Getting a mortgage is no easy task. Just the burden of making the biggest financial decision you are likely to ever make in your life is huge.
There are many things to consider when getting a mortgage. But if you are not careful about your financial needs, you might end up refinancing your mortgage loan.
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What is a Mortgage Loan?
A mortgage is an agreement between a lender, which is usually the bank, and a borrower to lend an amount of money that is used to purchase a home or a piece of real property.
The bank that is loaning you the funds will be your lender that pays for the property when you purchase a home using a mortgage. You then make monthly payments to the lender including interest paying back the amount they have lent you.
How Mortgage Works?
Mortgages either have short or long repayment terms. The interest rates they have can either stay the same or vary over time. They may also have different eligibility criteria depending on your preferences for repayment terms as well as the risk being taken by the lender.
The most common term for mortgages is 30 years. If you opt for a shorter-term loan, you are more likely to pay off your mortgage faster and pay less in total interest over the entire term of the loan. However, this means you will have to pay higher monthly payments. But if you opt for a longer pay-off period, you will have a higher interest rate which leads to higher cumulative interest paid over time.
Mortgages can also vary by the type of interest rate being charged. There are two main types:
- Fixed-rate loans that, as the name suggests, come with a fixed interest rate for the total life of the loan. You will always need to pay the same amount of interest every month with your payments until you have paid off your mortgage.
- Adjustable-rate loans that although come with lower interest rates than fixed-rate loans, can carry the risk of future interest rate increases. These types of loans can be a good choice if you do not plan on being in the home for long or want to refinance your loan into a fixed-rate loan before it expires.
How Long Does it Take to Get a Mortgage?
How long it can take you to get a mortgage depends on the circumstances. The duration from application to approval can vary depending on how smooth your application is.
If the lender has requested documents that you have failed to provide, it would end up delaying the mortgage approval process as they will only ask for them again until you provide them.
If there is an issue with your credit history, you can expect a delay in getting a mortgage loan offer. Lenders would also conduct an appraisal of the property that you want to buy which can take a few days to a week.
But the usual time it takes from the application process to getting the final mortgage offer is 18-40 days if there are no discrepancies in your application and everything is straight forward.
There comes a time in every homeowners’ life where they are left wondering whether or not refinancing their mortgage will be a wise decision or not. This is either because your friends told you about the great deal they got when they refinanced your loan or because there was a sudden drop in the interest rates.
What Does it Mean to Refinance a Mortgage?
If anything like that happens, the first thing you should know is what exactly does refinancing mean?
When you refinance a mortgage, you get a new home loan that replaces the existing home loan you had. This is an attractive option for people as you can end up saving money if you refinance into a loan that has a lower interest rate than the one you were previously paying for.
This is a good idea to consider when you are unsure what mortgage you can afford.
How to Refinance a Mortgage?
Once you have decided to refinance your mortgage, the most important thing to know is how to do it. The process of refinancing is not much different from getting a mortgage when you first purchase your home.
1. You should set a clear financial goal. There should be a valid reason behind you wanting to refinance your loan. The reason could vary from you wanting to reduce your monthly payment to wanting to shorten the term of your loan, etc.
If that is the case, you should be careful that you do not end up paying more over the course of the loan when trying to pay less every month by reducing your interest rate. This is because the majority of your interest charges are paid in the early years of a mortgage.
2. In order to qualify for a refinance, it is essential to make sure that your credit score is high. The higher your credit score is, the better refinance rates will be offered to you by lenders. And when you have better refinance rates, the better your chances are of underwriters approving your loan.
You may want to spend a few months giving your credit score a boost before you even begin the refinancing process.
3. You should determine how much home equity you have. Home equity is the value of your home in excess of the amount you owe the bank. You can check your mortgage statement to see your current balance and figure out your home equity. Then ask a real estate agent for an analysis to determine the current estimated value of your home. The difference between the two will be your home equity.
You will get better rates and less fees if you have more than 20 percent equity. And if not, you can still manage to refinance a conventional loan with 5 percent equity. But the more equity you have in your home, the less risky this loan will be to the bank or lender.
4. You can get quotes from multiple lenders and save yourself thousands of dollars. Once you have chosen a lender for yourself, you can discuss when it is best to lock in your rate so that you do not have to worry about rates increasing before your loan closes.
While comparing rates, you should pay special attention to the cost of fees and figure out whether they will be due upfront or with your new mortgage. Lenders also sometimes offer “no-closing-cost loans” but they charge a higher interest rate or add to the loan balance.
5. Make sure to provide your lender with recent pay stubs, bank statements, federal tax returns or anything else your lender requests for. You should be transparent about your finances. Your lender will also take a look at your credit and net worth so be sure to disclose your assets and liabilities upfront.
Once you have your documentation ready, you can start your refinancing process.
6. Some lenders may require a mortgage refinance appraisal of the home to determine the home’s current market value in order for it to be approved for a refinance.
You might have to pay a few hundred dollars for the appraisal and if you inform the lender of any improvements or repairs you have made since purchasing your home could guarantee you a higher appraisal.
7. How much money you need to pay out of pocket in order to close the mortgage will be listed in the closing disclosure as well as the loan estimate.
These costs may typically amount to a few thousand dollars but if you finance these costs, you are likely to pay more for it through a higher rate or loan amount.
8. You should keep tabs on your loan. This can be done by making sure you store copies of the closing paperwork in a safe place. You can also set up autopayments in order to stay current on your mortgage which can lead to the lenders giving you a lower rate.
However, your lender might resell your loan either immediately after closing or years later on the secondary market. This means you will owe mortgage payments to a different company now. In order to keep an eye out for any such changes, make sure you are reachable.
How Soon can you Refinance a Mortgage?
Once mortgage rates strike record lows, it is normal to wonder if you can refinance your mortgage. Maybe you did it recently or just bought a house. It does not matter. You can still refinance your mortgage and get low rates.
You might be able to refinance your mortgage right after closing. Some homeowners can refinance into a lower rate that requires no waiting period. However, some homeowners might be required to wait at least 6 months.
How soon can you refinance a mortgage depends on the type of mortgage loan you have and the type of refinance you are planning on using.
- Conventional Loan Refinance Rules.
If you have a conventional mortgage that is backed by Fannie Mae or Freddie Mac, you might be able to successfully refinance immediately after you have closed your home purchase or a refinance loan you had obtained previously.
You should keep in mind that lenders typically have a six month “seasoning period” before a current borrower is allowed to refinance with them. So if you want to refinance with the company you are already using, you will likely have to wait six months. However, if you are in a hurry, you can simply compare quotes from different lenders, shop around to see which one is better and refinance with a different lender.
Even though it is rare, some lenders tend to charge prepayment penalty fees that can end up derailing your refinance plans. You should check if your current loan has a prepayment penalty clause before you decide to move forward.
It is always recommended to shop around before refinancing in order to get the lowest rate possible.
If you want to take cash out, you will have to wait six months before you refinance regardless of the type of loan you have.
Additionally, a cash-out refinance will typically require you to have at least 20 percent equity left in the home. So before you decide to use the cash-out refinance loan option, you should make sure that you have enough built up in equity in order to make your loan option worthwhile.
- Government Loan Refinance Rules.
If you have a government-backed mortgage, the rules are slightly different for you. These government-backed mortgages include FHA, VA and USDA loans.
With a government loan, you are likely to have the benefit of using a streamline refinance.
Streamline refinancing will help you cut down the time and paperwork that is associated with a refinance loan so you are able to get a lower rate faster. However, the drawback to streamline refinancing is waiting 6-7 months before you can use it and having a recent history of on-time mortgage payments.
How Much Does it Cost to Refinance a Mortgage?
The fact of the matter is, it is never too early to think about refinancing after you have already closed on a mortgage. You will not be resetting your loan term with much if you have been just six or eight months into your mortgage. But if you are much further into your loan by five to ten years, it might not be a good idea for you to reset to a new 30-year mortgage. You can try a refinance calculator in order to calculate if it is worth based on your remaining term.
The best candidates for refinancing are individuals that have high mortgage rates and intend to stay in their home for a long time. They also have the cash ready in order to pay for closing costs. Alternatively, the lender can choose to roll the closing costs into the mortgage within the principal or in the form of a high interest rate.
However, that high interest rate may still be below your current rate. It also comes with zero closing costs from your pocket or is added to the loan balance.
The decision to refinance is an easy one once you drop your rate with no associated costs.
Refinancing costs can be similar to closing costs when you buy a home. They are about 2 to 5 percent of the loan amount on average. So if you decide to refinance with a loan balance of $200,000, it is likely to cost you about $6,000 to $10,000.
However, when you decide to refinance, you will have the option to add closing costs into your loan or get a loan with no closing costs which will have a higher interest rate. In cases like such, you will not have to pay for these costs out of your pocket.
So this way, you can avoid closing costs when refinancing by going for a “no-closing-cost refinance” which will typically mean that your lender covers the closing costs in exchange for a higher interest rate or you can choose to add closing costs in your new refinanced loan.
So, the answer to “how soon can you refinance a mortgage?” is not one that you would expect. Mortgages can be refinanced whenever you like. Even if you have recently purchased a mortgage or just refinanced an existing mortgage.
But even though you can choose to refinance your mortgage shortly after closing, you should be clear about your reasons behind the refinance. Once you have determined why you want to refinance, make sure your mortgage does not have a prepayment penalty clause. These clauses are not as common anymore but they still tend to pop up here and there. If that is the case, speak to your lender to make sure refinancing would still be a good move for you.
Another thing to keep in mind when deciding to refinance your mortgage is any rules your lender may have about refinancing a mortgage. Every lender is different and has various qualification requirements and rules you need to meet in order to proceed with refinancing.