DAVE: All these papers? You’re either a professor or a lawyer.
ALINE: Thanks for helping—
DAVE: Which is it?
ALINE: Thanks for helping.
DAVE: I say, I say think of the trees.
ALINE: I’m…I’m refinancing.
DAVE: Like the Lorax.
Aline’s had her condo for at least five years, but her long term boyfriend Clive has moved out, and she’s changing jobs. It’s time to refinance that sucker. So what does that mean?
SFGate’s Home Guide provides this useful summary:
People get mortgages to make home purchases possible, but falling interest rates and other economic factors might spur borrowers to look for ways to save money on the loans. Refinancing provides an option for homeowners to reduce monthly payments or pay less interest over the course of the loan.
Refinancing means basically applying for a loan all over again. Lenders require new home appraisals for refinance transactions, even if the original appraisal is only a few years old. They also generally require verification of employment, family income and ongoing debts. A caveat in the refinance process is that any changes to the applicant’s status since the approval of the original loan reveal themselves. Recent drops in savings accounts, for example, might serve as red flags for lenders.
Refinancing trades the original loan for another loan with rates and terms that better serve the financial interests of the homeowner. Borrowers can choose between 15- and 30-year terms, and fixed vs. variable interest rate loans.
Benefits of refinancing include saving money on monthly mortgage payments, which can free a homeowner from burdensome or sometimes unaffordable loans. The lower payments homeowners make after refinancing free up cash for them to save or spend on other necessities. When owners change a 30-year mortgage to a 15-year mortgage, they potentially save thousands of dollars in interest over the life of the loan. Refinancing an adjustable-rate mortgage into a fixed-rate loan provides homeowners the security of an interest rate that locks in and stays the same over the loan term. Their new monthly mortgage amount stays the same, too, over the life of the loan.
Refinancing has fees associated with it, so owners must spend enough time in the home to recoup the investment they made with the savings gained by refinancing. Those considering selling in a few years might be better off just sticking with the mortgage they currently have.
Realtor.com urges you to watch out for the following potential obstacles to the re-fi:
Four potential problems you might face:
– You just refinanced a short while ago.
– Your credit score has gone down.
– You missed a payment on your current mortgage.
– You moved out of your home, making it an investment home.
If you just got a mortgage loan, you will need to wait before refinancing. Some lenders will allow you to refinance after one year, others will want a longer period. On the whole, lenders don’t like the idea that you are refinancing often. They make their money on longer term mortgage loans.
If your credit score went down, you might not be eligible to refinance. Or if you are able to, the rates might not be as favorable for you. Lenders give better rates to borrowers with excellent credit.
If you have recently missed even one payment on your mortgage, you probably will not be eligible for a mortgage for a year or two. Not only will your credit score plummet, but lenders especially look at your mortgage history when considering a loan for you. They worry that if you missed a payment once, it could become a pattern. It makes them nervous.