What Is a Refinance?

A refinance is a lending process that replaces a homeowner’s existing mortgage loan with a new mortgage loan in order to realize some tangible benefit for the borrower.

There are two major types of refinances. The two types of refinances are a rate and term refinance and a cash-out refinance. Both are appealing opportunities for financial savings and/or growth!

5 Things to Know About Refinancing Your Home:

If you want to approach your refinance with confidence, we recommend familiarizing yourself with the following 5 things to know:

1. How Your Credit Score Impacts Your Refinance

A number of factors will affect the interest rates available to you, but your credit score plays a crucial role. For most financing, credit scores of 760+ will allow access to the best interest rates available.

As you may remember from your original purchase, your actual credit score may not exactly align with what you’re seeing on Credit Karma. For mortgage financing, lenders are required to choose the median credit score amongst the three determined by the Credit Agencies, and will use that mid-credit score to determine both loan qualification and interest rates.

To help set your expectations for what kind of interest rate you may be quoted, we would recommend reviewing your credit history and/or obtaining a copy of your credit report. Your lender can also do a ‘soft’ or ‘hard’ credit check on your behalf to determine where your scores are falling. The more you know, the more prepared you will be!

2. How Your Debt-to-Income Ratio Affects Your Refinance

Qualifying for a refinance is much like qualifying for a purchase, as you are still seeking formal approval to obtain a mortgage loan.

One of the key factors used to determine qualification for a mortgage loan is the “debt-to-income” ratio, commonly referred to as DTI.  This ratio compares monthly gross income to monthly debts. The ratio cannot exceed certain thresholds (e.g., 42%, 49.99%, etc.) depending on loan program (e.g., Conforming financing, FHA financing, etc.).

Knowing a rough idea of your total monthly income and total monthly debts will be a good step towards understanding your qualification for a refinance.

3. How Much Does It Cost to Refinance Your Home?

Like a purchase transaction, refinance transactions also come with closing costs. On average, closing costs on a refinance can average anywhere between 2%-6% of your loan amount.

When it comes to determining the closing costs, there are two types of refinances to pursue: a “no-cost” refinance or a regular refinance. A no-cost refinance is not free; it simply means that the lender will offer a credit (in exchange for a slightly higher interest rate) to cover all non-recurring closing costs for the transaction. Non-recurring closing costs are those specific to the transaction, including loan fees, title fees, appraisal fees, recording fees, etc. The borrower is still required to pay all closing costs that would be incurred regardless of the refinance, including those related to the impound account (property taxes and homeowners insurance) and pre-paid interest.

When discussing the potential costs associated with a refinance, it’s important to note that your lender is still required to prove that there is a tangible net benefit to you as the borrower for undergoing the refinance. During a “no-cost” refinance, your lender will ensure that you will be refinancing into a new loan with either a lower interest rate or lower principal & interest monthly payment; for a ‘regular’ refinance, your lender will conduct a cost-benefit analysis to ensure that you will recoup the upfront costs incurred to close the refinance with the monthly savings from the refinance’s lower interest rate (within a reasonable period of time).

4. How Much Home Equity Is Needed To Refinance A Home?

For any refinance, it’s important to know where your home’s value is approximately falling. The difference between your current outstanding mortgage loan’s balance and your home’s value is known as “equity.”

Equity is extremely important for cash-out refinances, because you’re trading the equity in your home for a larger loan amount. That larger loan amount will provide you with cash to do major home repairs or pay down debt (as part of debt consolidation).

When pursuing a refinance, you’ll likely have an appraiser come out to inspect your property, in order to write up an appraisal report of your home’s estimated value.  Be sure to make the appraiser and your lender aware of all recent improvements and upgrades done on the property, to help show that it’s appreciated in value since its last inspection.

5. How Long Does A Refinance Take?

Although similar to a purchase transaction in terms of the formal loan approval process, a key difference between a purchase and refinance is that a refinance will take longer. On average, refinances can take 30-45 days. We always recommend moving as quickly as possible, whether it’s responding to your lender or uploading the requested documentation, to ensure you can complete your refinance without any unforeseen factors emerging to interfere down the road.

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Why Should I Refinance?

Under a rate and term refinance, you are exchanging your existing mortgage loan with another mortgage loan that offers either a lower interest rate or more favorable mortgage terms. A lower interest rate may be available for a variety of reasons – for example, maybe the market took a dip and rates are now lower than when you purchased, or maybe you originally had a 30-year loan and can now qualify for a 15-year loan (which is associated with lower interest rates). A different mortgage term involves switching loan products –  for example, maybe your credit score improved significantly and you’d like to refinance from an FHA loan into a Conforming loan, to remove the monthly mortgage insurance payment that would otherwise be required throughout the life of the FHA loan.

Under a cash-out refinance, you as the homeowner are using the equity in your property to obtain a higher loan amount. The higher loan amount allocates cash to you as the borrower, which can be used for either major property repairs/remodeling or debt consolidation. It is important to note that cash-out refinances are usually associated with higher interest rates, so you may be sacrificing a lower rate for the extra cash.

Overall, a refinance is a great opportunity for many homeowners to lower their monthly mortgage payment, make improvements on their property, or consolidate debt. If interested in a refinance, please reach out to the JVM Team at (855) 855-4491 or at [email protected].