How does a mortgage refinance work?

If you’ve decided that you want to refinance your mortgage, for whatever reason, some examples of reasons to refinance are annotated over at Boston mortgage refinance, but you can refinance with a no closing cost mortgage by taking a higher interest rate. Like I’ve mentioned in prior posts, if you don’t believe you will be in your house for longer than a few years, a no closing cost mortgage is the way to go so that your not sitting on large closing costs that you incurred by refinancing.

So how does a mortgage refinance work? I’ll try to explain it in a way that is easily understandable and you can use this information while you refinance your mortgage. Be mindful that different states and localities have different ways of doing business, so if you live in Philadelphia, you may want to check up on important Philadelphia refinance information.

In the beginning, you found a house you wanted to purchase and used a purchase mortgage to acquire said house. You went with a broker or lender and filled out the paperwork and everything worked out well and now you ‘own’ your house, or are making payments towards owning your house. Since you purchased your house the mortgage rate has gone down or because of reasons listed above, you have decided that you want to refinance your mortgage to a lower rate.

You should research different lenders and speak to a couple of mortgage brokers to get a handle on the fees they charge to give you a loan. When it comes to fees, there are lender fees, and then there are third party fees. Lender fees are the fees that the lender charges you to give you a loan. They do of course have employees that they have to pay and overhead that they have to pay for as well. The third party fees are the fees charged by people or companies to do work on your loan, for instance the appraiser or title company. Lender fees are controllable by the lender and you can work on those fees with the lender. Third party fees however are not controlled by the lender and they can’t do anything about those fees.

Once you have decided to apply for a mortgage, by law, you are supposed to receive a GFE, or good faith estimate, from the lender outlining all of the different costs or fees that they are guessing will be incurred to give you a loan. Now, I say three days and it is required by law, however, many brokers don’t usually take the time to give you a good faith estimate for whatever reason. This could also potentially be a reason of concern because in my opinion, it could be reflection of the quality of institution or person you are dealing with.

Once you receive that GFE, or get off the phone with the broker and or lender, they will request some documentation from you. The usual documentation requested is your paystubs for the last two months, your W-2 from the last year to see if you earned what you said you earned the year prior, and IRS form which allows the IRS to share your tax information with the lender, and a couple other forms for you to fill out. They may also want all or a few of your checking and or savings account statements to see if you have any money in the bank. They also will need to know who your current mortgage lender is so that they can request a loan payoff and ensure that the amount you are asking for is in line with what you owe unless you are wanting cash out of your house. Now this is not an all encompassing list of the documents they may request, but these forms are normal and you shouldn’t get worried about sharing this information with the lender.

While you are gathering your information, the bank will order an appraisal to find out how much your house is worth so that they are not giving you more money than what the house is worth. The appraiser may want to see the inside of the house, or they may just drive by the house, possibly take some pictures of the outside, and come up with a value for your house. If they want to see the inside of your house, they will make an appointment with you so that they can get into your house and see what it looks like. Coming up with a value for the house is not just what this person may or may not think it’s worth, but they use information from houses around you as far as how much have they sold for, then they make adjustments to come up with a value for your house. The easiest way to come up with a round about figure is find out how much the houses around you sold for on a per square foot basis. Then, average all those figures out, and then multiply it by how many square feet your house is and you have a figure to see about how much your house is worth.

If you have a HEL or a HELOC, the new lender will ask the old lender for what is called a subordination. What happens when your first mortgage gets paid off is then the second mortgage will jump into the first position. Well, if your new lender is supposed to be in first position, then they will ask the lender of the HEL/HELOC to subordinate, or jump back into second position once the original first mortgage is paid off. Lately however, individuals are having a hard time getting the second mortgage to subordinate. You may have to call and hassle them a little to get them moving and this could potentially hold off your closing until it is accomplished. Some HEL/HELOC lenders also may charge a fee to subordinate. Again, this will also have to paid for.

Once they receive this information, you loan documentation with the application will go to what is called an underwriter. What this person does is review all the documentation and ensure it meets all of the lenders loan requirements. If they don’t like something or feel that something is missing, you may get a request for more information or additional forms. Again, this is normal and nothing to be concerned with. Once this is all completed, the lender will order what is called title insurance. This protects the bank so that if anything comes up like there is a title problem, the property because unmarketable, the lender is protected, the lender is protected.

Once title is completed, then a closing is scheduled so that you can go and sign a bunch of mortgage documents and close on your house. Once that is completed, the forms are sent to the bank and you are almost finished. There is a federal law that protects the borrow from having buyers remorse called the three day right of rescission. Because a mortgage is such a large transaction and most likely the largest most of us will make, they allow you three days to write the lender back and say, never mind, I don’t want this loan anymore. Once those three days are over though, your new lender will send the money to your old lender who will then consider your loan paid off. Something to consider however, is because technically you have money from two banks, you will be paying interest on that money for three days on two different mortgages. That interest expense begins when you sign the paperwork, including weekends. SO, don’t sign your paperwork at the end of the week because you will be paying interest for two extra days while you wait for the weekend to finish. If you sign your closing paperwork on Monday, you pay double interest until Wednesday or three days. If you close on your mortgage on Friday however, your paying interest for five days. The other thing is also to close your mortgage as close to the end of the month as possible to limit how much prepaid interest you have to pay before the end of the month.

For instance, if you close on your mortgage on the fifth of the month, you will pay interest at the closing table from the fifth until the end of the month. If however, you close on your refinance on the 25th, you are only prepaying interest for five to six days only. If your paying your own closing costs, this could be a way to lower your closing costs.

Once this is completed, then the old lender will refund to you any escrow amounts that they may have been holding and make sure you get any money back that you were due because of overpayment or bad calculations. Most people should receive a refund on money although some may not receive any.

This is a shortened description of how a mortgage refinance works. If you are however going to be getting a no closing cost mortgage however, everything will be the same except for the closing costs portion because technically, you are not paying for any of that. The only thing that would apply in a no closing cost mortgage is your closing date. Again, try to get the date to occur early in the week so that you are not paying costs for two mortgages for longer than the prescribe three days.

I am currently still in the middle of my no closing cost refinance with Wells Fargo and will update once I’m finished. Everything however is still the same as I mentioned above and everything has been pretty painless.

No Closing Cost Second Mortgages

Second mortgages are mortgages which are in second position and can be used for a variety of things, vacation, education, remodel, car, whatever. However, I would suggest against using second mortgages for any frivolous items like cars, vacations, etc. Using the money to remodel and improve your house, or higher education would be a wise move though.

There are two kinds of second mortgages. The first one is a Home Equity Loan, or HEL. Just as the name suggests, it is just a loan with a fixed percentage rate for a fixed period of time, whatever that may be, 10, 15, 20, etc. Your payments are always fixed until the loan is paid off. Once the loan is paid off, then the lender will cancel the lien on the house and you are then again able to get another loan. This does not mean that you cannot refinance a HEL, you just have to reapply and get a new loan, which usually pays off the original HEL. Some lenders may have other requirements to allow you to refinance your Home Equity Loan.

HEL's are most useful when used for fixed items and terms because of the way they are designed. If your financial needs may fluctuate as life goes on, then a HELOC may be the best way to go to access to your home equity. Of course, the HEL also allows you to lock in a fixed interest rate. In today's interest environment, that may be the best option. There is a lender out there that is offering a HEL at 4.99% fixed for up to 20 years. Can you imagine paying 4.99% for 20 years? This does not even take into account the interest rate after you take into account the tax deduction for the interest you may pay on it. Needless to say, this is an attractive proposition because nobody can say what the interest rate will look like in 5 years or 20 years, but I doubt it will be this low. We are in uncertain times and that is why the rate is so low currently. One thing to watch out for is if you payoff the HEL too soon, in the case of the lender I mentioned above, 24 months, then you will have to pay for all of the closing costs that lender incurred. This is a pretty standard practice, so if you don't want to pay for the closing costs and make it a truly no closing cost mortgage, then make sure you keep the loan open for 24 months or whatever timeframe your lender requires of you.

The second type of second mortgage is usually called a Home Equity Line of Credit, or HELOC. This is usually a variable interest rate which adjusts as the underlying index adjusts. Many HELOC's are tied to the Prime Rate, which is currently at a very low 3.25%, with an adjustment. Some institutions have a markup, others have no markup, and yet others have a prime -1% markup. As an example, the prime is currently 3.25%, and the lender mentioned above charges prime minus 0.50%. So that institution is currently charging 2.75% for their HELOC's. That is CHEAP money, I don't care who you are, because the effective interest rate is much lower once you take into account the tax benefits for the interest deduction on your taxes. This rate will fluctuate as the prime rate adjusts in this example. With the adjustment of the rate, the payment will also adjust.

Because the HELOC's are variable, they usually let the consumer pull money out of the Line of Credit as required for a fixed period of time. Once that time has expired, then the loan becomes a fixed rate and term loan like a HEL. So your payments will then include both the interest portion as well as the principal portion, therefore, paying down the loan amount. Your payments however will not adjust because the intent is to pay off your loan in the timeframe called for in the loan. Excluding the fixed portion, a HELOC operates much like a credit card. Some lenders actually issue a VISA or Mastercard branded card so that you can access your HELOC.

HELOC's usually also come with an annual fee. This is so ridonkulous in my opinion. The beauty of competition and a capitalist society is there are many different lenders out there who also in the name of competition do not charge an annual fee. I would suggest you go and find one of those lenders and get your loan through them. The lender I referenced above does not charge an annual fee.

In today's current credit environment, many people have been finding that their HELOC's have been cut because of a number of reasons given by the lenders. The home values in the neighborhood you live in could be decreasing and so the lender deems that your LTV has gotten too high and therefore decreases your available credit. The other thing is your credit profile has changed for the worst and therefore the bank wants to limit their exposure to you because of your changed economic situation. They will attempt to close or limit your HELOC availability because of this also.

The other thing that they have been doing is just plain outright closing the line of credit. Needless to say, these actions could not be coming at the worst possible time for you and other consumers I'm sure. The only way I know to prevent this from happening is to take out all the available cash in your Line of Credit. That way you have the cash in your pocket and the lender has no choice but to keep the loan open until you make payments or pay off the loan.

Many people shy away from HELOC's for whatever reason and I understand your debt shy or don't want the temptation or whatever. However, the best time to get your HELOC is when you are fully employed and can show that you can repay the loan. If you apply for a HELOC when you've lost your job, well, that's too late. Would you loan money to a consumer who had no employment and therefore no way to pay you back. Just smart decisions on the part of the bank in my opinion. So go and get that HELOC on your house assuming you have available equity and let it sit at $0.00 balance.

I mentioned that HELOC's were primarily tied to the Prime Rate set by the Federal Reserve board. While a majority of HELOC's I've seen are indeed tied to the Prime Rate, they are not all set to that index. There are many different index's available. There is the LIBOR index and even more rare, the 1 Year Treasury Bond HELOC. The Treasury Bond rates change weekly and are therefore very administratively intensive and cost more money to maintain, and therefore not very many lenders provide this index. The LIBOR rate is not very popular only because many people are not familiar with the LIBOR index. The LIBOR is an interest rate set by banks in Europe and is charged to banks that borrow money from other banks. The LIBOR is set in the morning, and can change throughout the day though. I'm sure there are lenders out there that can and do set their index's to other more exotic terms; I would suggest staying away from them as they are not readily advertised and may be difficult to track and understand. I like the easy stuff, and the Prime Rate is easy for me.

On top of the index, I mentioned earlier, different lenders will then have an adjustment on their index. That adjustment could be a subtraction on the interest rate, no change, or an addition to the prime rate. Regardless, the margin as it is referred too is also set depending on your credit score. If you have a high credit score, you are likely to get favorable terms. If you score is not that great, you may not get the most favorable margin setup. Regardless, your credit as always, determines how much in interest your going to pay on this money. To save money overall and not only in this transaction, keep your credit score as high as possible.

Second mortgages, or 2nd mortgages, depending on how you 'say' it, are a useful tool and they should be considered when you require access to cash locked up in your home equity. Beware however, that if you are looking at going the variable rate, or HELOC, route, get the line of credit when you don't need it, because no sane lender would or should lend you the line when you have no means of paying it back. The costs to acquire a second mortgage is pretty low to free because most lenders will pay for the costs to extend the loan to you, although some may charge a yearly maintenance fee which you should stay away from.