Client guide: How does the mortgage refinance process work?
Refinancing a mortgage allows a homeowner to change the terms of their home loan in a way that benefits them. This could mean extending or shortening the length of the mortgage, changing its interest rate or removing the need for private mortgage insurance, among other options.
While a refinance generally occurs only after a buyer has secured their original mortgage and moved in, after your work as a real estate professional is complete, sharing information about the process with your clients is a good decision from a business standpoint. You demonstrate your in-depth knowledge of real estate, offer valuable information to your clients and provide a reminder that your services are available should they decide to move or purchase more property in the future.
You can share this guide with your clients – the main body is written to speak directly to them – or use it as a refresher for yourself. With that said, let’s dive into the details of the mortgage refinance process.
What are the steps in the mortgage refinancing process?
The mortgage refinancing process begins with a decision by the homeowner to make some kind of change to their existing mortgage. This may be driven by a desire to adjust the loan term or move from an adjustable-rate mortgage to a fixed-rate loan, or the opposite.
With clear intent in mind, you can then reach out to lenders who will offer a refinanced mortgage. Assuming you meet their qualifications and their options are in line with your needs, you can then secure a new loan. Your new loan serves a specific purpose: It pays off your existing mortgage. With the old agreement paid off, you begin providing monthly payments to your new lender, following the new terms and conditions that are more beneficial to you.
The mortgage refinancing process is generally similar to securing an initial mortgage, although the stakes aren’t quite as high. You already own a home you want to live in for some time to come and have secured a mortgage for it. A mortgage refinance offers some clear benefits, as long as you carefully consider your financial needs and how the changes offered by a refinance can benefit you. However, a refinance isn’t a make-or-break situation for purchasing a home, like securing an original mortgage.
How much home equity do you need for a mortgage refinance?
Usually, you need about 20% equity in your home to start the mortgage refinance process. This is the lower limit most lenders look for when deciding whether or not to extend an offer to a customer. However, in some situations you may be able to refinance with a lower amount of equity.
If Fannie Mae or Freddie Mac own your mortgage, there are two programs you can consider, as Bankrate explained:
- Fannie Mae’s High LTV Refinance program.
- Freddie Mac’s Enhanced Relief Refinance Mortgage.
If you have a high loan-to-value (LTV) ratio – a measurement of risk that is essentially the opposite of your percentage of home equity – these programs can help.
What fees will you pay to refinance your mortgage?
The costs associated with a refinanced mortgage can add up, although there is plenty of variation from one loan to the next. In general, you should expect to pay 2-6% of the base loan amount, according to LendingTree.
There are many individual fees that may come into play. The largest for most borrowers will likely be the origination fee, which can add up to as much as 1.5% of the base amount. Title search and insurance can cost up to $900, and the home inspection and application fee both top out around $500.
Some of the fees associated with original mortgages and refinances can be negotiated downward or removed entirely, so don’t be afraid to inquire about this option with your lender. Just remember that they aren’t obligated to offer a discount.
What are some good reasons to refinance your mortgage?
There will always be banks willing to offer mortgage refinances as long as clients meet basic requirements related to factors like LTV, equity and credit score. Loans paid on time and in full ultimately make lenders money. What’s in it for homeowners?
- Reducing the interest rate tied to the mortgage.
- Changing the loan’s term, whether to make it shorter or longer.
- Using cash-out refinancing, a method for tapping into home equity.
- Moving between an adjustable and fixed-rate loan.
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