When does it make sense to refinance?
If the refinance is “no cost”, then a refinance almost always makes sense if you are saving even $25 per month as a result of the refinance. This is because the refinance will cost you nothing and it will save you thousands of dollars over the life of the loan. And even more importantly, refinances are much easier nowadays and almost painless because of JVM’s streamlined processes and new technology.
If you are one of the rare borrowers who opts to pay fees for a refinance, the rule of thumb is that the refinance makes sense if the fees can be offset in four years or less with the savings from the resulting lower payment. Borrowers who pay fees are either opting to buy down their interest rate or they have a loan amount that is too small (usually under $200,000) to make a no-cost refinance viable.
Cash out refinances require an entirely different analysis. For borrowers in need of cash for debt consolidations, home improvements, tuition and other needs, a refinance with or without fees will often “make sense” if the cash is a necessity or a borrower’s overall payments drop significantly as a result of the debt consolidation.
What is the difference between a “rate and term” refinance and a “cash out refinance?”
A rate and term refinance is the refinancing of an existing mortgage to lower the interest rate or to change the term of the loan (from a 7/1 ARM to a 30-Year fixed, for example) without increasing the loan amount. Refinances are still considered “rate and term” even if the mortgage loan amount is increased to cover closing costs.
A cash-out loan is the refinancing of an existing mortgage into a larger mortgage that not only changes the interest rate and the terms of the loan, but also advances cash to you. You can use the cash-out for anything of course, including home-improvements, tuition and debt consolidations.
Loan-to-value restrictions and credit standards are tighter for cash-out loans and interest rates are usually higher. You also need to make sure you have sufficient equity to meet cash out guidelines, but our experts are happy to assist with this determination with our free home valuation estimates.
I am 5 years into my current loan and don’t want to “start over” with my 30-year amortization; should I still refinance?
This is a myth that prevents all too many borrowers from refinancing and saving tens of thousands of dollars. As we explain in this blog, if borrowers “save their savings” from the resulting lower payment and earn just 5% on those savings, in most cases they will accumulate enough extra cash to be able to pay off their loan much sooner than they would if they had not refinanced.
What is a “No Cost” refinance?
When a lender offers a No Cost refinance, they are merely saying that they will cover all of your “nonrecurring closing costs” or your “one-time fees” such as title, escrow, appraisal, underwriting, processing and other fees associated with every refinance. Lenders are able to cover closing costs for borrowers by providing a lender credit. You receive this lender credit by taking a slightly higher interest rate. The higher rate generates extra commission or “yield premium” for the lender that is then used to cover your closing costs.
Can I keep my current impound account when I refinance?
Unfortunately we cannot simply roll over your current impound/escrow account to the new loan. If you wish to continue having an impound account, you will need to come in at closing with funds to establish a new impound account. We will collect a certain number of months worth of property taxes and insurance prorated to the month of the year you close on vs. when the bills come due. After closing, when your old servicer has received the payoff funds from escrow, they will audit your account and cut you a refund for any overage in the payoff as well as whatever balance was remaining in your old impound account. The check typically arrives within about 30 days after closing. There are no fees to set up the new account.
Note that because you are establishing a new impound account and because your next mortgage payment is over a month away, (see Do I get to skip a payment when I refinance?) the funds required to establish the new account are often 1 or 2 months worth of taxes/insurance higher than what is held in the old account. When you refinance, you are effectively skipping mortgage payments that would have further added to your existing impound account. When you account for these additional mortgage payments and the additional funds that they will or would have put into your impound account, you will end up paying the exact same amount for property taxes/insurance whether or not you refinance.
For additional details regarding impound accounts, we recommend visiting our more elaborate explanation of impounds here. Please also feel free to contact your JVM Mortgage Analyst or Client Advisor for additional explanation if this remains confusing.
If my loan is "No Cost", why do you charge for an appraisal?
For compliance and liability reasons, most lenders charge for refinance appraisals upfront. Through experience, lenders have realized that some borrowers are less committed to the refinance process if the lenders pay for the appraisal up front. As a result, when lenders front the cost of an appraisal, many refinances end up not closing and the lender is thus stuck with eating the cost of the appraisal. The combined total of all these appraisal fees can easily add up to many thousands of dollars every month, so lenders were forced to adjust appraisal policies accordingly. Because of this, you will have to front the cost of the appraisal (if one is required), even if you are targeting a “No Cost” refinance.
The good news is that JVM always reimburses the entire cost of every appraisal in escrow whenever we close a “No Cost” refinance, unlike many of our competitors.
Additionally, for many Conventional refinance transactions, we can obtain what is called a “Property Inspection Waiver” which will allow us to proceed with a refinance without incurring the cost of an appraisal.
What is “Cash to Close”? (IMPORTANT!)
“Cash to Close” refers to the amount of cash you will need to put into escrow to ultimately close your refinance. This is an extremely important concept to know because there is often so much confusion surrounding it.
A “no cost refinance” does NOT mean you won’t need to bring in cash to close. A no cost refinance means that lenders will cover your one-time fees (nonrecurring closing costs), but it does not mean that they will cover your “prepaid items” (recurring closing costs) such as interest, property taxes and/or hazard insurance. These fees can add up to several or even tens of thousands of dollars depending on when you close and depending on whether or not you are setting up a new impound account. (Quick note: the term “recurring” is used because the fees recur over the life of the loan, and are charged regardless of whether a refinance happens or not).
For example, if you close your refinance with any property tax bills are outstanding, you will have to pay them in escrow because all lenders require that property taxes are paid to current when you close. This also applies to any outstanding supplemental tax bills. These supplemental bills commonly ‘pop up’ 6-12 months after purchasing a home. This supplemental bill would be an item that is coming due regardless of this refinance. Additional information surrounding supplemental property taxes can be found here.
In addition, if you close at the beginning of the month and have not yet made a payment for your current loan, you will have to prepay interest through the end of the month for your new loan and you will also have to pay all of the interest for your old loan that accrued over the previous month. You will pay interest on your mortgage regardless of whether you refinance, but because you are refinancing the bill is due at close.
Example Refinance Scenario: Jill Smith wants to refinance her $400,000 loan with a 5% interest rate. She wants a “no cost” refinance with an interest rate of 3% that will close on February 15th when property taxes are also due. Her property taxes are $10,000 per year, or $5,000 every six months. She does not want to increase her principal balance either.
Jill’s “Cash to Close” might look like this:
|Money Required to Pay Off Old Loan:
|Principal Balance of Old/Current Loan:
|Interest Accrued on Old/Current Loan:*
|Prepaid Interest on New Loan:**
|Pay-off Demand Fee:
|Less Principal Balance of New Loan:
|CASH TO CLOSE
* Interest on old loan is the amount that accrued from Jan 1st – Feb 15th.
** Prepaid interest on new loan is from Feb 15th – Feb. 28th.
*** Many lenders require that Hazard Insurance be renewed when a refinance closes.
NOTE: This loan is still a “no cost” loan even though Jill is bringing in $9,100 because she is not paying any nonrecurring costs and is only prepaying items she would have to pay anyway – whether she refinanced or not.
In addition, Jill will not have a March mortgage payment. This is because she is paying her February interest through the end of the month when she closes her refi, making a March payment unnecessary. For more information about this, please see Do I Skip a Payment?
Can I refinance with no money out of pocket and roll my closing costs into my loan?
Yes, but only if you allow us to increase your loan amount enough to cover your cash to close. In the “Cash To Close” example, Jill Smith would have to increase her principal balance by $9,100 if she wanted a “no cash out of pocket” refinance. Assuming that you have sufficient equity and can qualify for the larger loan amount, this is always an option that you could pursue.
Is a “no money out of pocket” loan the same as a “no cost” loan?
We state this emphatically because many unscrupulous lenders try to entice borrowers to refinance with “no money out of pocket” sales pitches. In many cases, all those lenders are doing is increasing your principal balance in order to bury substantial nonrecurring closing costs in that larger loan amount.
You can increase your loan amount or principal balance to cover prepaid items like insurance, property taxes and interest even if you are getting a “no cost” loan, but should not be confused with increasing your loan amount to cover nonrecurring or one-time fees such titles, escrow, appraisal, underwriting, etc.
How long will it take to close my refinance?
The typical closing period from the day a lender locks in your new loan interest rate to the day of closing is around 45 days.
Capacity issues, however, can sometimes make closing periods even longer. When interest rates are exceptionally low, for example, lenders sometimes receive more business than they can handle, forcing lenders to push out closing periods. This can increase closing periods at some lenders (particularly large commercial banks) out to 60 or even to 90 days! We are fortunate to be able to keep our closing periods under 45 days in all environments with the use of better technology, more efficient systems and proper staffing to meet demand.
Why do refinance loans take longer to close than purchase loans?
Refinances tend to take longer to close for a couple of reasons. Due to the more time-sensitive demands of a purchase transaction (with many parties involved and a contractual close date), lenders are forced to give purchase transactions priority in appraisals, processing and underwriting. Refinance loans for primary or secondary homes also have 3-day rescission periods after loan documents are signed, that add to the overall closing time.
Why is my mortgage payoff amount so much higher than my current principal balance?
This is because your payoff includes the payoff statement fee (charged by the current servicer of the loan), all accrued interest to date, and late fees that you may have incurred if you made your mortgage payment past the “grace period.”
If a borrower’s principal balance is exactly $400,000, for example, her payoff demand could be as high as $403,000 – which includes accrued interest, late fees, and the payoff demand fee. If a borrower is closing her refinance in the middle of a month and she still has not made her previous month’s mortgage payment, she will have 45 days or more of accrued interest that will additionally be added to the payoff amount.
Do I get to skip a mortgage payment when I refinance?
This is somewhat of a misconception, as borrowers do get to skip a payment for the month after they close but that is only because they are effectively prepaying the next month’s payment when they close their refinance transaction, as explained above in “Cash to Close.” Additionally, if you close prior to the 15th day of a month (when mortgage payments are considered “late”), you can potentially “skip” 2 months of mortgage payments.
For example: if you close on February 10th and you have not yet made your February mortgage payment, you will effectively end up making both your February and March payments in escrow when you close – with no new payments due until April 1st.
Please note that mortgage interest is always paid “in arrears,” meaning that every month’s mortgage payment is covering the interest that accrued over the previous month. Your March 1st payment, for example, will cover the interest that accrued in February. The only exception to the arrears rule is when you close on a new mortgage and pay the interest on your new loan through the end of the month at close. This effectively replaces your next month’s payment.
Why are refinance transactions so much easier than purchase transactions?
Refinances are easier than purchase transactions because there are no purchase contracts or real estate agents involved, and fewer people and documents always make transactions easier. This can be an important consideration for anyone who endured a stressful or rushed purchase transaction.
In addition, refinances typically require far less “cash to close” because there is no down payment to be made, and closing costs are much lower and often covered by lenders for many transactions.
Lastly, if you financed your home purchase it is likely you already qualified for the same or similar loan terms at least once. If your financial situation has stayed the same as when you purchased your home, your qualification and the conditions the underwriter requests may look similar.
Another lender is quoting me a lower rate that he cannot lock until my loan is approved. Can you match the rate? How do I know your rates are competitive?
Beware of Sales Tactics: We address this in our FAQs because this is a common tactic used by online lenders to reel borrowers into their webs. Online lenders often quote very low rates that can only be “locked” in for very short periods (often 7 days or less) when your loan is formally “approved” – which could be weeks down the road, and by which time rates may have moved significantly.
If rates go up, those loan officers will contact you to share the “unfortunate news” and then try to get you to refinance anyway at a higher rate, given that you paid for your appraisal and have already gone through all the trouble up to that point.
Rates Are Volatile: Another factor to consider is that interest rates are very volatile in general, as they move up and down every day – sometimes by the hour. We always recommend locking in your rate as soon as possible whenever a refinance is viable.
Timing The Bottom: This is something borrowers often want to do but it is simply impossible because nobody knows if or when rates will move. If anybody did know, they could literally make billions in the bond markets. We again always recommend locking in your rate immediately whenever a refinance is viable. If rates fall even more after you refinance, you can always refinance again at no cost.
Freddie Mac Average Interest Rate/Rate Surveys: JVM performs internal rate surveys every week to compare ourselves against to other major lenders, and our rates are almost always lower than those offered by every major mortgage bank. In addition, our rates are always lower than those seen in the weekly Freddie Mac Average Interest Rate Survey. When viewing the rate surveys, it is important to note the fees quoted. If the rates shown in the survey reflected only “no cost” or “no fees loans,” the average rates would be even higher (much higher in most cases). In other words, if we quoted rates with fees like most of the lenders in the survey, our rates would be even lower.
Is there a prepayment penalty or a balloon payment when I refinance?
None of JVM Lending’s mortgage loans have prepayment penalties or balloon payments. We might add here though that while none of our borrowers are subject to prepayment penalties, we, as a lender, are subject to “Early Pay Off Penalties.” These are substantial penalties (in the five-figure range) that we, as a lender, have to pay whenever a loan is paid off in less than six months after we fund it. Investors that buy our loans on the secondary market subject us to these penalties to ensure that they can make up for some of the “premium” they pay for our loans by collecting interest payments for at least six months.
To be clear, none of our borrowers are subject to these Early Pay Off Penalties – ever. Only we, as a lender, are subject to them. Because they are so costly, we only request that our borrowers refrain from refinancing for at least six months (180 days) after closing their loans. Borrowers can still lock in their new interest rate on a refinance as soon as four months after closing, start the refinancing process, and then fund after the six-month period has passed.
We discuss Early Pay Off Penalties more in-depth here.
I am in forbearance; can I still refinance?
On May 19, 2020, the FHFA came out with new guidelines for “conforming loans” or loans backed by Fannie Mae and Freddie Mac.
If a borrower has had her forbearance authorized by her servicer but is still making timely mortgage payments, she will still be allowed to refinance (or finance a new purchase) even though she is technically “in forbearance.” This is because there were no missed payments and are no unpaid balances.
If a borrower is formally in forbearance and not making payments, she will not be able to refinance (or finance a new purchase) until her forbearance has ended and she has made at least three timely payments in accordance with her repayment plan. In other words, she does not need to repay unpaid balances, but if she does not repay unpaid balances, she has to “season” her forbearance with three timely payments.
If a borrower is formally in forbearance and not making payments, she will be able to refinance immediately after her forbearance ends in most cases as long as she repays ALL of her unpaid balances and begins to make timely payments. The key difference here is the repaying of all unpaid balances.
For jumbo loans and other loans that fall outside of “conforming” or Fannie Mae and Freddie Mac guidelines, the repercussions of forbearance will be more severe.
These borrowers will likely not be able to refinance until they are out of forbearance and their deferred balances have been repaid.
A major risk of forbearance, particularly if payments are actually missed, is the possibility of missing out on a fantastic refinance opportunity while rates are very low.
Why are refinance interest rates often higher than purchase interest rates?
Refinances are associated with slightly more risk than purchases from both a default and a fallout perspective – so lenders sometimes charge slightly higher rates to account for the extra risk.
Purchases are rarely quoted as no cost loans because purchase closing costs tend to be much higher and because lenders have much less control over them.
Lenders often quote refinances as “no cost” loans for several reasons: (1) refinancing closing costs are much lower; (2) lenders have far more control over refinancing closing costs; and (3) no cost refinances are often more enticing for borrowers.
Refinancing closing costs, however, can still easily approach $4,000 so lenders are forced to quote slightly higher rates in order to generate more “yield premium” or commission that they can then use to cover those closing costs.
If a well-qualified refinance borrower wants to pay all of her closing costs (instead of opting for a no cost loan), her interest rate would likely be very close to or the same as the prevailing purchase money mortgage interest rate.
There is one more reason refinance rates are higher than purchase rates: an “adverse market fee.” In December of 2020, Fannie Mae and Freddie Mac imposed a 0.5% “adverse market” fee on all refinances. The extra fee is ostensibly in place to help Fannie Mae and Freddie Mac cover the extra risk associated with refinances in an economy weakened by the COVID crisis. Borrowers do not typically pay this fee directly but instead see it in the form of a slightly higher interest rate.
Who Is Vellum Mortgage/JVM’s “Mortgage Bank?”
Vellum Mortgage is the “Mortgage Bank” with which JVM is affiliated. A mortgage bank is an entity whose sole purpose is the underwriting and funding of mortgage loans. This is in contrast to a “commercial bank” that holds deposits, issues checking accounts, and makes commercial loans.
JVM Lending operates independently of Vellum Mortgage and affiliates with Vellum Mortgage solely and only to get our loans underwritten and funded in the most efficient and cost-effective manner possible. By affiliating with a mortgage bank the size of Vellum Mortgage , we can offer much lower rates than we could if we set up our own much smaller mortgage bank.
As a borrower or an agent, all of your interactions will be with JVM Lending only. We are 100% independent with our own tech stack, website, marketing, systems, hiring, training, accounting, and everything else required of a fully functional business.
We share this info in our FAQs because our clients receive disclosures and other information from Vellum Mortgage for regulatory reasons, and it sometimes confuses people.
Will a refinance affect my property taxes?
A refinance will not affect your property taxes, no matter what your property appraises for. Properties are assessed by the county annually independent of the refinance process. The county valuation determines your property tax rate, subject to your state’s laws.
Can I roll down my rate after locking it in?
When we lock in your interest rate, we effectively buy an option that guarantees your rate – even if rates go up substantially. We are promising to deliver a loan at a certain rate when we buy the option and if we don’t deliver that loan, we have to pay a substantial penalty. If we did not buy the option at all, we could not guarantee your rate (something that is very important to us, as we want to ensure you’re protected if rates rise).
So we can roll down your rate in some cases, but rates need to improve dramatically before we can negotiate a rate-rolldown. This is because we need to capture enough additional yield premium to cover the cost of the penalty we will incur for breaking your original lock.
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