Refinancing your mortgage is a wise move,provided you break even on the cost long before you sell your home or pay off the mortgage.
Follow this formula:
(Mortgage Value * (Old Rate – New Rate))/12 = Savings Per Month
Cost to Refinance / Savings per month = Months it takes to break even
In general, I like to refinance my mortgage if I can break even within 12 months. My favorite type of mortgage refinance is a “no cost mortgage refinance” where the lender builds in the costs the refinance. This way, even if you decide to sell the property earlier than expected, you don’t lose.
Refinancing a mortgage today usually takes between two to four months. Before the financial crisis began in 2008, you could often refinance a mortgage within 45 days. But lenders have gotten much more stringent since. My current refinance is taking 3.5 months because it’s taken a couple weeks for me to transfer over assets for relationship pricing.
Once you lock in your rate, the clock begins ticking. If you don’t complete the refinance within the lock timeline, you could end up paying extension fees or end up having to re-lock at a higher rate. Make sure you clarify up front who pays the rate extension fee.
Rate locks are usually priced in 15-day increments, although different lenders may offer other timelines. My latest mortgage refinance had a 45 day rate lock, plus an additional 30 day extension.
In general, the shorter the lock period, the better your rate should be. If you can complete your refinance within one of the shorter lock-in periods, you’ll end up with a lower rate, lower costs or both.
How To Quicken Your Mortgage Refinance Process
Before you start a mortgage refinance, you must first mentally prepare for at least a three-month long process. Once you set expectations for a long mortgage refinance, you will be able to endure the process easier because a lot of paperwork and back and forth is involved.
I recently refinanced my primary mortgage and it took four months! At least I got an amazing rate at 2.625% for a 7/1 ARM with no fees and a $220 credit. I recommend checking out Credible for real mortgage quotes to compare.
Here are some tips to help you complete your mortgage as fast as possible.
1) Know the two types of refinances.
The easiest mortgage refinance is one where you can reduce your cash out flow each month. That is the easiest type of mortgage to refinance. You should expect the refinance to take roughly two months on average.
If you want to do a cash-out refinance, then things get more complicated because the lender is taking on more risk as you have less skin in the game. The lender will act like the CIA and go through every single financial transaction over the past two years. You should expect this type of refinance to take three months on average and often times much longer.
2) Consider a streamline refinance option
One of the benefits of government-backed loan programs, such as those offered through the Federal Housing Administration (FHA) and Veteran Affairs (VA), is the ability to refinance under “streamlined” guidelines. These refinance programs don’t require any income verification, and they usually won’t require any appraisal.
They also don’t require a full credit report, and they only verify that you’ve made your current mortgage payments on time with a mortgage-only credit report. Because lenders don’t have to underwrite your income or an appraisal, the refinances can be completed very quickly.
If you have an FHA or VA loan and have made seven payments on time since you took out your mortgage, you are probably eligible for a streamline refinance option. The VA streamline program is more commonly called a VA Interest Rate Reduction Refinance loan (IRRRL), but it features the same income and appraisal flexibilities as the FHA streamline refinance.
The biggest downside to these type of mortgages is that you will pay a much higher rate than if you had a 760 credit score or higher. Government-backed loans are one of the root causes of the previous housing crisis because the credit-worthiness of the borrower was much lower than it should have been.
3) Try and get an appraisal waiver
An appraisal is often required by the lender so it knows that its loan is backed by an asset with the proper value. The appraisal generally takes two weeks from start to finish because an appointment has to be set up, the appraiser has to come out, and then write up the report and send it to the bank. If you can get the appraisal to be waived, you will end up saving two weeks of time and $300 – $850 in appraisal fees, depending on where you live.
Appraisal waivers are usually only available on rate-and-term refinances, which are refinances paying off the balance of your loan to save money. If you are looking for a cash-out refinance to consolidate bills or do some remodeling, chances are you’ll need a full appraisal.
Chances are low you can get an appraisal waiver, despite a strong housing market since 2010. But it never hurts to ask. One way an appraisal could be waived is if your appraisal is within 12 months old. A couple Financial Samurai readers have stated a mortgage broker or a credit union helped get an appraisal waiver. Always ask.
4) Be accurate and concise in your application.
The mortgage refinance process takes an endless amount of paperwork. Take the time to fill out your loan application accurately. Be sure to provide contact information for your employer, your homeowners insurance company and a complete two-year history of your employment and addresses.
Here are the basic list of documents you’ll need for a refinance:
- Current month of pay stubs: If you aren’t doing a streamlined government refinance, this is usually the bare minimum a conventional lender will need.
- Last year’s W-2: If you have high credit scores (above 720), you may not have to provide a W-2, but it depends on the type of income you receive. If you get overtime and commissions on top of a base salary, expect to provide two years’ worth of W-2s.
- Current mortgage statement: This is needed to show that there are no late fees accruing. It also provides a snapshot of your current loan balance for your loan estimate preparation.
- Two months of bank statements from a checking or savings account: Some lenders will only require one month. If you’re adding the closing costs to your loan balance, you may not need any bank statements at all.
- Copy of your current homeowners insurance policy: Whether you include your homeowners insurance in your monthly payment or not, the lender will need this to calculate your total qualifying payment. It will also need to switch the lender information to show who your new mortgage company will be.
- Current property tax statement: Again, this is required regardless of whether you have an escrow account. Your property taxes will need to be current, and the lender will need the yearly taxes to calculate your total qualifying payment.
- Copy of your driver’s license or picture ID: This is needed to confirm your identity at your application and then again at your closing.
- K-1 statements for all your private investments.
- Insurance statements.
- HOA statements.
- Brokerage records.
4) Do not take out new credit close to the mortgage refinance.
I highly recommend NOT taking out new credit accounts within 90 days of applying for a mortgage. Definitely don’t try to take out new credit accounts during the refinance mortgage process either. These will be red flags for the bank to investigate and will certainly delay your mortgage refinance process.
Try not to make any large transactions before or during a mortgage refinance either. The bank will have you explain all the transactions that are going into and out of your account.
Stupid me, I decided to pay cash for a new house 65 days before I decided to refinance my primary residence mortgage. I thought it would be no big deal because I paid cash. But the cost of operating the house reduced my income and the amount I’m able to borrow.
5) Take advantage of online lenders
In the old days, you had to go to a bank branch, sit down with a loan officer, talk for hours, and see if you could refinance your mortgage. Today, you can get a free online quote within three minutes with a large mortgage marketplace like Credible.
They get lenders to compete for your business so you don’t have to. Once you fill out your information online, lenders will contact you for free with their best offers. You can then use their written e-mail offers as leverage to get a better offer from your existing bank.
New technology allows lenders to access your income and employment history through online databases. It can see your assets with “view-only access” to your banking accounts. Going with an online lender doesn’t mean you don’t have to share any of your financial documents anymore. But it is streamlined and will save you at least a couple days.
6) Don’t leave your job
Whatever you do, don’t leave your job within 60 days before your refinance your mortgage. Definitely don’t leave your job during your refinance process. Once you lose your W-2 income, you become dead to banks.
In fact, always refinance your mortgage before you leave your day job. Switching from a salaried to a commission position, or changing employers, will create delays in the process or prevent you from being able to complete the refinance at all.
Even if you earn much more in 1099 freelance income, it won’t matter because lenders need at least two years of 1099 history. Trust me, this happened to me and my mortgage refinance got denied.
7) Don’t volunteer more financial information than you need to
Refinance lenders only need enough documentation to approve your loan. The more you volunteer, the more they may have to look into your assets and do some digging. The more they dig, the more you will have to explain.
You would think that my $800,000 investment in a real estate crowdfunding fund would be an asset. And it is. But to the bank, they had to do a lot of digging and asked my to produce two years worth of K-1s and also explain the large deposits I received from fund distributions. It was a pain.
If you have an extensive portfolio of stock funds, 401(k) plans or several different asset accounts, you don’t need to disclose them if you aren’t going to be liquidating them to complete your refinance.
8) Be completely open with your loan officer ASAP
Your loan officer is on your side. The only way he or she can make money is if your mortgage gets approved by underwriting. The underwriting department is what usually delays the mortgage refinance process.
You need to come clean and let your loan officer know ASAP what’s going on with your finances. Maybe you have a new job opportunity or you have to spend a small fortune to cover an emergency. Or maybe you found out your credit report is being erroneously attacked.
Let your loan officer know so s/he can help take steps and offer suggestions to fix the situation. One time, my mortgage refinance got held up b/c I had an $8 judgement from my local utility company. Apparently, my old tenants never paid their last month’s utility bill in full years ago! My loan officer ended up contacting the bank to smooth things out.
9) Pay down principal.
One of the big hangups with refinancing a mortgage is a lower-than-expected appraisal which puts your loan-to-value ratio too high. Too much debt is no good if it breaches your lender’s limit.
If your appraisal comes too low, you should pay down some debt to get to the right LTV ratio if you want to refinance. For example, let’s say you think your home is worth $1,000,000 and the bank can lend you up to 80% LTV ($800,000 mortgage). If the appraisal comes in at $950,000, your bank can only lend you 80% of the value, or $760,000. You may need to come up with an extra $40,000.
I’ve found there is no use in trying to fight the appraisal once it’s done. The whole purpose of the appraisal process is to have an “unbiased” third party make an assessment. You can’t bribe them either, so don’t try!
If your value comes in lower, reach out to your loan officer to have a new break-even point analysis done to make sure the refinance still make sense. Remember the original refinance formula at the beginning of this article.
Accelerate Your Mortgage Refinance With Confidence
An organized borrower who is very responsive is a dream come true for a loan officer. Get all your paperwork together and make sure you follow my recommended tips. If you do, I’m sure you’ll quicken your mortgage refinance process.
With interest rates still hovering at multi-year lows, now is an excellent time to refinance. I’m personally refinancing my primary residence to a 7/1 ARM at 2.75% with no fees. I plan to pay off the mortgage within seven years, hence why I’m not taking out a 30-year fixed mortgage.
Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. Credible allows you to compare multiple real quotes, all in one place for free. When banks compete, you win.
For those of you looking to make money from lower interest rates, consider investing in real estate crowdfunding and REITs. The lower rates go, the higher the demand there will be for real estate. Instead of taking out a lot of debt to by a single property, invest in real estate with a platform like Fundrise. You can invest as little as $500 and diversify your real estate investments across the country.
Given I own property in expensive San Francisco and love real estate, I’ve diversified into 18 different commercial properties mainly in the heartland of America where valuations are lower and net rental yields are higher. It feels good to earn income 100% passively and have less concentrated exposure. Further, I believe in a multi-decade demographic trend towards lower cost areas of the country thanks to technology.