There are many reasons to refinance. Primary among them are:
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Get a copy of your credit report & correct any potential problems |
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Correct any potential problems before your loan starts. |
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Know your recission rights |
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In California, after you sign your loan documents on a refinance (this doesn't apply to purchase loans), you have three days to rescind the loan if you realize that it is not in your best interest. Therefore, if you felt pressure at the signing and are having second thoughts, you have three days (Mon-Sat – Sunday is not counted) to call off the deal. |
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Don't make “apples” to “oranges” rate comparisons |
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Your neighbor may say they got a fantastic rate that is much lower than the ones you're looking at. There are many variables that affect rate. Does your neighbor have an adjustable mortgage where yours is fixed? Does your neighbor have a stellar credit score while yours is in the middle? Could your neighbor provide full documentation to show income while your income needed to be stated? All of these factors dramatically affect the programs and interest rates available. And finally, as is common in many money manners, your neighbor may be fibbing. |
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Make sure you know the costs of refinancing |
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Consider all of the costs that may be associated with your refinances. You will most likely have to pay for an appraisal. Your current mortgage may have a pre-payment penalty that means that if you pay off the current loan (refinance to a new lender), there is a monetary penalty. There may also origination fees, credit report fees, administration fees, etc. Ask your loan officer for a Good Faith Estimate that will provide an estimate of the costs of doing the refinance. |
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Write a letter to explain how you will use cash proceeds |
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Many lenders want to know what the cash will be used for. Work with your loan officer to draft a letter that explains the intended xxx of the loan proceeds. This will make the lender more comfortable and increase the chances of you getting the best loan. |
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Get your financial documents in order before applying for the refinace |
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If you are salaried and want to provide full documentation (to get the best rate), have 2 years of W2s and your current paystub ready. If self-employed, you can still use full documentation by providing 2 years tax returns and the current year-to-date profit/loss statement for the business. You should also have 2 months bank statements to show funds. Many lenders want to see cash reserves to make sure that the borrower can handle the new higher payment. You may also need to provide a divorce decree to show alimony or child support payments. |
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Get a pre-qualification or a pre-approval |
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A pre-qualification is a letter that states that you qualify for a loan based on basic submitted information. |
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Consider your future moving plans |
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If you believe you will move out of the house in the next few years, an Adjustable-Rate mortgage can save you a great deal of money. You can obtain a mixed fixed/adjustable. A 5/1 ARM, for example, keeps the rate fixed for five years and then the rate becomes adjustable. Therefore, if you sell your home in 4 years, you've been paying the lower rate of an ARM for that time. |
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Examine pre-payment penalties on your current and new loan |
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When you take out a new loan, some loan programs include a pre-payment penalty. Lenders spend a great deal of time, money, and energy setting up a loan so they can earn money over time through the payment of interest. If a loan is paid off immediately, the lender gets very little return for their investment. For this reason, pre-payment penalties charge a percentage fee if the loan is paid off early. They are largely utilized so a borrower doesn't take a loan with them and then immediately refinance with another lender. There are two types of pre-pays: soft and hard. A soft pre-pay is only charged in the case of a refinance. If you sell your home, no penalty is charged. A hard pre-pay is charged regardless of whether you refinance or pay off the loan by selling your house. In California , pre-pay penalties can only exist for the first 5 years of the loan. |
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Consider the timeline |
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On average, a refinance should take 30 days or less. The time it takes to complete the loan depends upon the complexity of the loan, but it's rare for a refinance to go over 45 days. Nonetheless, a refinance can seldom be completed in under 3 weeks. If you need money immediately, it is typically in your best interest to look to other methods of financing. |
