Mortgages take more time today than they did just a few years ago. Some of the recent rules and regulations inject delays into the process, and all lenders are more careful today to be sure every single document in the loan package is just what it should be.
If you can snag a much lower interest rate when you refinance compared to what you’re currently paying, you can save quite a bit of money over the long run. The question is, what is happening after you apply that adds time into the refinance process?
There are many good reasons to refinance your mortgage, including the following.
Refinancing at a Lower Interest Rate
One of the most common reasons why homeowners refinance their mortgages is to take advantage of lower rates. If the current mortgage rate is lower than what you are currently paying on your mortgage, refinancing at a lower rate can save you a lot of money.
Generally speaking, refinancing may be a good idea if you can lower your rate by at least 2%. That said, even 1% savings may be enough reason to refinance. To determine whether or not it’s worth it to refinance, it’s important to crunch some numbers, as there are costs associated with a mortgage refinance.
In addition to saving money with a lower rate, refinancing may also help you to build equity in your home faster, especially if you’re able to reduce your monthly payments.
For instance, let’s say your current mortgage owing is $300,000, and you’re paying 5% on a 30-year fixed-rate mortgage. Your mortgage payments would be $1,601. If you refinance at a rate of 3.1% (today’s rate for a 30-year mortgage), your mortgage payments would drop to $1,277. You’d save about $324 per month.
Refinancing to a Shorter Loan Term
If you’re currently paying a long-term mortgage, such as a 30-year mortgage, you may want to shorten the term to get you out of debt faster. Just keep in mind that a shorter loan term will often mean higher mortgage payments.
However, that’s not always the case, depending on the difference in interest rates. You may be able to refinance to a shorter term without significantly impacting your monthly mortgage payments.
For example, if you took out a 30-year fixed-rate mortgage to pay for a $500,000 home at 7%, refinancing to 3% would mean only a minor increase in your monthly payment. In this case, you’d go from $1,975 per month to $2,069.
However, if you’re already paying a 5% rate for 30 years and refinance at 3%, the difference would be much more significant. In this case, you’d go from $1,601 to $2,069 per month, which is a much bigger jump.
Refinancing to Change to an Adjustable-Rate or Fixed-Rate Mortgage
If you want to change the type of mortgage you have, refinancing might help you do that. For example, you may have an ARM loan and want to convert it to a fixed-rate mortgage. ARMs are attractive at first because of the very low rate that is charged during the initial period.
However, once that time period expires, the rate may go up significantly. In this case, converting to a fixed-rate mortgage at a lower rate can not only help you save money, but also help you avoid rate increases in the future.
Refinancing to Consolidate Debt
Many homeowners refinance their mortgages to consolidate their high-interest debt. Paying off debt tied to a high interest rate with a lower-rate mortgage will leave homeowners with one single bill payment at a lower rate, helping to save money and alleviate the implications of managing more than one bill.
Refinancing to Tap Into Home Equity
Homeowners can access the equity to cover the cost of major expenses, such as renovations or college tuition for grown children. In the case of updating your home, you can add a lot of value through any projects you undertake, which can justify the money borrowed against your home.
What Happens After You Apply to Refinance Your Mortgage?
After you complete your loan application, many other people spring into action behind the scenes.
The title company will open an escrow file and begin inspecting the title of your property. An appraiser will make an appointment to view your property and take photos in preparation for your appraisal. Appraisers deliver their reports in about a week—sometimes more or less, depending on their workload.
Related: Find out what your home is worth now
Once the underwriter has reviewed your file, you will get a conditional loan approval. The “conditional” aspect of the approval means that there may be some other documents to provide. There may be routine questions about the appraisal, for example; or the underwriter may ask for clarification about notations on your paystub.
When the underwriter has signed off all the conditions, we will send you the Closing Disclosure (CD). This document shows all the final numbers for your loan. Once you have received the CD, you must wait three business days before you can sign loan documents.
You’ll sign your loan package with a notary, who will acknowledge your signature. Then, if you are refinancing your residence (rather than an investment property), you’ll have to wait three business days more (“rescission period”) before the loan can close escrow.
If you sign loan documents on Thursday, for example, the rescission runs from Friday to Monday at midnight (Saturdays count, Sundays and Holidays don’t) and the loan would fund on Tuesday.
Your Next Steps
Although we’ve addressed what happens behind the scenes once you’ve applied for a refinance, there are many other factors, tips, and tricks you can learn about the process.
Find out more by downloading our ebook How to Refinance Before Mortgage Rates Go Up.
Ready to Apply For a Mortgage?
Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington serving the entire state, as well as Oregon, Idaho, and Colorado, and we have been doing so since 1992. We offer many mortgage programs to buyers all over the Pacific Northwest. Contact us today with any questions you have about mortgages.