November 27, 2019

SMART FAQs About Refinancing Your Mortgage

SMART FAQs About Refinancing Your Mortgage

Disclaimer: The FAQs listed here are for informational purposes only. For specific questions, please consult your loan officer or mortgage consultant.

The term “refinance” frequently gets tossed around in the real estate industry, but do you really know what it means?

To refinance your mortgage is to pay off your old loan with an entirely new loan that may have entirely new terms. Refinance could also mean adding an additional mortgage without paying off any loans. There are several reasons why refinancing is an attractive option, including:

  • To get a lower interest rate
  • To have a lower monthly payment
  • To get better repayment terms (10-year, 15-year, or 30-year)
  • To reduce your risk with a fixed-rate loan
  • To pay off other debts or home expenses
  • To get cash out of the equity in your property

We receive many questions regarding refinances, so we compiled a list of our most frequently asked refi questions! Be sure to contact a SMART Agent if you think refinancing is a good option for you.

How do I close out my old loan?

The current mortgage that is being paid off at closing receives a payoff that includes seven days of daily interest beyond the date of disbursement from an escrow company like SMART. This money is routinely collected to ensure complete payoff and closure of the old mortgage. A payoff short by even a dollar can be rejected by the lender, and in that case, the lender continues to collect daily interest. The cushion is there to protect the borrower from a situation like that. The old lender will refund any excess daily interest it receives, as well as any funds sitting in the lender’s escrow account, via mailed check. This refund takes about two to three weeks from your closing to process.

What are the best practices for closing out my old loan?

  • Be mindful of the disbursement date when deciding when to stop making mortgage payments. Late fees on the old mortgage will accrue for payments made after the 15th of the month.
  • Autopay for the old mortgage should be turned off because SMART’s payoff of the mortgage does not necessarily extinguish the autopay. Luckily, all overpayments must soon be refunded by the old lender, so it is better to pay too much than too little.
  • Typically, the title company is not made aware of the escrow balance for the old loan. In rare cases, it is listed on the payoff, but you should assume your title company does not have that information. The borrower is in the best position to check the balance on their escrow account directly with the lender.
How much equity do I need in order to refinance?

This answer depends on the type of loan you get and the requirements of your lender. Generally, lenders require between 5% and 20% equity for conventional mortgage loans. However, if you refinance to an FHA home loan, only 3% equity is required. Keep in mind that your home will likely be appraised when refinancing to reflect its current value, which could affect your current equity.

What does it cost to refinance?

There are a few ways the refinance costs are structured. Closing costs range between 2-5% of the mortgage balance. Some lenders waive these fees in exchange for a higher interest rate, and some lenders add the closing costs to the balance of your mortgage. It is also important to find out if your current mortgage lender has a pre-payment penalty clause and to know your place in the amortization process.

Do I need to have good credit to refinance?

Refinancing creates a brand new mortgage loan, and as with any loan, you must apply for it and be approved. The lender will check your credit and income in that process. If a conventional lender denies your application and your score is 620 or higher, consider refinancing with an FHA home loan.

Do I refinance through my current lender?

You are free to choose your refinance lender, but many homeowners choose to use the same lender because it has your payment history, offers competitive rates, and often waives some of the closing costs. For example, Smart 4 Life means that customers who close with Smart are guaranteed the lowest fees for life.

What is a “cash-out” refinance?

Some homeowners choose to refinance because they need cash for other expenses, such as home improvements or debt consolidation. The cash-out refinance loan is a new home loan that pays you the difference between your home’s value and your mortgage balance. The cash from the loan is paid to you at closing.

Can I cancel my refinance loan?

Principal residence refinances are subject to a three-day rescission period. Per federal statute, the borrower has the right to cancel the loan within three full business days, not including the closing date. This time period cannot be waived. This means that the signed documents and funds are held in escrow until the rescission period has expired, and only then does the loan fund. The closing disclosure will have both a closing date and a disbursement date on the top of Page 1.

Does my second mortgage affect my chance to refinance?

A second mortgage occurs when you use your equity to receive a loan or line of credit. Second mortgages are considered riskier than first mortgages, so you may find that lenders require that you pay off those encumbrances before refinancing.

For additional information on this topic contact Evelyn Miller, Partner, at 202-753-7400.

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