Determining if a home refinance loan is right can be confusing. That's why we've put together a list of common questions that homeowners have when considering refinancing.
What is Refinancing?
Refinancing is simply getting one loan to pay off another.
What does refinancing cost?
When you refinance you pay for updated title insurance, some lender administration fees and an appraisal fee. These costs typically range from $2500-4000. You will also have “recurring” costs at closing that consist of one month of interest (paid in lieu of your next regular mortgage payment), property taxes (if they are currently due but not yet paid) and home insurance (if your current policy will expire within three months). These costs are typically financed as part of the loan amount, but may be paid in cash if that is your preference. In exchange for a higher interest rate the lender may pay some/all of the refinance costs.
What are points?
One point represents 1% of the amount of your loan. It is an optional fee that you can pay to permanently reduce your interest rate. Your loan officer will review the points/payment tradeoff with you to determine if incurring that cost is worthwhile.
How does the APR differ from the interest rate?
The rate refers to what percentage of your loan you will pay in interest per month, whereas the annual percentage rate (APR) is an adjusted percentage that expresses the yearly cost and also includes certain charges and fees.
The APR is designed to demonstrate the total cost of credit including the interest rate and cost to obtain the loan, thus it is always higher than the note interest rate. Your monthly payment is based on the note rate, not the APR. The APR is provided for information purposes only.
What are FRM & ARM?
The interest rate of a Fixed-rate Mortgage (FRM) will not change for the life of the loan. Alternatively, an Adjustable-rate Mortgage (ARM) will be subject to periodical interest rate adjustments based on interest rates around the country.
What’s the 2% rule? Is it useful?
The 2% rule was the old rule of thumb that stated that in refinancing you should aim for a 2% interest rate reduction to ensure that you would have enough savings to justify the cost. That rule originated at a time when closing costs to refinance were dramatically higher than they are today and “no cost” refinances didn’t exist. So, that rule is not a reliable tool in today’s market.
It has been replaced by a “breakeven point” rule in which the costs of refinancing are divided by the monthly savings to determine how long it takes to recoup the costs. If that period is less than the time you plan to stay in your home then refinancing may make senses.
What is PMI?
Many people refinance in order to eliminated PMI that was required by the lender when they purchased their homes. If one has less than 20% equity when one refinances PMI will still be required.
Will I need to get an appraisal when I refinance?
Does bad credit exclude me from a refinance loan?
Not exactly. When considering a refinance loan it's important to remember that the better your credit score the better interest rate you can get. So if you don't have perfect credit you can still qualify for a refinance loan but you'll want to make sure that you're lowering the interest rate on your loan enough to make a refinance worth it.
Do I need to have equity in my home to refinance?
Yes. Ideally you would refinance with at least 20% equity so as to avoid mortgage insurance, but in some cases refinancing with mortgage insurance may make sense.
Can I get cash from a refinance loan?
Yes. Depending on the type of refinance loan you opt for you can take out cash to use for bills, home repairs or whatever you might need it for.
How long does it take to go through the refinance process?
The refinance process generally takes 4-6 weeks, depending on mortgage industry loan volume at the time. In low interest rate periods lender and appraiser turn times can be extended.