How and When to Refinance Your Mortgage
When you refinance your mortgage, you are paying off your existing mortgage balance with proceeds from a new mortgage.
If you have never refinanced, that’s OK, we’ll cover the basics here and when you’re done, you can certainly speak with one of our mortgage professionals and they will give you valuable guidance.
There is absolutely no obligation and you can rest assured you are receiving the most up to date information on how and when to refinance as well as the very best rates!
Let's be realistic, sometimes it makes no sense for you to refinance, if this is the case, we will tell you! We will not advise you to refi, if there is not a clear beneift to you, this is our pledge and this is why our clients Love Us!
Refinancing is a simple process, here is an overview of how it works:
- You will need to place an application with one of our loan officers, if we have worked together in the past, we can retrieve most of your information from our system but, we will still need to complete an application as personal circumstances do change quite a bit over time.
- In some cases we will need to verify your home's value and we do this by ordering an appraisal. The appraiser will come to your home and take pictures, inside and out, and gather some basic info from you. Mostly the info will be readily available or you will know it off the top of your head. They will schedule with you once we order the appraisal and they try to make it as convenient for you as possible.
- Poli will email you an encrypted package of disclosures and application documents. You will want to review these documents for accuracy and call or email your loan officer with any questions. As soon as you can, you should sign these documents and deliver them back to us. We will advise as to the best way to get these back email, fax or US mail.
You will also be required to supply your most up to date financial information. Not as much as you had to supply when you bought the home but, we will require the basics.
- Most Recent Paystubs
- Most recent W2 statements from your employer
- Bank statements and investment statements including retirement accounts
- Recent Mortgage Statement from your existing lender
These four document types are the most important, sometimes we will need more and sometimes less. We make every attempt to streamline the required documentation as much as possible. But, you never know what the underwriter might ask for and - We need to keep them Happy! A Happy Underwriter makes for a smooth transaction!
There are numerous reasons why a homeowner would refinance:
- To simply get a lower mortgage rate
- To fix an Adjustable Rate Mortgage or ARM
- To consolidate a first and second mortgage
- To take cash out, essentially borrowing against your equity
- Use your "as renovated" value to finance home improvements
- To take cash out and pay off household debt
Let’s cover these various reasons to refinance, one by one.
1) Refinance for a lower interest rate
It is customary that a mortgage lender will watch the market and alert you when an opportunity to lower your rate presents itself. Not all lenders provide this service, here at Poli Mortgage, we do and our clients really appreciate it.
There is no Golden Rule as to how and when you should refinance, over the years there have been differing schools of though. Years ago refinancing for just .50% or .75% may have not made sense.
Today, mortgage balances are much higher and refinance programs are much more flexible than they once were.
Let’s compare the impact of .75% or 3/4ths of a percentage point can have:
Mortgage with a smaller balance
$150,000 at 6.75% = $972.90 / month
$150,000 at 6.00% = $899.33 / month
The refinance in this case would save $73.57 / month and $882.84 per year.
Mortgage with a higher balance
$285,000 at 6.75% = $1,848.50 / month
$285,000 at 6.00% = 1,708.72 / month
This refinance would save $139.78 / month and $1,677.36 per year.
It is pretty easy to see where the benefits are in saving just .75% on your mortgage rate with the higher principle balances today.
It is very normal that we will refinance a customer that saves a few hundred dollars per month.
You can use our handy Mortgage Calculators to see how much you will save.
Learn how to Maximize the benefits you receive from refinancing; grab our free tool, a spread sheet with an amortization table and a field to plug in extra paymens. This tool can show you how to pay less interest and pay off your mortgage early, using the banks money!
2) Refinancing to a fixed 30 year from an ARM
Many people opt for an adjustable rate mortgage because they needed the lower rate to qualify or simply because that was the only term available in that program.
However, the thing about ARMs is, they don’t last forever! Literally, they will start adjusting one day and it is rare that they will adjust down. Usually they go up and this will result in a higher monthly mortgage payment.
If an ARM starts going up, it will almost always make sense to refinance to a lower fixed rate.
ARMs can also have a point where they are required to be paid off with a new mortgage because a Balloon Payment is due. A balloon payment is a pre-determined point in time disclosed on your Mortgage Note, where your loan is due to your current lender “In Full”.
Most people do not have the cash required to meet this Balloon Payment therefore they have to refinance.
If you have an Adjustable Rate Mortgage, you should choose a loan officer from our list and call them so they can review your note, the last thing you want to have happen is you are suddenly hit with a Balloon Payment and you are scrambling to find a way to meet the terms of the Note.
3) Consolidate a First and Second Mortgage
For a period of years between 2000 and 2008, it was very normal that a client would opt for a Combo First and Second Mortgage. This was popular because a customer would only have 5% or so to put down and in order to avoid PMI they would opt to take a first and second.
First mortgage to 80% of the purchase price and a second mortgage to fill in the extra 15% to get all the way up to 95% financing.
With interest rates so low, we help a lot of clients consolidate these two mortgages into one first mortgage with a much lower rate than both first and second.
Even if the second mortgage was taken after the first mortgage and not at the time of purchase, this would also be called a consolidation.
It is important to note that, when consolidating a second mortgage that was not used to purchase the home, the Underwriter will consider this transaction a “Cash Out” for risk purposes.
4) Refinance to take Cash Out
People with low mortgage balances and have built a lot of equity over time, are eligible to unlock some of that equity they have tied up in their home. In this case, it is your prerogative to use this cash as you wish.
However, an underwriter will ask for a letter stating what you plan on using the cash for. It may seem like this is “none of their business” but, it is.
Straight cash out refinances are classified as risky by mortgage investors.
The most common reasons for taking cash out are things like home improvements, paying off debt or starting a business.
It is also quite common that a Cash Out refinance is court ordered during a Divorce preceding, the reason for the cash would be to pay the spouse their portion of the locked up equity in the marital home.
5) Refinance to Make Home Improvements
With our FHA 203-k Streamline Refinance, you can make up to $35,000 in renovatons to your home.
We can actually lend on your home's "as renovated" value. The Repair and Restore Home Loan is a simple way to make home improvements without needing to come up with a bunch of cash to pay contractors. The new and improved Streamline Program is easier than ever.
6) Cash Out for Debt Consolidation
Taking cash out to pay off household debt such as credit cards, personal loans and student loans can be a very wise decision but, one that needs careful consideration.
While there are certain tax advantages to paying off high interest rate debt with mortgage debt. You should discuss this with your tax professional and a qualified mortgage professional in order to make an informed decision.
Some times the benefit will look very good on paper because your total monthly obligations will drop significantly but, the long term repercussions could be harmful.
Other times the benefits are so clear, it is simply a “no-brainer” to take cash out of your home to eliminate pesky household interest payments.
When you decide to refinance, you should also explore all the Amortization Periods. We offer fixed rate mortgages with terms of 10, 15, 20, 25 and 30 years. You may want to look at a couple different terms and payments, this could be the most important consideration when determining how and when to refinance. If you have been paying your mortgage for 4 years, it may make sense to take a 25 year as opposed to moving back to a 30 year.
This is a broad overview of typical refinance transactions.
In order to determine if your home mortgage needs are met you should contact one of our friendly and knowledgeable Loan Officers, and be sure to ask them about our No Points and No Closing Cost Mortgages.