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Financial Learning Center


Refinancing Your Mortgage

The Process of Refinancing

Now that you have determined that refinancing makes financial sense for you, you are ready to begin the refinancing process.

Procedures Checklist

Here are the typical procedures you will encounter when refinancing:

  • Fill out an application
  • Ask your lender if fees and costs may be included in the loan amount
  • Your lender will order an appraisal of your home
  • Determine what is tax-deductible

We will walk through each of these procedures.

The Application Process

Lenders are obligated to provide you with a GFE (Good Faith Estimate) and Truth in Lending (TIL) disclosure that outlines the terms of the loan free of charge (except for a reasonable credit report fee). After you have reviewed your options and found the package that makes financial sense, it is time to proceed with the application. At that time the application fee can range anywhere from about $150 to $450. Some lenders may even offer deals to refund the fee once the loan is closed. In most cases, the fee is not refundable, so don't submit the application until you are reasonably certain this is the lender you want. It's also a good idea to get pre-qualified for the loan. Ask the lender before going forward with the application if there is a pre-qualification program. The loan officer will tell you what you need to do to get this done; it could save you a hassle once you have already paid the application fee.

If you choose to refinance with your current lender because they can give you the best deal, you could save money on the fees. And the process can be smoother since the lender already has information about you. You also may not need to get a new appraisal on your home when you refinance to a fixed-rate mortgage with the same lender. However, this may be a rare occurrence in these days of fluctuating real estate values.

The lender will typically run a credit report. So it is important that your credit report is in good order and that your mortgage payment record is in good shape.

Fees

Did you know that you may be able to include most, if not all, costs of refinancing in the new loan? Each lender has their own rules, so be sure to ask your lender how it handles these costs. Refinancing the costs makes it easier to go through the process because you won't be required to come up with a lot of out-of-pocket cash. The most significant cost that you can include in the loan amount is the points. Instead of paying them outright, you can finance them with the principal amount. Just remember, there's no such thing as a free lunch! Taking out a bigger loan will mean higher monthly payments.

Thanks to the Real Estate Settlement Procedures Act (RESPA), lenders must provide people who refinance with a reasonable estimate of settlement costs and fees associated with the loan; this is called a "Good Faith Estimate."

Appraisals

An appraisal is necessary because lenders don't want to lend you more money than the property is worth. They want to be sure that, if the property is sold, they will get their loan paid back.

In general, lenders are not usually willing to lend you more than 80% (sometimes higher, depending on the lender) of the appraised value of your property. This amount is then compared to your current mortgage balance to determine if you have enough equity in your home to pay off your existing mortgage. This gives the lender a cushion if the value of the property goes down.

For example, let's say you bought a home in 2002 for $287,000. You put 20% down and borrowed $229,600 with a 7%, 30-year fixed-rate mortgage. In 2006, when the interest rate was 5.5% on the same type of loan, you refinanced. Your heart sank when the bank required an appraisal, because you knew you paid close to top dollar for the home and that property values since 2002 had dropped in your area quite a bit.

The appraisal came in at $257,000 and the principal balance remaining on the mortgage was $213,600.

The result: you were declined the refinancing unless you were able to come up with additional cash of $8,000.

Value of the Home

$257,000

80% of the Value

$205,600

Principal Balance Remaining

$213,600

Additional Cash Needed

$8,000

Unfortunately, this may be a reality for some people. Be aware of the appraised value of your home as you enter the refinancing process.

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