Life of a Loan: The refinance mortgage

Once the purchase mortgage wraps up, the borrower will want some time before they consider refinancing. But with all the time in between, the need or reasons for a borrower to refinance become more apparent or important.  

At the beginning, the purchase mortgage conquers the hardest step — getting a loan. When I first looked into the life of a loan, I outlined the heavy amount of back-end work that goes into the application. From there, the loan grows, and we now step into the life of a refinance mortgage. 

Three of the main reasons for a borrower to refinance are to take advantage of lower rates, get cash out or a divorce, Wade Betz, vice president of sales with Guardian Mortgage, said.

The primary driver for a refinance is a lower interest rate environment, Betz explained.

Although mortgage rates are slightly increasing, they are at historical lows, and refinance applications are still flooding the pipeline.

But after the motivation, borrowers should look at how much money will go into the refinance versus how long it will take them to break even on the money they are saving. 

The fees on a refinance come in three sections: lender fees, title company fees, and prepaid expenses, which is the basically the funding of an escrow account, Betz said.

At minimum, a property value has to go up 6% to cover the Realtor commission that they likely are going to have to pay on sale, he added.

If they can time it right, they should only do it once, Betz said. However in the past ten years, rates have steadily gone down, so people have refinanced quite a bit more.

Looking ahead, there are a lot of changes coming down the pipeline with the Consumer Financial Protection Bureau for refinance and purchase applications.

“It is a growing issue, because more and more rules are coming down the pipe at us. Most of them are targeted directly at the salesperson. What I can and can’t say, what I do and don’t do and what I am able and not able to do,” Betz said.  

Ultimately, Betz said, “No lender should close a borrower on a loan with the intention of refinancing them in the future. That lie got a told a lot during the subprime crisis.”

A refinance application is simpler than a purchase application, but it still requires its own set of due diligence, and this is just an overview of a refinance application. 

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