What is home refinancing?
Basically, when you refinance a home you pay off the existing loan and then replace it with a brand new loan. There are a number of ways that this new loan might differ from your old loan, including:
- Loan amount.
- Term length.
- Interest rate.
- Loan type.
Home refinancing gives you the opportunity to choose a new lender if you'd like or you can stick with your current lender. While you do have to obtain a new mortgage for your home when you refinance, it isn't nearly as much of a hassle as it was to get your initial loan when you bought the house.
Are you choosing between home refinancing and selling your house? If so, check out this article to help you decide which path makes more sense for you.
How long does it take to refinance a home?
It could take anywhere from 15 to 60 days to refinance your home, and in some circumstances, it might even take longer than that. While the average time is between 30 and 45 days, this certainly isn't everyone's experience. Some homeowners might find the process went quicker than expected, while others might find that refinancing was a slow and frustrating process.
There are a number of different factors that can impact how long it takes for you to refinance your home. These include the economic climate, the documentation required, and how complex your financial situation is.
Why does it take so long to refinance?
When you start the refinancing process, how long it will take can feel like a big question mark. There are a number of reasons why refinancing might take longer than usual these days, which include:
- Backed-up financial institutions with many people applying for mortgages and refinancing.
- The Federal Reserve cut interest rates in March due to the coronavirus pandemic.
- Understaffed mortgage offices due to COVID-19.
Refinancing isn't typically the fastest process in the world anyway, but these factors can drag out the timeline even longer. By being organized and familiarizing yourself with what it means to refinance, though, can help you make sure any avoidable snags are in fact avoided.
Are you thinking about selling your house for cash instead of dealing with a long-drawn-out refinance or sale process? If so, take a look at the benefits of accepting a cash offer.
How can you speed up the home refinancing process?
Not every aspect of the home refinancing process is entirely within your control, but there are definitely some things you can do to ensure the smoothest possible refinancing experience.
Consider using a lender with an online platform
It can help simplify and streamline the process tremendously when your refinancing company has an online platform. This means that you can easily upload necessary documents rather than sending them by snail mail or physically dropping them off at the mortgage office.
Make the right choice the first time
If you've applied for a loan and you decide to start from scratch with a different lender, it can add weeks to your closing time. It's worth it to do your homework ahead of time and find a lender you are happy with from the start. That way, the refinancing can be over and done as fast as possible.
Stay communicative with your mortgage rep
One of the best things you can do to keep a refinance moving along is to respond to any requests for documentation or information from your representative right away. You'll also want to keep copies of your communication with the rep for good measure.
Be prepared to explain credit dings
Ahead of time, you might consider writing a letter describing why you have any credit blemishes if you do. This can explain the circumstances that surrounded any charge-offs, late payments, or collections. You can also reiterate that your current financial standing makes it unlikely that these problems will occur again.
Don't apply for new credit
When you apply for credit, it can actually lower your credit score. On top of that, your debt-to-income ratio will be increased if you acquire new debt during the lending period. Both of these circumstances can decrease your chances of qualifying for a refinance.
Have a letter explaining employment gaps
A lender might question whether or not your income is stable if you have unexplained gaps in employment. They are assessing the risk of whether or not you will make payments on time, and are therefore concerned with periods of time where you weren't earning income.
Make sure your home is up to code
You can help make sure the process is streamlined by making sure your house is up to code. It should meet zoning requirements and be compliant with local safety codes.
Document any improvements you've made
If you've made any improvements to your home, particularly ones that set it apart from other homes in your neighborhood, you'll want to document these. You can then give them to the appraiser as a part of the refinancing process.
What questions should you ask before starting the refinancing process?
Before applying to refinance your home, there are a number of questions you'll want to ask yourself to make sure it's the best choice for you. Everyone's circumstance is going to be different, and there's no use refinancing if it won't be an improvement over your current mortgage terms.
What is the current market interest rate and what is your current interest rate?
It might be to your advantage if the difference between your current mortgage rate and the available rate is about 1.5 points or more. If the difference is less than this, refinancing might not be a worthwhile endeavor when you factor in the closing costs.
Do you have a variable or fixed rate?
If you have a variable rate mortgage and the current market rate is lower, refinancing to a fixed-rate could help you save money over time. You'll also want to be mindful of whether you want to refinance to a fixed-rate or a variable rate mortgage, depending on your predictions for interest rate changes over time. With interest rates at historic lows, however, there's a good chance the market rate is currently lower than your interest rate.
How long are you planning on living in this home?
Refinancing can make sense if you plan on staying in your current home for more than 3 years. If you're pretty certain that you're going to be moving in a shorter time frame than that, you might just want to stick with your current loan. The only reason to refinance even if you're moving that soon would be if there is a drastic difference between your current interest rate and the market rate.
Can you cover the closing costs?
You'll pretty much always need some cash to cover closing costs. VA and FHA loans can let you bundle closing costs into the loan, but in general, there will be costs associated with refinancing.
How is the value of your home changing if at all?
Consider how the value of your house has changed and what the projected direction of your home's value is for the future. If your home's value is increasing or staying the same, a lower interest rate can help you increase your equity faster. If your home's value is decreasing, it might not be worth it to refinance and pay closing costs when your equity is decreasing.
Benefits of house refinancing
In the right circumstances, refinancing can save you a lot of money over time. Let's take a look at the potential benefits of refinancing a home.
Depending on the terms of your old and new loan, you might have lower monthly payments when you refinance. This can help leave more room in your monthly budget for essentials or savings.
Lower interest rates
Locking in a lower interest rate can save you tens of thousands of dollars over the life of the loan. How much it saves you of course depends on your previous loan terms, your new loan terms, and the value of your home.
Eliminating mortgage insurance
Private mortgage insurance (or PMI) is something that homebuyers who make a downpayment of less than 20 percent typically have to pay. This costs more money every year, but how much it costs can vary between loans. You can eliminate this if you refinance and your new mortgage balance is lower than 80% of the value of the home. This works for people whose homes have increased significantly in value since the time they acquired the mortgage.
Changing loan types or terms
Refinancing is also an opportunity to change your type of loan or the terms of the loan. Maybe you want a shorter loan or longer loan, or maybe you want to switch from a variable-rate to a fixed rate.
What are the drawbacks when you refinance a home?
There are also some reasons you might not want to refinance a home. Let's take a look at what might make you think twice about applying for a new mortgage.
When you apply for refinancing, the lender to make a hard inquiry of your credit report. This means that your credit score will drop every time a lender pulls your report. Luckily, though, if you shop around for lenders within a 45 day period, only one hard inquiry will show up on your card.
It's important to understand that you are starting over on a new mortgage when you refinance. That means that if you were 10 years into a 30-year mortgage and you refinance for another 30-year mortgage, you still have 30 more years of mortgage payments. This also means that you're back to square one with amortization, meaning that your ability to gain equity with each monthly payment is slowed down.
You'll want to do the math on the lifetime cost of the property if you refinance or if you stick with your current loan. Because of the way amortization works, you might end up paying more over the life of the loan even if your new monthly payment is lower.
Lastly, refinancing isn't free. There are closing costs associated with the process, so you'll have to be ok with throwing down some cash.
Are you choosing between refinancing and selling?
Your own particular life circumstances, financial situation, and existing mortgage structure will help to dictate whether or not refinancing is the right choice for you. Now that you know the answer to "How long does it take to refinance a home?" you can factor that into your decision, too.
Wondering what your home's worth in the current market? Get a free online home valuation!
It isn't uncommon for people to find themselves deciding between refinancing on their current home or selling their house entirely to start a new mortgage elsewhere. The refinancing process is certainly simpler than actually selling your house, buying a new house, and moving all your stuff. However, sometimes that's what makes the most sense for you and your family.
If you're considering selling your house, you can find out how much your home is worth with our iValuation tool here!