How a Refinance Works
In some cases, a refinance can save you hundreds of dollars a month and tens of thousands over the life of the loan. A $300,000 loan for 30 years at 6 percent interest costs $1,811 per month and $285,845 in interest over the life of the loan. The same loan at 4 1/2 percent interest costs $1,579 per month and $203,100 over the life of the loan. The process itself is not much different from the process of applying for your initial mortgage. In the case of a refinance, you have the added step of satisfying the existing loan.
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Application
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Once you've made the decision to refinance, obtain an application from your chosen lender. Speak with a loan representative prior to submission if you have any questions. Complete the application in its entirety, and submit the completed application to the lender along with the required supporting documentation and any applicable fee. Provide the bank with copies of two to three years of W-2 forms and tax returns, one month's worth of pay stubs and three months of bank statements. If you refinance with your original lender, you only need to provide documents it does not already have on file. Sign all applicable disclosure forms in the packet, including, but not limited to, truth-in-lending, privacy, servicing and good faith estimate.
Underwriting
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The bank reviews your application and examines your credit report. The underwriter derives your monthly income from your financials and compares it to the debt listed on your credit report and your new monthly payment. The bank typically requires that no more than 28 percent of your income goes to housing expenses such as mortgage, taxes and insurance and no more than 36 to 40 percent goes to your overall debt, although those percentages may vary slightly depending on the lender. If you have acquired a significant increase in debt since the original loan, you may not qualify, even if the payment is lower. The bank will order an appraisal of your property to ensure proper loan-to-value to support the new loan. If your property value has dropped since the original loan, you may not qualify for a refinance.
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Commitment
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When your loan is approved, the lender sends you a commitment letter. This letter represents the bank's promise to lend you the money to pay off your existing loan. The letter details all the conditions that must be met to close on the refinance. You have a set amount of time to accept the letter by signing and returning it along with any applicable commitment fee. After you've accepted the letter, you have another window, usually 30 to 60 days, in which to close the loan.
Closing
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Contact your lender to coordinate a closing date. Once the date is set, contact your current lender and request a payoff statement. This letter outlines all principal, interest, cancellation and administrative charges due on your loan. Allow at least 48 hours to receive the letter. Some banks charge a fee to provide a payoff statement, so make certain you have your closing date or at least a close approximation. At closing, you sign all the documentation for your new loan. After the rescission period of three business days, the new bank will send the payoff money to your current bank and file a new lien in place of the previous one.
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