Each year, many homeowners refinance their mortgages to take advantage of lower interest rates or to obtain a shorter repayment term (or both). Refinancing can also be used to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Some people also refinance to tap into home equity to make a large purchase or for another reason.
If you are currently considering refinancing your home, you may be wondering how long it takes for the process to be completed. Perhaps you also have questions about the process itself.
Although many factors can affect how long it takes to refinance a house, the process may take up to 45 days. In the current competitive environment it may take more than 60 days.
Why Does It Take so Long to Refinance a House?
In the modern electronic age we now live in, it seems reasonable to assume that the refinancing process could be completed with the click of a mouse. But there are several steps to the refinancing process, and completing them takes time.
First, new mortgage rules were implemented in 2014 that require more verification by lenders. These government regulations require mortgage applicants to be thoroughly vetted to make sure they can repay the loans they are applying for.
Second, whenever mortgage rates drop, lenders typically see an influx of people interested in refinancing. This can slow down the process as lenders work to keep up with the demand.
Third, there are many steps in the mortgage process, and an application may pass through several hands before it is approved. Loan officers, underwriters, and others review all applications and supporting documentation to assess risk and minimize the chances of a default.
Finally, you may be required to have your home appraised and have a title search performed before the refinancing process can be completed.
What Kinds of Term Lengths Are Available?
When refinancing a home loan, the two most common mortgage terms are 15 and 30 years. But this doesn’t mean that those are your only options.
The length of the new mortgage you acquire can be customized to meet your needs. You may opt for terms of 10 or 20 years, for example. It may also be possible in some cases to stretch your repayment term to 40 years.
When determining the term of your new mortgage, there are some important things to consider. If you want to keep your monthly payment within a certain amount, for example, you may have to opt for a longer term.
Choosing a mortgage with a shorter term doesn’t just mean that you will repay your loan in less time, the total amount that you will repay over the life of the loan will be much less. The savings can be substantial. A loan with a shorter repayment term could save you thousands over a longer one.
The interest you pay on a mortgage is payment for use of the money you were loaned. Time is money, and mortgages with longer repayment terms will be more expensive overall than mortgages with shorter terms.
What Are Prepayment Penalties?
Many people refinance their mortgages to take advantage of lower interest rates to decrease their monthly payments. Being charged a prepayment penalty, therefore, may defeat the purpose when the object of refinancing is to save money. The purpose of these penalties is to discourage borrowers from paying off their loans early, which would cause the lender to earn less money in interest.
A prepayment penalty may be assessed by a lender when a borrower pays off a mortgage during the penalty period, which is usually the first three to five years of a mortgage. Prepayment penalties typically start at two percent of the loan amount and decrease each subsequent year until the amount reaches zero.
Not all mortgages have prepayment penalties. In fact, they are prohibited by federal law for FHA loans, USDA loans, and other types of loans. If your mortgage has a prepayment penalty, it will be stated in the mortgage note, mortgage disclosures, or in a rider to the note.
How to Avoid a Prepayment Penalty
Although prepayment penalties can be substantial, there are some ways you may be able to avoid them.
The first, and the most obvious, way is to go with a mortgage that doesn’t include a prepayment penalty. You can obtain quotes from different lenders to see if any of the loan offers you are presented don’t include prepayment penalties.
Negotiating with your lender is another strategy to consider. Not everything is written in stone with mortgages, and lenders may have some leeway in what they can offer. Some stipulations may have to be met before a prepayment penalty can be removed (like offering a higher down payment). You’ll never know unless you ask.
Finally, another option to consider is to simply wait until the period for prepayment penalties on your current loan has passed. This will require a judgment call if mortgage rates decline significantly. In some cases, it may be worth paying a penalty to save money over the long-term with a better rate.
Ensuring a Smooth Process
Although there really isn’t anything you can do to speed up the mortgage refinancing process, being prepared with all necessary documentation may help to prevent delays. The following are some typical documents you will need to refinance your home:
- Proof of income
- Tax documents
- Proof of homeowner’s insurance
- Asset information (bank statements, retirement account information, etc.)
- Government-issued ID
- Proof of your Social Security number
- Other documentation as requested
Before you start the refinancing process, be sure to check with your lender to make sure you have all of the required documentation. The better prepared you are, the smoother the refinancing process will be.