Refinancing & Other Issues

The Process of Refinancing

The Process Of Refinancing

Now that you have determined that refinancing makes financial sense for you, you are ready to begin the refinancing process. Once you are familiar with the steps you'll take, it should help relieve the stress of refinancing.

Procedures Checklist

Here are the typical procedures you will encounter when refinancing

• Fill out an application.
• Ask your lender if fees and costs may be included in the loan amount.
• Get an Appraisal by an independent party. (Your lender will assign you an appraiser)
• Determine what is tax deductible.

We will walk through each of these procedures later on.

The Application Process

After you find a lender that has a package that makes financial sense, it’s time to apply for the loan. The application fee can range anywhere from about $150 to $450. Some lenders may even offer deals to refund the fee once the loan is closed. In most cases, the fee is not refundable, so don’t submit the application until you are reasonably certain this is the lender you want. It’s also a good idea to get pre-qualified for the loan. Ask the lender before submitting the application if there is a pre-qualification program. The loan officer will tell you what you need to do to get this done; it could save you a hassle once you have submitted your application with the fee.

If you choose to refinance with your current lender because they can give you the best deal, you could save money on the fees. And the process can be smoother since the lender already has information about you. You also may not need to get a new appraisal on your home when you refinance to a fixed-rate mortgage with the same lender. However, this could be a rare occurrence in these days of fluctuating real estate values.

A full-blown credit history is not usually required in a refinancing. The lender will usually just check your existing credit file and do a simplified income verification. It is important that your mortgage payment record be in good shape.

Fees

Did you know that you may be able to include most, if not all, costs of refinancing in the new loan? Each lender has its own rules, so be sure to ask your lender how it handles these costs. Refinancing the costs makes it easier to go through the process because you won’t be required to come up with a lot of out-of-pocket cash. In some areas of the country, you may find that the most significant cost that you can include in the loan amount is the points. Instead of paying them outright, you can finance them with the principal amount. Just remember, there’s no such thing as a free lunch! Taking out a bigger loan will mean higher monthly payments.

Thanks to bank regulators, lenders must provide people who refinance with a reasonable estimate of settlement costs and fees associated with the loan, this is called a "Good Faith Estimate". They must do this within three business days after receiving your application.

Appraisals

An appraisal is necessary because lenders don’t want to lend you more money than the property is worth. They want to be sure that, if the property is sold, they will get their loan paid back.

In general, lenders are not usually willing to lend you more than 80 percent (sometimes as low as 70%) of the value of your property minus your outstanding mortgage balance. This gives them a cushion if the value of the property goes down. Some lenders have more lenient lending policies though, so it pays to shop around if one lender is not willing to work with you.

For example, let’s say you bought a home in 1987 for $187,000. You put 20 percent down and borrowed $149,600 with a 9%, 30-year fixed-rate mortgage. In 1991, when the interest rate was 7% on the same type of loan, you refinanced. Your heart sank when the bank required an appraisal, because you knew you paid close to top dollar for the home and that property values since 1987 had dropped quite a bit.

The appraisal came in at $157,000 and the principal balance remaining on the mortgage was $139,600.

The result: you were declined the refinancing unless you were able to come up with additional cash of $14,000.

Unfortunately, this may be a reality for some people. Be aware of the appraised value of your home as you enter the refinancing process.

What Can You Deduct On Your Tax Return?

There are some special tax rules with regard to what costs can be deducted in connection with a refinancing. Let’s see what tax breaks you’ll get from Uncle Sam.

Interest and Points

Depending on what your motive was for the refinancing, there are several different ways the interest and points on the loan are treated for income tax purposes.

* If you finance the points, they cannot be deducted in the year of the refinance, but are deducted equally each year over the term of the loan.

What happens if this is your second refinance and you still have points left over from the first refinance that have not yet been fully deducted? You get a bonus!! You are able to deduct the remaining balance of the points in the year of the subsequent refinance.

This information should serve as a guide for you - to give you an idea of what’s tax deductible and what’s not. You should call your tax advisor to clarify anything you don’t understand and to verify that the information is still valid under current law. Keep in mind that tax laws are always subject to change, and that the tax information provided here could change at any time, so don’t take it for granted!