So, you think it’s time to refinance? Maybe your credit score has improved, or you want to consolidate some debt. One thing’s for sure, you know you wouldn’t mind seeing a lower monthly payment.
There are a few important questions you should ask to make sure refinancing your mortgage is the right thing, what you should expect when refinancing and which program will best suit your financial goals?
What Kinds of Refinance packages are Available, and which one is right for me?
Whether you live in Portland or Seattle, if you are looking to make a change to your mortgage, you will want to know what your refinancing options are. There are several refinancing programs available.
With interest rates on the rise, perhaps it’s time to convert that adjustable rate (ARM) to a fixed mortgage. True to its name, an adjustable rate mortgage may have been the perfect tool to get you into your current home. With low introductory rates, it’s hard not to see the initial benefit. However, true to its name, as interest rates rise so will the rate on your mortgage. In situations like these, many homeowners may want to seek a conventional refinancing option. With a conventional mortgage, the interest rate and term are fixed, providing a sense of security in the knowledge that the rate will never go up.
Though it can be a somewhat restrictive process, some may want to change their conventional mortgage to a federally insured VA or FHA loan. While its not entirely common, it can be done.
If you are looking to consolidate debt and enjoy a lower interest rate on debt you may have accumulated, a home equity loan may be your best bet. Whichever program you choose, make sure to ask your lender to provide you with a thorough explanation. Ask them what their experience is with closing the type of refinance package you are thinking about.
What is the Interest Rate? Is That APR? What’s the Difference?
It seems like the “Rate” is the first word on everyone’s lips whenever there is a conversation about home loans. Then, before you know it, you heard another person mention APR (annual percentage rate); what’s the difference? It can be a little confusing, but it is very important to understand the difference.
That’s great, however it costs money to refinance a loan; origination fees, credit reports, appraisal fees, these are just a few of the costs associated with generating a mortgage. The APR or annual percentage rate is the important number, because it reflects the entire cost of the loan and demonstrates it as a percentage rate. Make sure you understand the difference. According to federal law, your mortgage professional must show all costs in the form of a loan estimate which we will discuss later.
What Costs Can I Expect to Pay?
Typically, “closing costs” or the amount you can expect to pay runs between 2 and 4% of the loan value. So what’s included in these closing costs? Let’s take a look at the most common fees.
- Credit Report
When shopping for refinancing options, your credit will be pulled. Don’t worry! Credit Reporting Bureaus can and will group multiple credit requests as a single incidence as long as they occur within a reasonable “shopping” period (30 days).
- Origination Fee
Your lender covers the cost of creating and processing your loan with this Fee. How your lender gets and all of the people involved get paid
- Appraisal Fee
Just like the appraisal you had when you initially purchased, another appraisal will be required by your lender. Take into account the current condition of your home. Does it look like its ready to sell? Maybe it needs a little paint, or the fence is leaning. Take care of the little projects that make your home look marketable. It can have a real effect on the overall value of your appraisal.
- Flood Zone Certification
In some areas Flood Zone Certification is mandatory with refinances. As flood zones can and do change, your lender may require a new certification.
- Title Search
A title search will be performed to ensure a smooth transfer. Encumbrances such as liens or property line disputes could make it difficult to sell the property. This is seen by lenders as a bad risk, and may hinder the process.
You may have heard them called discount points, but really they are a fee the lender charges to lower, or “buy down” the interest rate. Usually each “point” refers to 1% of the loan value. For example, 1 point on a $200,000 loan would be $2,000.
Is it Worth it for Me to Refinance? When will I start to see a savings?
So, after all of those fees, is it really worth it? For example, if the total fees for a $200,000 mortgage refinance are 4%, you will be expected to pay $8,000 in “closing costs.” In other words, you wouldn’t start seeing a savings until you paid off the $8,000 that has been added to the loan. Many financial advisors have suggested a 1% or greater reduction in the interest rate may necessitate a review of your current loan terms. It helps to have a good lender in your pocket. A reputable Seattle mortgage broker will take the time to help analyze your financial goals, and review available plans with you. If your broker can’t show you the savings, keep shopping.
Are there any Prepayment Penalties?
Some mortgages include prepayment penalty clauses. If you decide to pay the loan off early a charge may be incurred. Check with your lender and be aware. There may come a time in the future when you need to refinance again. In some cases you may be expected to pay up to 80% of 6 months worth of interest on the balance of the loan. Needles to say, this can be a costly mistake. Make sure you get the facts.
Do You Offer a Rate Lock?
Mortgage rates change day to day and sometimes more often than that. After you have applied for your mortgage, it will take some time to process. The rate lock is the lender promising to keep the rate at the same value the rate was when you applied until the time of closing. There can be fees associated with rate locks. Ask your lender to explain the benefits and drawbacks.
What’s Included in the Loan Estimate, and When do I Get One?
A Loan Estimate is a three page form, standardized by the federal government in 2015. The lender has 3 days from the date of the application to present you with this document. It clearly defines all of the costs associated with the mortgage such as services you can’t “shop” for and ones that you can, the total dollar amount needed at close, comparisons and other considerations specific to you and the loan you are applying for. When you are shopping around for a mortgage, remember the Loan Estimate form is the most accurate way to compare mortgage options.
In many ways, refinancing your home is a lot like buying one. A homeowner’s best defense is knowledge. Partner with a Lender that will take the time to explain the refinancing products they offer, and how they will help you reach your financial goals. Contact Sammamish Mortgage to learn about refinancing and mortgages rates.