Rate And Term

A rate and term refinance is simply the refinancing of an existing mortgage for the sole purpose of changing the current interest rate and/or term. This is also the most common type of refinancing, as there is no money to be received in the form of cash out from the home’s equity.

Rate and term refinances are heavily influenced by current economic activities. In times of low rates (ahem, now), homeowners engage in this type of refinance to lower their interest rate to accomplish either:

a) Save money on their monthly payments

b) Lower the number of years outstanding on their mortgage.

One of the key things to remember on a rate/term refinance is the fact that lower rates are attained when going to a 15 or a 20-year mortgage. The reason for this is that lenders assume a lower risk for the borrower and are willing to lend money at a lower rate. Although the interest payment is lower, payments toward the principal will generally increase. This is due to the faster amortization.

How do I know if a rate/term refinance is right for me?

The simple answer is that it must make sense. Sometimes, lowering the rate for the purpose of saving monthly may not provide enough benefit to break even. 

Understand that there are ALWAYS closing costs included in any mortgage transaction and these may variate depending on the loan program. Don’t be fooled by a lender that states they will cover them for you. If they are not being included into the new loan amount, then they are charged into the rate by through the yield spread.New regulations have changed lender policies of the maximum amount allowable to include in the loan amount. Refer to this link to read more.

What are some of the benefits of saving money on your monthly payments?

Saving money on the current monthly payments allows borrowers to have some breathing room on their monthly expenses. Depending on financial difficulties for some, borrowers who can refinance to a lower rate to save on payment are able to allocate some of that money toward other expenses or to pay off other liabilities. During and after the financial recession, many borrowers who experienced job or income loss have benefited tremendously by refinancing through government-sponsored programs such as the Home Affordable Refinance Program (HARP), Streamlines or by conventional rate and term refinances.

What are the benefits and considerations of paying a mortgage in a shorter time? 

• Refinancing to a lower term is perhaps a longer-term goal that can sometimes out-weight the “saving on monthly payments” option.

• Paying off the loan quicker allows homeowners to not have to worry about making a mortgage payment by the time they retire, if not sooner. 

• It frees up capital for other things once the mortgage is paid. 

• However, one of the most enticing reasons to refinance to a shorter term is the long-term savings on interest payments. 

A few points should be considered before engaging in a term reduction refinance. 

• Assess your financial situation to ensure that you can handle a possible “payment shock”. A payment shock is an increase on the monthly mortgage payment.

• Know what your goals are with the property. If you consider living in it for the next 10 to 20 years and there are no foreseeable goals of relocation, this refinance may be for you.

• Generally there no prepayment penalties nowadays but that may change from lender to lender. Most states do not allow them anymore but to be sure, always ask your lender if there are any. You can also see this on the Good Faith Estimate.

What is some of the criteria can you expect to provide?

Income:

Your lender will require income documentation. This can be in the form of full-time, part-time jobs as well as commissions and bonuses. The key is that they must be verifiable and must create a sense of continuity.

Other permissible sources of income:

• Rental: This is a tricky one. Lenders will accept the rental of a home as income but only for the 75% of the total rent income. However, if you declare a loss on your rental property on your taxes, this will count against you. 

• Retirement pay.

• Fixed income (Social Security awards, pensions).

• 401k and IRA: These are only considered if money has been withdrawn on a monthly basis for at least 1 year.

• Capital gains: Must be verifiable through tax returns.

• Disability: A disability letter must be shown and must include the amount of time it will continue.

• Child support: Must be supported by tax returns or divorce decree stating the amount of child support and the number of years it will be ongoing.

Credit history

• A credit report will have to be pulled by the lender in order to obtain the tri-merge score and assess your liabilities to calculate the debt-to-income ratio (DTI).

• It is important that you keep an eye on your credit. Many times the credit reporting bureaus can make mistakes in reporting your credit, especially if you have a common name. Some derogatory information may hamper your mortgage application or you may obtain a higher interest rate as a result of a lower score.

Assets

• Asset documents must be provided if you are paying for some if not all, closing costs.

• You may have to demonstrate that you can pay for a number months of taxes and insurance if your new loan does not have escrows.

• The rule of thumb is to provide the most liquid accounts (Checking/Savings). Permissible assets can come in the form of a CD, Money Market, IRA, 401K or brokerage account. However, further documentation may need to be provided such as the terms of withdrawal for those accounts.

Property

• The lender will generally require for an appraisal on a conventional rate/term refinance unless this process is going through a HARP or streamline program where one isn’t needed.

• The appraisal is necessary to assess the current market of your property and to comply with the underwriting guidelines of your lender.