Do you get money when you refinance

Applying for a home equity loan can be tedious, because interest rates and packages are generally not published online. You will need to enquire at various banks (by phone or in person). At MoneySmart, we make the loan application process simple for you. All you have to do is provide us with your details, and we’ll take care of the rest. This means we’ll be checking all bridging home equity packages available in the market, and give a recommendation that works best for you. Should you decide to proceed with your home equity loan, you will need to pay for a property valuation. You will then be given an approved loan amount.

There are several good reasons that someone might consider a cash-in refinance, from qualifying for better loan terms to reducing your monthly payment.

You’ll Lower Your LTV Ratio And Might Qualify For A Better Interest Rate

When lenders set the interest rate on a mortgage, they consider the loan-to-value ratio (LTV), which is the percentage of your loan balance to the market value of the home. The smaller the LTV, the better because it represents less risk for the lender. And because of the reduced risk, lenders often offer lower interest rates to homeowners with a lower LTV.

This consideration is especially important to homeowners with underwater mortgages, meaning they owe more than their property is worth. A cash-in refinance can help those borrowers build some equity in their home, making them eligible for refinancing and a better interest rate.

You Might Get Rid Of PMI Payments

Lenders usually charge private mortgage insurance (PMI) to borrowers to buy a home with less than 20% down. The PMI protects your lender in case you default on your loan. PMI is often 0.1 – 2% of the loan amount.

PMI usually falls off automatically once a property’s LTV reaches 78% or less. But another way to get rid of PMI is with a cash-in refinance, where you make a lump-sum payment to increase your equity in the home. As long as you have at least 20% equity with your new loan, you won’t pay PMI.

It’s important to note that if you have a loan insured by the FHA, VA, or USDA, this perk may not apply to you. The FHA’s mortgage insurance, the VA’s Funding Fee and the USDA’s Guarantee Fee aren’t cancellable, meaning you’ll need to refinance to a conventional mortgage to eliminate them.

You Might Be Able To Afford A 15-Year Fixed-Rate Mortgage

A 15-year fixed-rate mortgage comes with several perks, including lower interest rates and lower lifetime interest payments. Unfortunately, because of the higher monthly payments, 15-year mortgages are unaffordable for many people.

But with a cash-in refinance, you may be able to reduce your mortgage amount enough to trade in an adjustable-rate mortgage or a 30-year fixed-rate mortgage for a 15-year fixed-rate mortgage. Depending on the size of your loan, it could make the difference of tens of thousands of dollars – or even upwards of $100,000 – in interest.

You’ll Lower Your Monthly Mortgage Payments

Another perk of a cash-in refinance is that if you choose to stick with a longer mortgage term, you can reduce your monthly mortgage payment. As a result, you have more room in your monthly budget for other expenses.

Suppose you have a mortgage of $200,000 and an interest rate of 3%. On a 30-year fixed-rate mortgage, you would pay about $843 per month in principal and interest payments. If you did a cash-in refinance and made a lump-sum payment of $25,000, you would reduce your monthly payments to $737. You’ve saved more than $100 per month, and that’s with the same interest rate. You may be eligible to refinance at a lower rate, which would help you save even more.

You’ll Reduce Your Overall Debt Load

Among all the other benefits, a cash-in refinance can help you to reduce your overall debt load. Some people may just want emotional freedom from debt. Others might want to reduce their mortgage balance to lower their debt-to-income ratio.

Reducing your total debt can be especially beneficial for those considering retiring early, since eliminating a large monthly payment will make retirement more achievable.

The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. It can be hard to predict how long your refinance will take, but the typical timeline is 30 – 45 days.

Let's take a closer look at the refinance process.

Applying

The first step of this process is to review the types of refinance to find the option that works best for you.

When you apply to refinance, your lender asks for the same information you gave them or another lender when you bought the home. They’ll look at your income, assets, debt and credit score to determine whether you meet the requirements to refinance and can pay back the loan.

Some of the documents your lender might need include your:

• Two most recent pay stubs
• Two most recent W-2s
• Two most recent bank statements

Your lender may also need your spouse’s documents if you’re married and in a community property state (regardless of whether your spouse is on the loan). You might be asked for more income documentation if you’re self-employed. It’s also a good idea to have your tax returns handy for the last couple of years.

You don’t have to refinance with your current lender. If you choose a different lender, that new lender pays off your current loan, ending your relationship with your old lender. Don’t be afraid to shop around and compare each lender’s current mortgage interest rates, availability and client satisfaction scores.

Locking In Your Interest Rate

After you get approved, you may be given the option to either lock your interest rate – so it doesn’t change before the loan closes – or to float your rate.

Lock Your Refinance Rate

Rate locks last anywhere from 15 to 60 days. The rate lock period depends on a few factors like your location, loan type and lender.

You may also get a better rate by opting to lock for a shorter period of time because the lender doesn’t have to hedge against the market for as long. Be warned, though: If your loan doesn’t close before the lock period ends, you may be required to extend the rate lock, which may cost money.

Float Your Rate

You might also be given the option to float your rate, which means not locking it before proceeding with the loan. This feature may allow you to get a lower rate, but it also puts you at risk of getting a higher mortgage rate.

In some cases, you might be able to get the best of both worlds with a float-down option, but if you’re happy with rates at the time you’re applying, it’s generally a good idea to go ahead and lock your rate.

Underwriting

Once you submit your refinance loan application, your lender begins the underwriting process. During underwriting, your mortgage lender verifies your financial information and makes sure that everything you’ve submitted is accurate.

Your lender will verify the details of the property, like when you bought your home. This step includes an appraisal to determine the home’s value. The refinance appraisal is a crucial part of the process because it determines what options are available to you.

If you’re refinancing to take cash out, for example, then the value of your home determines how much money you can get. If you’re trying to lower your mortgage payment, the value could impact whether you have enough home equity to get rid of private mortgage insurance (PMI) or be eligible for a certain loan option.

Home Appraisal

Just like when you bought your home, you must get an appraisal before you refinance. Your lender orders the appraisal, the appraiser visits your property, and you receive an estimate of your home’s value.

To prepare for the appraisal, you’ll want to make sure your home looks its best. Tidy up and complete any minor repairs to leave a good impression. It’s also a good idea to put together a list of upgrades you’ve made to the home since you’ve owned it.

How you’ll proceed after the appraisal depends on whether:

• The appraisal matches the loan amount. If the home’s value is equal to or higher than the loan amount you want to refinance, it means that the underwriting is complete. Your lender will contact you with details of your closing.
• The appraisal comes back low. If you get a low appraisal, the loan-to-value ratio (LTV) on your refinance could be too high to meet your lender’s requirements. At this time, you can choose to decrease the amount of money you want to get through the refinance, or you can cancel your application. Alternatively, you can do what’s called a cash-in refinance and bring cash to the table in order to get the terms under your current deal.

Closing On Your New Loan

Once underwriting and the home appraisal are complete, it’s time to close your loan. A few days before closing, your lender will send you a document called a Closing Disclosure. That’s where you’ll see all the final numbers for your loan.

The closing for a refinance is faster than the closing for a home purchase. The closing is attended by the people on the loan and title and a representative from the lender or title company.

At closing, you’ll go over the details of the loan and sign your loan documents. This is when you’ll pay any closing costs that aren’t rolled into your loan. If your lender owes you money (for example, if you’re doing a cash-out refinance), you’ll receive the funds after closing.

Once you've closed on your loan, you have a few days before you're locked in. If something happens and you need to get out of your refinance, you can exercise your right of rescission to cancel any time before the 3-day grace period ends.

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