Refinancing: Frequently Asked Questions (FAQ)

Need refinancing answers fast? You’re in the right place.

You’ve heard your neighbors and friends talk about the joys of refinancing-namely, lower payments and cash in your pocket-but you’re not exactly sure how it all works. Don’t worry; we have the refinancing answers you need.

What’s a mortgage refinance?
A mortgage refinance is a new loan that pays off and replaces an old mortgage loan. Since mortgage loans are not typically amended, a refinance mortgage is the easiest means of restructuring mortgage debt. There are several reasons why you might do this: to lower the interest rate or payments, to shorten or lengthen the loan maturity, or to increase or reduce the loan amount.

What’s a cash-out refinance?
If you have home equity, you may have the option of refinancing for more than what you owe on your old mortgage. This is a cash-out refinance, in which the amount leftover after the pay-off is transferred to you, and can be used as you wish. Your payment will reflect a higher loan balance, but you could possibly offset some (or all) of the increase with a lower interest rate or extended maturity date.

How does refinancing work?
The application process for a mortgage refinance is very similar to what you experienced when you purchased your home. You consult with a lender, have the home appraised, complete a loan application, and supply the required documentation to verify your income and assets. You’ll have to pay closing costs, but they should be lower than they were when you purchased the home. When the refinance mortgage funds, the new lender automatically pays off the old mortgage lender, including any prepayment penalties, and transfers any remaining funds to you. The old lender releases its claim on the home, and the refinance lender files a new one.

Can I reduce my payment with a mortgage refinance?
You can reduce your payment with a mortgage refinance by lowering the interest rate and/or by extending the maturity date.

How do I know if I should refinance?
Many homeowners start thinking about refinancing when there’s some part of the existing mortgage loan that’s no longer appealing. Examples include:
* Your payment is too high
* Your interest rate is higher than what’s available on the market
* Your adjustable interest rate is too volatile
* You want to pay off your mortgage in 15 years instead of 30
* You want to cash out your home equity

A refinance calculator can help you run the numbers, but the decision usually depends on how market mortgage rates compare to what you’re currently paying. If you can find a refinance mortgage that will save you money and help you achieve your financial goals, then the time is right.

What is APR?
The acronym stands for Annual Percentage Rate (APR). Basically, the APR shows the cost of the loan, expressed as an interest rate. Because there are always other finance charges in addition to the note rate (the interest rate base on which payments are calculated), the APR is almost always higher than the note rate. The APR is one of the items required to be disclosed in the Truth-in-Lending form.

Why is the APR different from the interest rate for which I applied?
As we just discussed in the previous answer, the APR is computed from the amount financed and based on what your proposed payments will be on the actual loan amount. For example, on a $50,000 loan with $2,000 prepaid finance charges, a 30 year term and a fixed interest rate of 7%, the payments would be $332.65 (principal and interest). Since the APR is based on the amount financed ($48,000), while the payment is based on the actual loan amount ($50,000), the APR of 7.4095% is higher than the interest rate.

How often do interest rates change?
Interest rates can sometimes change several times a day. This is because they’re dependent on a bunch of different variables, such as the bond market, the type of loan you’re seeking, your credit profile, the amount you plan to mortgage, and others so it’s impossible to know if or when they will change. Read our article on Understanding Rate Fluctuations for even more information.

When should I lock in an interest rate?
You always have the option to lock in an interest rate or float at any time. You must have a property address to lock the rate in with though. However, no one knows or can predict exactly which way the rates will go and when, so the decision to lock or float is completely up to you.

I have seen interest rates advertised for as low as 1%. Why aren’t you offering this kind of rate?
Mainly because these rates are way too good to be true. These companies lure you in with an impossibly low rate and then add-on a bunch of fees, require specific criteria for the deal, and secretly raise the rate something closer to what you see across the market. It’s a classic “bait and switch” approach. And it’s not how we do business. We pride ourselves in being honest with our clients, so you can be sure that what you see is what you get. However, there are some loan programs that can offer payments with really low rates, such as pay option adjustable-rate mortages (ARMs). Even if you don’t end up doing business with us in the end though, we strongly recommend giving us a call first to discuss your these types of loans because of the risks involved.

How do I best compare the offers from different lenders?
Three words: Good Faith Estimate (GFE). This standard form will allow you to accurately and fairly compare rates and fees. This gives you the chance to uncover any hidden fees and the true differences between loans. You will also want to look at the APR on the Truth-in-Lending Statement. The general rule of thumb here is that the lower the APR, the less cost associated with the loan.

What is a Good Faith Estimate (GFE)?
A GFE is a preliminary estimate of the closing costs and fees for your mortgage. When comparing lenders’ offers, make sure that you review this form along with the Truth-In-Lending Statement from each lender.

What is a Truth-In-Lending (TIL) Statement?
A TIL is used in connection with the Good Faith Estimate (GFE). A TIL gives you the total cost of a mortgage with the closing costs and fees included. A TIL will allow you to determine if a higher rate with low fees is better for you than a lower rate and higher fees, and vice versa.

What is PITI?
It stands for principal, interest, taxes (property taxes) and insurance. In essence, it’s the cost of living in your particular home. In some cases, PITI can also include private mortgage insurance and homeowners/condo association fees.

What is a loan-to-value (LTV) ratio?
LTV is the size of your proposed loan in proportion to the value of your home. For example, if you are buying a home for $200,000, and you make a down payment of $20,000, then your loan amount would be $180,000. Your LTV would be 90% (the loan is 90% of the value). It is important to know that lenders will always use the lesser of the appraised value or the purchase price for the value. If you refinance, then the appraised value is used.

What is DTI?
This stands for debt-to-income ratio. This pretty much will decide how much of a loan you can afford. You get this number by dividing your total monthly debts by your total monthly income.

What is PMI?
Private Mortgage Insurance, or PMI, is insurance from a private company that is required when the borrower does not have a minimum 20% down payment for a purchase or 20% equity in the home on a refinance. PMI is an insurance that you pay for to protect the bank in case you default on your loan.

What is the amount financed?
You can determine the amount financed by subtracting the prepaid finance charges (i.e. closing fees, points, adjusted interest and the initial insurance premium) from the total loan amount applied for.

What is the total of payments?
This figure equals the total amount you will have paid if you make the minimum required payments for the entire term of the loan. This includes principal, interest and mortgage insurance premiums (if applicable).

What does my mortgage payment include?
For most homeowners, your monthly mortgage payment will include principal (actual repayment of the amount borrowed), interest (additional payment to the lender for the opportunity to borrow), and taxes and insurance (to fund the escrow account; if you are required).

What information is required to apply for a refinance?
We will need your current residence, employment history for the past two years and a rundown of your current income and assets. From this information, as well as the potential loan programs open to you, we can then let you know the amount and type of additional information we may need in order to keep the process rolling. Take a look at our article on Getting Your Refinance Started for an even deeper explanation of possible requirements.

What is a credit report?
A credit report contains information on how you pay your bills, where you live and work, and any information that is on public record, such as bankruptcy, judgments, tax liens and lawsuits. Your permission is required before a copy of your credit report can be ordered. In order to obtain the report, you will need to supply your name, address and social security number. Please keep in mind that your credit scores may drop if you allow too many people run your credit.

What are credit scores?
Essentially, your credit scores are an estimation of your creditworthiness. These appear on your credit report with FICO being the most well-known rating. Your FICO score is computed by the credit reporting agencies based on factors such as the amount of current and past credit, payment history, late payments, and others.

Should I be worried about past credit issues on my credit report?
On average, unfavorable credit issues, such as late payments, remain on your credit report for seven years. However, extreme events like bankruptcies – 10 years – and lawsuits – indefinitely – can remain for much longer.

Does bad credit disqualify me from getting a mortgage?
Nope. A mortgage can be obtained by people with all kinds of credit. Obviously, the rates will increase as credit score decreases, but there’s still a potential loan program out there for you. However, with a lower credit score you may also be limited to a few less mortgage loan programs than you would with excellent credit. The good news is that mitigating factors such as: a lot of money in the bank; funded 401k’s; investments; long-time employment; low loan-to-value (LTV) and debt-to-income (DTI) ratios; and lower terms (15 year instead of a 30 year) may help to compensate somewhat for a lower credit score and qualify you for a better rate.

Do I need to make a big down payment?
Short answer: no. Slightly longer answer: it always helps. There are many programs out there that require little or no down payment. However, with smaller down payments (specifically those under 20% of the purchase price), you’ll be required to pay for private mortgage insurance (PMI), or get a second “piggyback” mortgage or line of credit.

Will an interest-only mortgage save me money?
Yes and no. It’s true that if you elect only to pay the interest during the initial period, your payment will be lower at first. However, after this period, the payment will increase and actually be higher than your normal mortgage payment. If this increase is also coupled with an interest rate that adjusts, the new payment could be significantly higher than the original payment from the beginning of the term. If you only plan to stay in the home for a short time, or feel that the home will retain its value or appreciate during the initial payment period allowing you to refinance, then this may be a good loan option for you.

Is there truly a “no closing cost loan”?
No. What actually happens is that the interest rate will adjust in order to offset the costs of waiving the fees or the closing costs are simply rolled into the amount financed.

Can I roll my closing costs into the loan?
Yes, most of the time you can finance all your closing costs just as long as there is enough equity in your home. Just remember that by doing so your balance will increase, which may also drive your rate up as well.

How long will it take to refinance?
Though this timeframe varies from loan to loan, we pride ourselves in how quickly we can take you from application to closing – as little as 7-10 days! However, we will never sacrifice our service to you in order to hit this goal. We guarantee that we will always get you the best loan at the best rate for your situation, and keep you up to date with its stage in the process all along the way.

Can I pay my own taxes and insurance?
It depends. On conventional loans, the loan must meet certain criteria and you must agree to pay either an increased rate and/or monthly fee. However, with FHA loans the government doesn’t allow this option and requires an escrow account to be set up for taxes and insurance.