Chapter 6: Refinancing a mortgage

What is a refinance?

Replacing an existing mortgage with a new one, which can be equal to, larger, or smaller than the original. Placing a mortgage on a free-and-clear property is also a refinance.

What are the two main types of refinances?

Rate Reduction Refinance and Cash-Out Refinance.

What is a Rate Reduction Refinance?

Replaces only the existing mortgage balance, often to get a lower interest rate. Closing costs can be financed.

What is a Cash-Out Refinance?

Replaces more than the existing balance and closing costs, providing the homeowner with additional cash.

What is the most common reason people refinance their homes?

To lower their interest rates and monthly payments.

When considering refinancing to lower the interest rate, what is important to consider regarding the loan term if closing costs are financed?

The loan term may increase, extending the total interest paid over time.

What is a "point" in the context of a mortgage?

1% of the new mortgage amount, paid upfront to potentially secure a lower interest rate.

How can refinancing effect the term of the mortgage?

Refinancing can possibly be used to lower the term of the mortgage to save some interest over time.

Why might a homeowner refinance to change their loan type?

To switch from an Adjustable-Rate Mortgage (ARM) or balloon mortgage to a fixed-rate mortgage, or to consolidate a first and second mortgage.

What is a "debt consolidation refinance"?

Using a cash-out refinance to pay off existing high-interest debts, converting them into a single mortgage payment. (ex. credit cards)

What is a potential drawback of a debt consolidation refinance?

Spreading debt over a much longer period (e.g., 30 years), which can quickly reduce home equity if the home is sold soon after.

What is the FHA Streamline Refinance program designed for?

Existing FHA mortgage holders to reduce their interest rate and payment with limited documentation.

What is a key requirement for an FHA Streamline Refinance regarding the new payment?

The new payment must be less than the old one.

What is the maximum cash back allowed on an FHA Streamline Refinance?

$250

What is the VA Interest Rate Reduction Loan (IRRL) similar to?

The FHA Streamline program

What is the funding fee for a VA IRRL, and can it be financed?

0.5%, and it can be financed.

What is the maximum Loan-to-Value (LTV) for a VA full documentation cash-out refinance?

90%

What is the "Right of Rescission" in the context of owner-occupied refinance transactions?

A three-day "cooling off" period granted by Federal Truth in Lending Law, allowing the homeowner to cancel the transaction and recover costs.

What is the practical implication of the Right of Rescission for lenders?

Lenders cannot fund the transaction until the three-day rescission period expires, delaying the receipt of cash-out or payoff of the old mortgage.

What is a "reissue rate" in title insurance for refinances?

a discounted rate on the lender's title insurance policy since there was previous title insurance on the property.

What is "subordination" in a refinance, and when is it needed?

Ranking home loans in order of importance. Lenders assign which loan is goinging to be the primary “lein”

Why might a lender charge a "cash-out surcharge" on a refinance?

At higher Loan-to-Value (LTV) ratios, due to increased risk.

Can a homeowner typically refinance a property that is currently or recently listed for sale?

No, there needs to be an intent to occupy statement for owner occupied refinances.