Rate and Term Refi
Rate and Term refi’s are designed to take advantage of better interest rates, mortgage insurance reductions, changing your home loan to a different product (FHA to Conventional), or restructuring to a new term; i.e., going from a 30 year fixed to a 20 or 15 year mortgage, or refinancing out of an ARM to a fixed rate mortgage product. There are a lot of options available. One of the great things about a refi is that there are generally no out of pocket costs because closing costs can be rolled back into the loan utilizing your equity.
Equity is the difference between the appraised value of your home vs. the payoff on your current mortgage. If your home has increased in value, you have gained equity. This is basically theoretical money until you sell your home and someone agrees to pay the sales price or you refinance to take advantage of your increased equity. The sales price or proposed home value must be supported by the market value as verified by the appraiser. If you bought your home for $200,000 and put 5% down, you have a loan for $190,000, but you also have mortgage insurance (MI) until you reach at least an 80% Loan to Value (LTV). If your home value magically became $237,500 overnight, you now have 20% equity in your home and 80% (LTV). A more plausible scenario is that you purchase the same house for $200,000 but it was worth around $208,000 at the time of purchase and you pay down your mortgage for a few years while your home gradually appreciates. So several years later the market is great, your home has appreciated to around $220,000 and your mortgage payoff is $180,000. You now have 20% equity, or 80% LTV and can refinance out of your mortgage insurance and reduce your monthly payments with no MI and a smaller loan amortized over 30 years.
If you bought your home at a 6% interest rate and now interest rates are in the 4% range, refinancing will significantly reduce your mortgage payment.
If you have a 30 year mortgage but your family income situation has improved and you want to pay off your loan sooner but pay far less interest, you can refi into a lower term. 20 and 15 year mortgages are popular, but you can do just about any term you want. Keep in mind that you will pay less interest and more principle, but your payments will be a bit higher because you are amortized over fewer years. Still, if you can afford the payments, lower term mortgages can save you thousands of dollars over the life of the loan.
If you are in an FHA mortgage, you most likely have a loan with mortgage insurance that will never go away. Once you reach an 80% LTV by paying down the mortgage in relation to the current market value, you can refinance out of mortgage insurance into a conventional loan. If this is your goal, be sure to work on your credit score and your debt to income ratio while you pay down your mortgage so that once you reach that 80% LTV you will qualify for a conventional product.
There are a lot of reasons to refi your home and I’d be happy to go over your specific scenario.
Rate and Term Refi FAQs
The longest part of a refinance is usually the appraisal. Unless you plan on bringing cash to close instead of rolling the title work into your loan, in which case we would need to show the funds to close with 60 days of banks statement just like a purchase. None of this really takes long, and generally speaking refinances are faster than purchases. You can figure around three weeks from start to finish provided the appraisal comes in quickly and the title company is on the ball.
Great question. It primarily depends upon your state and the title company. Title fees are reduced for refi’s, there is no Owner’s Title Insurance, and you won’t have to pay a year’s worth of home owner’s insurance up front because you already have a policy in place. Escrows are the tricky part. The first thing to point out about escrows is that it is your money being held in escrow. The second part is that it all depends on when in the year you are refinancing. When you reestablish your escrows, whatever is currently in your escrow accounts will be refunded to you. So it will ultimately be a wash. Again, it’s your money. If you are refinancing closer to the end of the year when taxes are due, the lender may require a full year of taxes to ensure taxes are paid on time. If this happens, you will get the full amount that is in your escrows account refunded to you. In this example, you would be skipping potentially two house payments and a year’s worth of taxes will be refunded to you within 30 days of closing. If this takes place at the end of the year, that’s a pretty nice chunk of cash for Christmas shopping. 🙂
The bottom line is that since there are so many variables for each individual refi, it’s best if I work up those numbers specific to your situation. Just give me a call.
In that case you would need to bring cash to close and we would need bank statements to show that you have the cash available. I will always work out estimated cash to close even if we are rolling it into the loan so you know what to expect.
Mortgage payoffs are always higher than the balance on your mortgage statement for two reasons: the balance on your statement shows the principal balance but does not reflect the daily interest that accrues, and interest is paid in arrears meaning that this months payment is paying last months interest. Consequently, a payoff is your principal balance, your daily interest up to the point of funding, and last month’s interest payments.