The Refinance Process: Is It Right for Me?

Are you ready to pay less in interest on your mortgage and lower your monthly payments? A refinance may be the right step for you.

A mortgage refinance is the replacement of an existing mortgage with another mortgage under different terms. Mortgage refinancing can lower your monthly payments, which can add up to significant savings.

Knowing your current refinance mortgage rates is important. American Home Lending USA, LLC can keep you informed and help decide when a refinance may be best.

Reasons to consider a mortgage refinance:

• Reduce your monthly mortgage payment: Mortgage rates are still very low. A refinance with American Home Lending USA, LLC may help you lower payment and possibly save you money.
• Consolidate high interest debt: You could pay off those higher-interest debts by refinancing with a lower rate. Even with less-than-perfect credit, we can help you lower your monthly payment and pay off your higher-interest debt. By consolidating your payments into one low monthly payment, you can pay less each month, lower your debt, and improve your credit score.
• Pay Off Your Mortgage Faster: The shorter the term on your mortgage, the lower your mortgage rate. Did you know that you may be able to take advantage of today’s competitive rates by shortening the term of your loan (which means paying less interest) without a significant change in your monthly payment?
• Switch to a different loan product: If you have an adjustable-rate (ARM) or a balloon mortgage, reduced interest rates may make a fixed-rate mortgage more desirable, especially if you want the stability of an interest rate that does not change over time.

We offer information on a variety of mortgage refinancing rates and options. When you are ready to take the next step, contact us today for a free, no obligation mortgage rate quote. We can advise you on which mortgage refinancing program meets your needs.

To determine whether a refinance might be right for you, you should begin to think about the following questions:

• What are your reasons for refinancing?
• How long you plan to stay in your home?
• How much equity you have built up in your home?
• What is the interest rate of the existing mortgage?
• What is the interest rate of the new mortgage?
• What costs are associated with refinancing?
• What is your current income and credit status?

Why Refinance?

A refinance of your current loan may make sense for several reasons:

You may want to get a mortgage with a lower interest rate to reduce your monthly payment.

You may want to borrow additional funds for home improvements, education bills, or other needs. This is often referred to as a "cash-out" refinance.

You may want to switch from one type of loan product to another: for example, from an adjustable-rate loan (ARM) to a fixed-rate loan. This may make sense if interest rates have fallen since you took out your ARM and you now want the assurance that your mortgage payment will remain the same for the life of your loan.

One common type of refinance is when you have an adjustable-rate mortgage and you refinance to a fixed-rate mortgage. Your mortgage payments with an ARM adjust with changes in market rates; so when interest rates go up, your monthly payments likely go up at the next rate adjustment period. But with a fixed-rate mortgage, your interest rate stays the same for the entire term of your loan. The predictability that comes with locking in the same interest rate for as long as you live in your home is one reason why changing from an adjustable-rate mortgage to a fixed-rate loan is one of the more popular refinancing choices -- especially when interest rates are falling.

Another reason to refinance is to use the equity in your home, perhaps for a major purchase, a child's education, or even debt consolidation. You have been building equity in your home since you first started making monthly mortgage payments. A portion of your payments is used to pay principal -- helping you build equity -- and the rest is used to pay interest, taxes, and insurance. With this type of refinance -- often referred to as a "cash-out" refinance -- your new loan lets you draw on the equity in your home and provides an easy way to get cash you may need for other purposes.

Refinancing: Beneath the Surface

Refinancing can do a lot for you. From lowering your mortgage and interest rate, to getting a shorter loan term, to absolving your spouse from the deed, to trading an ARM for a fixed rate, to protecting yourself in case of a job layoff, refinancing can be used as a serious strategy for long term savings.

• Strategy #1 - Don't Wait to get Lower Rates Refinancing generally becomes cost effective when current interest rates are lower than your current mortgage rate. This strategy may lower your monthly payments as well as the interest over the life of the loan. For example, say you have a $300,000 30-year loan at a fixed rate of 7%. You refinance at 6.5% which will save you approximately $100.00 a month, and about $35,000 in interest over the life of the loan.
• Strategy #2 - Less is More By reducing your loan term from 30 years to a 10, 15 or 20- year loan, not only can you speed up the equity process, but you can lower the total interest rates and pay more towards the principle. Robert Benson moved into his house 6 years ago with a salary of $23,000. Robert now owns his own business and makes $60,000. By shortening his loan term, he will pay a slightly higher mortgage, but he can afford it. He will also be able to pay off his home loan before he retires.
• Strategy #3 - Separate When You Separate If you are divorced, you can remove your ex-spouses name from the deed by refinancing, because, in a refinancing, the old loan is paid off and you get a new one. Consider Gretchen and Byron Martin, who divorced 6 months ago. Byron leaves the house to Gretchen, who is able to afford the mortgage by herself. Now Gretchen can refinance and change her interest rate from 7.5% to 6%. Refinancing will also make her solely responsible for the property.
• Strategy #4 - Take the Surprise out of an ARM and get it FIXED When interest rates run high, many owners take advantage of an Adjustable Rate Mortgage (ARM) which tend to offer great introductory interest rates. However, the key word is "adjust". Your interest rate could change considerably after a specific time period. Trading in your ARM for a fixed rate is another effective refinance strategy. Jason and Renee moved in their house 5 years ago. They were offered a loan with a fixed interest rate of 8%. Instead, they opted for a five-year arm of 5.59%, which was due to adjust in five years. After their initial 5-year rate period expires, their mortgage rate, which resets based on the one-year Treasury rate, could increase by two points a year or more. Since they plan to stay in their house, it makes sense for them to refinance now to get a new loan with a fixed rate of 6%.
• Strategy #5 - Don't Let A Layoff Force You to Layoff Mortgage Payments With such a volatile economy, layoffs and pay reductions have become common. One of the ways you can protect your home after being laid off, is to refinance for more than the balance and put the difference in a safe place. This strategy is called "cashing out". Linda, who works in Human Resources for her company, found out they were going to lay off 70 people. She wondered if she would be one of them. With no children and no car note, Linda only worried about her mortgage. She pays $1,538 a month on a $200,000 30 year-fixed loan at an 8.5% interest rate. She refinanced at 7.5%, and is able to borrow an extra $20,000 to put aside just in case she's one out of 70.

Refinancing: Myths vs. Facts

There are times in the mortgage industry when the market dictates certain advantages: Whether it's a good time to buy or sell a home for instance. You may have several reasons for wanting to pay off your old loan and secure a new loan through refinancing. Listed below are a few popular myths/misperceptions about refinancing.

Myths and Facts

• Myth #1 Refinancing simply means making a few changes to my mortgage. Fact #1 Refinancing is the process of acquiring a brand new mortgage, and using the money to pay off or close your old mortgage.
• Myth #2 When the Federal Reserve cut the rates again, I'll get a super deal. Fact #2 Federal rate cuts don't always mean mortgage rates will be lower. Generally, Fed rate reductions are figured into mortgage rates weeks before an anticipated rate cut occurs through Treasury yields.
• Myth #3 It's going to cost me too much to refinance. Fact# 3 Probably not. Because this is such a competitive environment for refinancing, you may be able to convince a mortgage company to waive some of the application, appraisal and legal fees, which can run you up to $3,000. Also, work with your lender to figure out how much you can save each month. With a good deal, you will be able to recover your refinance costs in a couple of years and save thousands of dollars in interest over the life of the loan.
• Myth #4 There are always penalties for paying off my loan early. Fact #4 Some states prohibit penalty points for paying off an original loan before amortization. The cost of a refinance depends on the number of points, interest rates and other costs for securing the loan.
• Myth # 5 The only time to refinance is if current interest rates drop a full 2% below my rate. Fact # 5 As the amount of loans increase, and the cost of refinancing stays relatively stable, a mortgage rate ranging from 3/8 to 1/2 a percentage point may make sense to refinance, and save you thousands of dollars. For example, a fixed 30 - year $200,000 loan, borrowed at 7% compared to 7.5%, will save more than $24,000 throughout the life of the loan.
• Myth #6 It's ok for me to refinance with less than perfect credit. Fact #6 Although you may be eligible for a refinance due to the amount of equity in your home, where you stand with your credit could make a substantial difference in the rate you will be offered.

Refinancing: Popular Questions

Buying a house is probably one of the largest purchases you'll ever make. Refinancing is probably one of the smartest strategies you can accomplish to save thousands of dollars in your investment. Although there's a lot of general information about refinancing, it's good to know the specifics. Here are answers to some commonly asked questions:

Popular Questions

When does it make sense to refinance? People usually refinance for 3 basic reasons:

• To lower their interest rate - Will save thousands of dollars over the term of the loan.
• Extend/Change the term of their mortgage - Switch mortgage products (i.e. Adjustable Rate Mortgage to a Fixed Rate or change the term of the loan from 30 years to 15 years to save thousands of dollars in interest).
• To get cash out - Leverage the value in your home by using the cash received at closing for a large purchase, such as college tuition or renovation.

What factors should I consider before refinancing? There are a few things to consider before you begin the process of refinancing:

• Your reasons for refinancing.
• Your current interest rate.
• The interest rate of the new mortgage (should be 1 to 2 points lower than current rate, say from 6% to 4%).
• The total cost of refinancing (includes title, appraisal, legal, inspection, origination, settlement fees, discount points, etc.).
• The equity you have in your home (at least 5% to qualify).
• The length of time you plan to stay in your home (is it worth it to refinance, when it's going to take 3 years to recover your costs and you plan to move in two?).
• Credit (in good standing).
• Current Income.
• Tax Benefits (know IRS refinance rules).
• Time it takes to recover your refinance costs (up to three years).

What are the different types of refinancing? There are several refinance options available to suit your needs:

Traditional - With this type of financing, you will pay off your existing loan and secure a new one at a lower interest rate. Refinancing is structured to save you thousands of dollars over the life, or term, of the loan.

Accrue Equity more Quickly - In an attempt to build value (equity) faster, you can refinance a 30-year mortgage with a 15 or 10 year loan. This will lower your total interest and accelerate the equity in your home. Equity is defined as the value of your home minus what you have left to pay on your mortgage.

Cash Out - With this refinancing option, you can leverage the equity in your home, and receive the cash when you close on your loan.

Low Cost Refinancing - You may be able to get some of the fees and closing costs waived, which will reduce your up front fees. By negotiating with your original lender, you may be able to get a reprieve on point reduction, title search, application or credit check fees.

No-cost Refinancing - This type of refinancing will save you out-of-pocket costs during closing. However, it's important to note that you may pay a slightly higher interest rate.

Mortgage Product Change - You may be able to benefit from switching mortgage products. For instance, say you originally financed with an Adjustable Rate Mortgage (ARM) when rates were higher. Typically, ARMS have lower interest rates than fixed loans for the first few years. But, now that you've been in your home a while, you may prefer a mortgage that is more stable than an unpredictable ARM. Consider refinancing to a fixed rate loan, which will remain the same until you've paid off your mortgage.

How much will a refinance cost me? Your total expenses for a refinance depends on the number of points, interest rate, and associated costs of preparing the loan. In an effort to provide you with a low rate, a lender may charge discount points that average three to six percent of the borrowed amount. If you have a $100,000 mortgage, 3 to 6% will cost you $3,000 to $6,000 to close.  Contact us today to obtain a free quote.

Can I change my mind? Yes. You have three days to change your mind about the loan. Officially, it is called your right to rescission. According to federal law, you are allowed to cancel the refinance process after settlement, receipt of your Closing Disclosure (CD), or receipt of your cancellation notice. You are required to put your rescission in writing.

Refinance Essentials: The Nuts and Bolts

Refinancing may save you thousands of dollars over the life of your loan. Here's how:

The "IF" Factor

• If the current interest rate is at least 1.5 to 2% points lower than the rate you originally financed,
• If you've been in your house long enough to build equity,
• If you bought your house with equity (i.e. foreclosure),
• If you need a large sum of money (i.e. cash-out),
• If you can convert your 30 year mortgage to a 20 or 15 year mortgage, shortening your term and reducing your interest rate,
• If you can convert an Adjustable Rate Mortgage (ARM) to a fixed rate or an ARM with better terms,

You may want to consider refinancing.

How Does a Refinance Work?

The refinancing process is similar to the one you followed when you got your first mortgage loan. The four-step process is listed below:

1. Check Your Credit

You should order a copy of your credit report and review it before beginning the refinance process. Please check our resources Web page for more information in obtaining your free annual credit report.  You can also order a credit report by contacting one of the major credit bureaus:

Equifax: (800) 685-1111; www.equifax.com 

Experian: (800) 682-7654; www.experian.com 

Trans Union: (800) 916-8800; www.tuc.com 

2. Get Your Paperwork Ready

It's likely you will have to provide the lender with documentation and information that are similar to those you submitted for your original loan. This checklist can help you organize your paperwork and get it ready for your new loan application. Check with your lender to find out if additional documentation is required.  For more information on required documents.

Income - W-2s for the past two years - paycheck stub(s) covering the past 30 days (must include year-to-date earnings, name and Social Security number) Note: If you are self-employed, you may also need to submit the most recent years' personal tax returns proof of other income for consideration in loan application such as alimony, child support, or gift letter.

Assets - bank statements covering the past 3 months for all savings accounts, checking accounts, 401(k) accounts, and any other asset account

Debts - documentation for liabilities -- most recent loan statement for current mortgage, student loan, car leases/loans, and credit card debts, as well as alimony and child support, if applicable

Other original property settlement documents -- deed, deed of trust, survey, and title policy insurance policies -- homeowner and flood, if applicable insurance policies -- homeowner and flood, if applicable.

3. Apply for Financing

Figure out the type of mortgage that best meets your needs.

Decide whether you want to tap into some of the equity in your home by applying for a "cash-out" refi, or whether you prefer to minimize up front costs by a "no-cost" refi.

Contact a loan officer for advice on how best to accomplish your financial goals.

Discuss with the loan officer interest rate lock options and when best to lock in a rate.

Be sure to review your disclosures (which should be given to you at application or within 3 days), in particular:

Loan Estimate, which estimates your closing costs.

Find out how long the process will take before you get a commitment and can close the transaction. Generally, refinances are processed much faster than purchase loans. Check that your rate lock extends to the scheduled closing date (and a little beyond for safety).

4. Close the Loan

You have the option of choosing your own settlement attorney or using the one recommended by the lender. The closing attorney and lender will coordinate all the necessary paperwork. Request a copy of the settlement statement (also called the Closing Disclosure) prior to closing so that you can review all the costs. Unless you are getting a "no-cost" refi, you will need to bring a cashier's check to settlement.

When you refinance, you have 3 business days after closing in which to change your mind and rescind the transaction. This is called the rescission period. Until that time is over, no funds are disbursed, so your old mortgage is not paid off and your new mortgage is not funded. If you do have a change of mind, you must notify the settlement attorney in writing by midnight of the third day.

Refinancing: Things You Should Know

Now that Refinancing is popular, it is important for you to understand that there could be some companies that might try to take advantage of you. From giving you phony rates over the telephone to adding ridiculous hidden costs in your loan, some financial companies will do anything to make money off of you. Here are some tips to make sure that you get the most out of your refinance experience:

Many new companies will try and get a slice of the refinance pie. Lack of experience, no reputation, and no company history are just a few of the factors that can contribute towards a bad deal.

What should you do? Ask lots of questions and make sure you feel comfortable with their level of service. Make sure you understand every aspect of your refinance process.

Know What Questions to Ask
It takes more than calling a lender and asking "What's your rate?" A lender could tell you the rates are at an all time low of 1.99%. But what they don't tell you is that there are three origination points involved. It is your responsibility to ask about the conditions of the rate, talk about the kind of loan you need, i.e. cash-out, low-cost refinance, lock period, etc. Did you know that a loan with a lock period of 15 days is much lower than 60 days?

Refinance for the right reasons
Don't exchange one debt problem for another. Aggressive debt collectors may be putting the pressure on you to pay outstanding medical expenses, credit card debt, etc. You may feel that by refinancing your property and receiving a "cash out " payment, everything will be ok. Make sure you understand that "cash out" refinancing might mean that you owe even more debt, especially if you use your house as collateral to consolidate debt. A higher mortgage loan balance may mean you need to make a bigger monthly mortgage payment when you're trying to save money with penalties, charges and fees. You need to understand that if you fall behind on your mortgage payments, the lender can take your home in a foreclosure on the mortgage loan.

3 is the magic number
You have a right to change your mind about the refinance process. The law says you have 3 days to cancel a refinance deal. It is called the right to recision. So if you feel you have erred, or refinancing isn't for you at this time, you may opt out by signing a letter with the date and cancellation of the transaction.

The Costs of Refinancing

If you are considering refinancing your existing mortgage, it is important to understand the costs and fees you'll have to pay and how long it will take you to recover those costs. This article provides in-depth information about refinancing, and takes away the questions about how the money is allocated during the process.

What You Can Expect To Pay

Refinancing is similar to applying for an original mortgage, so you can expect to pay similar costs. Some of these may include:

• A fee for a search of the public record of ownership of your property.
• A title insurance policy, which protects the lender for any loss due to a discrepancy in the title (you may be able to have your settlement company re-issue your current title policy at a reduced rate, saving you some of the cost to have this service performed).
• A fee to have your property appraised.
• A new survey of your property to confirm that no changes to the land or physical structures have been made that would affect its potential sale.
• A loan origination fee, which covers the lender's work in evaluating and processing your loan. It is usually expressed as a percentage of your loan.
• Other fees, depending on the type of mortgage refinancing you are seeking, may include a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance.

Other Costs and Considerations

Some refinance costs may be waived under certain circumstances. For example, an appraisal may not be necessary.  Or you may be able to get a lower rate or have some of the fees dismissed with through negotiation.

If you have additional cash for the closing, you may be able to bring your interest rate down by having discount points applied to your new mortgage. Each discount point equals one percent of the loan amount (for example, one point on a $150,000 mortgage equals $1,500).

Be sure to ask your lender if your existing mortgage contains a prepayment penalty. Many states limit this penalty or prohibit it altogether.

You may choose to hire your own attorney to review documents and to represent and guide you through the stages of this transaction. If you do, you will have to pay your attorney out of your own pocket.

Recouping Your Costs Over Time

An important question to ask before starting the refinance process is "How long will it take to recoup the up-front costs of the refinance?" In some cases, you may have to remain in your home for several years before you have recouped these costs.

To determine if you're likely to recover the fees you pay to refinance within an acceptable amount of time, just divide your total refinancing cost by your total monthly savings. This will show you approximately how long it will take to recover your up-front costs through your lower monthly mortgage payment. If you find it would take longer to recover your costs than you plan to remain in your home, you may not want to refinance your mortgage. Your lender can help you make this decision.

The Money You Need to Refinance

Financially, refinancing shouldn't hold too many surprises for you. Primarily, you are paying off your old loan and securing a new one. Many of the costs are similar to what you paid when you first closed on your existing property. You may be able to eliminate costs and save even more money during the refinance process.

How Much Money Do You Need?

Today, since market conditions are favorable for refinancing, several lenders offer low to no-cost refinancing in return for a slightly higher interest rate, or increased loan amount. Typically, the lender will build in fees that are usually paid up front to save you out of pocket costs. In the case of low-cost refinancing, you may have to pay something like $500.

Here are a few estimated costs to use as you consider refinancing. Some of these costs may not be charged in your situation. It's also important to remember that these costs are estimates; your actual costs will vary depending on lender and state.

• Appraisal Fee: $350 - $650
• Survey costs: $125 - $300
• Hazard Insurance: $300 - $600
• Legal Fees: $75 - $200
• These fees will pay for the attorney used for closing on behalf of the lender.
• Title Fees: $450 - $1000

This will cover the amount of cost of a policy insuring the policyholder for a certain dollar amount to cover property loss. The fee will also include the cost to examine public records to validate the property owner.

• Home Inspection: $300 - $650
• Points: 1 - 3% of loan amount.

Defined as the percentage of fees the lender will charge to originate, or prepare the loan, there are two kinds of points; origination and discount. Discount points are prepaid finance charges to help you get a lower interest rate. One point is equal to 1% of the value of the mortgage. So, if your property is valued at $100,000, a point is equal to $1,000.

Other - Whether your mortgage loan is FHA, Conventional or VA, you may have to pay for a VA loan guarantee, FHA or Private Mortgage Insurance (PMI), or pre-payment penalties.

As you can see, your costs for refinancing can add up. However, talk to your lender, as they may waive some of these costs, such as title search, inspections and surveys. Make sure you ask specific questions, and ask them to present you with an itemization of charges before closing.

The Refinancing Process

Thinking about refinancing your mortgage but feeling unsure about the process? Are you wondering if you can lower your monthly mortgage payment but aren't sure if it would be worth the cost of refinancing?

The refinancing process is similar to the one you followed when you got your first mortgage. In a nutshell, refinancing involves paying off your existing mortgage and taking out a new one. Your new mortgage could be at a more attractive interest rate, for a different term, or an entirely different type of mortgage (such as refinancing from a fixed-rate to an adjustable-rate mortgage).

A good place to start when considering whether to refinance is to ask yourself several questions. How long do you plan to stay in your home? Is the current mortgage interest rate more attractive than the one you have? How much equity do you have in your home?

You may want to take advantage of lower interest rates to reduce your monthly mortgage payments or you may want to build equity in your home faster by refinancing to a shorter-term mortgage. Ask several lenders about the interest rates they offer, as well as any costs associated with refinancing.

Required Documents

• Past two (2) years W-2 statements
• Pay Stubs covering the last (30) thirty days
• Three most recent monthly bank statements
• Most recent transaction summary of 401K, IRA, or Mutual Fund Accounts
• Photocopies of any stocks or certificates of deposits
• Copy of the purchase and sale agreement
• If you are currently renting….either 12 months canceled rent checks or the name and address of your current landlord
• If divorced…a fully executed divorce decree
• For a refinance...a copy of the deed, and most recent tax bill
• A letter of explanation for any known credit problems

For self employed borrowers, employed in sales, paid by commission, or owns rental real estate:

• Two (2) years signed personal tax returns - including all schedules
• If self-employed through a corporation, last two years corporate returns as well as a year-to-date profit and loss statement and balance sheet

Different programs require varying amounts of documentation. The loan program you select may require more or less documentation. Please contact us for a free, no-obligation consultation.