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How Does Refinancing Work & Why You Should Refinance Your Mortgage

When purchasing a home, most buyers need the help of a mortgage to complete the transaction. The mortgage used to buy real estate is called a purchase money mortgage.

A mortgage refinance differs from a purchase money mortgage because it occurs sometime after the original closing. While a refinance can happen at any time, it generally happens when a homeowner wants/needs to pull equity from the house for a child’s education or a renovation/repair, or, has the opportunity to grab an interest rate that is below their current rate.

Sometimes, there are several good reasons to refinance.

A mortgage refinance replaces the home’s current first position lien with a brand-new mortgage — with rates and terms that will likely differ from the original mortgage.

Refinance Tip: A borrower can choose any broker/lender to refinance. They are not required to refinance with the bank that holds the current mortgage.

The Steps to Refinancing

Essentially, the mortgage qualification process is the same when buying or refinancing a home. Although, there are some built-in short cuts for refinance transactions that banks can use if the mortgage scenario fits. And, closing costs for a refinance transaction are generally less than the costs required to close a purchase money mortgage.

Mortgage refinancing requires a borrower to ‘re-qualify’ for the financing because the new requested mortgage needs a new lending decision — that is based on current market and rate conditions.

Refinance applicants must document their assets and income by submitting W2s, paystubs, tax returns and asset documents. However, the required verification documents will likely differ from applicant to applicant.

Most refinancing applicants can be certain that their home will be re-appraised as the lender must determine the market value at the time the mortgage refinance application.

The good news for borrowers who wish to refinance is that the mortgage qualification process will no longer feel like a walk in the dark. Refinancing borrowers now know what to expect; this allows them to approach the process with added confidence.

Once an underwriter approves the financing, the new mortgage closes with a mandated condition that the existing lien be paid in full.

Mortgage Tip: When a refinance transaction closes, the borrowers will not receive loan proceeds until the three-day Right of Rescission period has passed. The Right of Rescission is a right granted to borrowers by the federal Truth in Lending Act. This federal law gives homeowners an opportunity to cancel the mortgage transaction within 3 days of closing.