and compare the latest mortgage rates.
Tools and Resources:
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|Refinance Top Stories||Refinance Q&A: Ask Our Expert|
Q: Dear Mr. Gumbinger: Who owns my mortgage and why does someone else service the loan?
I was told by Fannie Mae over the phone that they own my loan. When I went into the loan lookup it said Fannie Mae does not find a match, therefore, they do not own the loan. How can this be? This has happened many times over.
I have been told by my servicer that both Wells Fargo and Citibank own the loan. Something is wrong.
A: The owner of the loan is most often the "investor" -- the entity who put up the actual funds to make your mortgage happen. This may be the original party for your transaction, such as a bank, but loans (like other investments) are bought and sold between parties, so the owner can change from time to time and could be anyone from a pension fund to a real estate investment trust (REIT) or other entity (you might actually be a part owner of certain mortgage loans in any bond mutual funds investments you hold, for example).
That said, the servicer is usually a separate entity, whose responsibility is to collect the monthly payment from you, maintain escrow accounts, and distribute those funds to other parties (local tax authorities, insurers and to the owner of the loan). For many lenders, this is beyond their capabilities or business model, and so these "servicing rights" are actually sold to other entities that make a living providing these services to loan owners and homeowners.
Some large lenders do their own servicing for their own loans and since they have the capacity, may also do servicing for other investors, too. There are also specialty "subservicers" who may be contracted for specific tasks (loan workouts, modifications, etc.) on behalf of the actual servicer.
In many cases, a large lender may be the servicing entity for large investors or guarantors of loans, like Fannie Mae or Freddie Mac. They may have even originated your loan, and since your contact would be with this entity, and all your paperwork/statements/correspondence would come from them, you might come to believe that they actually own your loan, when in reality they may have long ago sold the actual mortgage to another party but retained the servicing rights.
If Fannie Mae or Freddie Mac owns or guarantees your loan, you should be able to determine this by using the loan lookup tool at www.makinghomeaffordable.gov. If you're not there, there is also a list of lender contacts, so that you can contact your mortgage holder directly.
If you have a specific complaint you are trying to resolve with your servicer, the Consumer Finance Protection Bureau welcomes and openly solicits for these kinds of queries and does follow up on them -- you can find a complaint form and learn more about your rights and obligations at http://www.consumerfinance.gov.
Should you refinance?
How do you know if you are a good candidate for a home refinance? You might assume that the only reason to refinance is to reduce your monthly mortgage payment. Though that's a compelling reason, there are actually many possible reasons for refinancing.
With a refinance, you can:
- Lower your interest rate to reduce your monthly payments.
- Shorten your loan term to own your home free and clear sooner.
- Refinance from an adjustable-rate mortgage (ARM) or an interest-only loan into a fixed-rate, fully amortized mortgage--perhaps refinance into another ARM.
- Consolidate consumer debt into your mortgage.
- Take out some home equity as cash to pay for major expenditures such as home improvements, medical costs or college tuition.
Are you a candidate for a refinance?
Financial experts used to offer such rules of thumb as "refinance when mortgage rates have fallen 1 or 2 percent below your current rate." But the truth is that refinancing should be an individual decision that fits into your overall financial plan.
One factor that greatly affects your decision to apply for a mortgage refinance should be how long you plan to stay in the property. Closing costs vary, but you might expect to pay 3 to 6 percent of your mortgage balance in closing costs. It can take several years to recoup those costs through the savings generated by a lower mortgage rate.
Of course, there are "no-cost" or "low-cash-out" refinances too--transactions that allow you to roll closing costs into the mortgage rate or loan balance. HSH.com's Tri-Refi mortgage calculator makes it easy to make side-by-side comparisons of different refinancing options. With careful financial analysis of the costs and benefits of the refinance, you can determine what refinance option will be most advantageous for you.
Mortgage options when refinancing
There are many choices for homeowners when refinancing, including fixed-rate and adjustable-rate mortgages at various terms.
While 30-year and 15-year fixed-rate mortgages are the most common, borrowers can also opt for a 10- or 20-year mortgage. Adjustable-rate loans come with a different initial fixed-rate terms, from one to seven or more years before the mortgage rate becomes adjustable. Consult with an experienced mortgage lender to determine which type of loan best meets your financial needs.
In addition to choosing the loan type, consider whether you want to access some of the equity in your home through a cash-out refinance, or consolidate your other debts with a larger mortgage. Both of these scenarios are likely to result in a larger mortgage payment than the one you have currently, even if you are able to lower your interest rate. But for some borrowers, this type of refinance can allow them to pay off high-interest debt or make needed home improvements more quickly.
A mortgage payment calculator can give you an estimate of your monthly payments at different loan amounts and different mortgage rates. Check today's mortgage rates to find a range of realistic numbers to run through your scenarios.
Qualifying for a mortgage refinance
Some homeowners assume that because they have consistently paid their mortgage on time, they will automatically qualify for a new mortgage.
In reality, mortgage lenders qualify homeowners for a refinance under the same guidelines as a purchase mortgage. Just as you did when you first took out your home loan, you'll need to meet credit qualifications and satisfy debt-to-income ratio tests, and the home must be appraised to determine how much equity is in the property.
Mortgage rate forecasts
Homeowners interested in refinancing may want to keep track of predictions for mortgage rates. Though even seasoned economists cannot always accurately predict what will happen with mortgage rates, it's smart shopping to do your homework on the big picture.
Are interest rates trending up or down? How quickly? Do experts predict big changes on the way? What's the pattern for your state's mortgage rates? HSH.com's up-to-date mortgage rate data and mortgage rate forecasts can help you decode all this.
After some initial research into the pros and cons of a refinance, consult with a mortgage lender who can guide you through the final decision on whether this makes sense for you.