Financial knowledge: refinance

Refinance is “refinancing,” specifically the financial process of reapplying for a new loan to pay off an existing loan. The new loan will have a lower interest rate than the existing one, which will significantly help you reduce your monthly payments and improve your current financial situation and ability to pay.

When do I need to refinance?

Get a lower interest rate. The main reason to refinance is to get a lower interest rate, which can help you reduce your monthly payments and save you a lot of money. Whether or not you can get a lower interest rate depends on a number of factors, such as an epidemic that leads to a downturn in the economy and lower interest rates; Your credit score goes up, your other liabilities go down, and so on.

2. Adjust the term of the loan. During the application process, the loan term can be re-selected, such as shortening the existing 30-year loan to 15 years, so that the loan can be repaid in advance.
3. Change the type of loan. Replace the adjustable loan Rate (ARM) with a Fixed Rate, which can help you reduce losses and save interest to the greatest extent when interest rates fluctuate greatly during the economic downturn.

4.Remove insurance from loans. If you buy a house with a down payment of less than 20%, you need to pay for loan insurance. When you refinance, if the loan is less than 80% of the home’s value, you don’t need to continue paying mortgage insurance.

5. Consolidate multiple loans. If you have multiple loans, refinancing can help you consolidate multiple loans into one, which can lead to a lower interest rate and improve your credit.
6. Take cash out of a loan. If a loan has been paid off for a while, you can Refinance it with a portion of your cash-out Cash that you can use elsewhere. For example, as a down payment to invest in other properties.

How do I refinance?

The process of refinancing and applying for a new loan is almost the same. When applying for a new loan, due to the tight time to buy a house, I can not fully compare the interest rate and various fees offered by several banks. You have a lot more freedom to refinance. You can contact several banks, shop around, and find a loan that you’re happy with. Generally speaking, refinancing can be divided into eight steps.

1. Identify your needs. First, make sure you know your main purpose for refinancing, whether it’s to get a lower interest rate, shorten the term of the loan, consolidate multiple loans or cash out of the loan.
2. Prepare your materials. In this stage, I will find out the materials when I applied for the loan before, and update them accordingly according to my current situation, such as my current address, contact information, job employer, latest income and so on.
3. Set goals. According to the current average loan interest rate, combined with their own credit rating to determine the desired target interest rate. Then use the Loan Calculator widget [Link] to figure out how much you’ll pay each month after refinancing.
4. Shop around. There are four types of institutions in the United States where you can refinance your loan: banks and Mortgage banks, Credit unions, Mortgage lenders, and Mortgage brokers. Each of these four types of organizations has advantages and disadvantages, which we will discuss in detail later. You can apply for a Loan from any of these institutions and get a Loan Estimate.
5. Submit your application. Follow the interest rate and fees in step 4 to figure out where to apply for a loan. A designated Loan Officer/Loan Originator will contact you and submit all the documents you need for the Loan application, such as your tax return record, certificate of deposit, social security number, etc.
6. Lock the Rate. The loan officer will lock in a mutually satisfactory loan rate based on your application materials. The term of the rate lock is generally 30 days.
7. Appraisal the property. Evaluating the value of a property needs to be done by a special housing surveyor. The specific choice of which inspection institutions, can be based on the service evaluation and quotation to choose their own satisfaction.
8. Closing the loan. The lender will issue a Closing Disclosure on the loan, which will list all the detailed information, including the terms of the loan, the final interest rate, the monthly payment amount, the loan fee, and which fees are paid by the lender and which fees are paid by the borrower.

What are the fees for refinancing?

What are the cautions for refinancing?

1. The total cost of the loan. The above list of common refinancing fees can add up to thousands of dollars. Before refinancing, be sure to talk to your lender and find out what the lender’s fees are.
2. Real estate valuations go down instead of up. Property valuation will directly affect the final interest rate and fees offered by the lending institutions. If the property’s valuation declines from the time of the loan, the total cost of the eventual refinancing could be higher than expected.
3. Read the loan documents carefully. The Closing Disclosure issued by the final lender can be as many as hundreds of pages, which involves various information, including monthly expenses and long-term liabilities. It is recommended to read each clause carefully and communicate clearly with the lending institution before signing.
4. No loan fees. According to [ClosingCorp, 2020], refinancing fees cost an average of $5,749. To put that in perspective, these fees can range from 2% to 6% of the total amount of a loan. For example, for a $200,000 loan, fees can range from $4,000 to $12,000. A few lenders will launch a loan that Costs No Closing or Zero Closing. There are usually two ways to do this. One is to add the fee to the loan amount. For example, if the loan amount is $200,000 and the fee is $6,000, you actually end up needing the loan amount of $206,000. The other way is to raise the interest rate, for example, on the same $200,000 loan, the interest rate is fixed at 3 percent for 30 years, but the final loan will raise you to 3.5 percent. The benefit is that the fee is spread evenly across your monthly payments, reducing the financial strain of taking out a loan. But it’s also important to carefully calculate whether your long-term payments will increase.