Buy the Same House Twice for Less Than Buying It Once
Earlier this year, my husband and I refinanced our house. The entire process took just a shade more than six weeks. It was our first-ever refinance, on our first-ever mortgage. While nothing totally unexpected happened, the experience was instructive. (See also: Will 4.5% Mortgage Rates Jumpstart the Housing Market?)
If you are preparing to refinance, here are some of the basics you should know.
A Refinance Is Another Loan
The first thing to understand is that a refinance is actually another loan.
When you refinance, you are getting a new mortgage to pay off your old mortgage. The new loan, though, has (or should have!) a lower interest rate. And, if you get a 30-year loan, you end up starting over again. Generally, your refinance is only for the amount you still owe on the house, so the loan amount is smaller than your original mortgage amount.
So, since the interest rate is lower, you have another 30 years to pay off the loan, and the mortgage is for a smaller amount than your original loan, you usually end up with a lower payment. This can help with your cash flow now, and if the interest rate is low enough, you often pay less over the life of the mortgage, even though it's stretched out to another 30 years.
Because a refinance is a new home loan, you need to jump through a lot of the same hoops you cleared to get your mortgage in the first place.
Required Documents and Info
Since you are getting a loan — and a pretty big one at that — you need many of the same things required for your original mortgage.
- If you want access to the best rates, you need to have good credit. The lender will check your credit score and offer you an appropriate rate. You're not in the clear after the initial pull, either. The lender will check your credit again before the loan closes, so don't rack up additional debt on your credit cards or open new lines of credit.
- You will also need to provide proof of income (tax returns, pay stubs), as well as copies of your bank statements for the last two months and statements for other asset accounts (such as a retirement or savings) you own. Because most of my family's income comes from my business, I also sent PayPal statements, since the lender wanted to see where the large, periodic deposits on sometimes odd days were coming from.
The lender will have a lot of paperwork for you to sign at the outset, including the Good Faith Estimate, which outlines the terms of your loan and the out-of-pocket expenses you can expect to pay. Make sure you read everything carefully before you sign.
Patience and More Documentation May Be Required
Once you get the ball rolling, you will be presented with the opportunity to "lock in" your interest rate. If you are concerned that mortgage rates will rise before your loan closes, locking your rate is a good idea. Things can change quite a bit in the four to eight weeks that it can take for your refinance to close, and you want to make sure that you still have access to the good rate you were quoted.
Throughout the process, you will be presented with updated Good Faith Estimates, and requests for documentation. At one point during my refinance, I was shocked to see that my out of pocket expenses rose dramatically partway through. I was concerned, but my loan team assured me that the final numbers would be closer to what I was originally quoted (and they were).
One of the issues is that your final numbers depend, in part, on how quickly your new lender can get a payoff amount from your current lender. Additionally, when the closing happens matters as well. Normally, your lender will give you a target closing date so that you can prepare. If you want to hit that closing date, it's vital that you respond to requests from your lender immediately.
My refinance was handled by Quicken Loans, and it took place entirely over the Internet. It was fairly easy to scan and upload all of my documents, and the online interface was easy to manage. If your refinance takes place locally, find out how the lender prefers to receive your paperwork (you might have to take it to the branch). Since the huge stack of papers does need to be signed in person, Quicken sent a notary to our house, and he took care of everything. You might have to go into the bank, or receive the packet in the mail and find your own notary to witness your signature.
One of the scariest things about a refinance is that, once you get things moving and the initial steps are taken, it can be two or three weeks before you hear anything from a lender. The underwriting process can take a while, so be prepared. If you are concerned, you can always contact your lender and get an update on your status.
Fees and Rights
As with other loans, you normally have fees to pay with a refinance. Our fees amounted to a little more than $1,700. With our savings of more than $300 a month, we've already almost broken even on the fees. Fees that you might have to pay with a refinance include an appraisal fee, inspection fee, attorney fee, and title search fee. Your old mortgage might also have a prepayment penalty, or you might want to pay points in order to reduce your interest rate.
Depending on the refinance you are eligible for, however, you might not have to worry about some of those fees. My refinance was done through HARP (which is scheduled to end December 31, 2013), and I wasn't required to have an appraisal or an inspection. This made the process a little easier.
Before you get too far in, make sure that you understand exactly what fees you will pay and when they need to be paid. Also, realize that a "no cost" refinance might actually involve rolling your fees into the mortgage. There's no cost to you up front, but you pay over time. Find out if you are paying the fees that way, or if the lender is truly covering your costs. And, finally, know your rights. You usually have three days to change your mind on a refinance after you close.
Have you refinanced recently? What was the process like for you?