Refinancing is a dynamic tool for homeowners but one that should be used wisely. It enables you to settle your current home loan with another one so that you can have brand-new interest rates and repayment terms. Is it worth it, though?
There is a certain degree of financial acumen required in knowing when to refinance a home loan—and when to absolutely avoid it. This article will introduce you to all the factors you should consider before refinancing home loans. We’ll also check out some relevant logistical aspects, such as:
- Types of mortgage refinance loans
- Process of refinancing a home loan
- Lender options for sensible home loan refinancing
Back to the Basics—What Is a Refinance Home Loan?
A real estate structure—residential or commercial—is an investment for life because its worth appreciates over time. Refinancing is a concept rooted in recycling the value of a property that already has an existing mortgage. Based on the current market value, a borrower can secure:
- Fresh interest rates (often lower than the old mortgage rate)
- Early or delayed settlement terms
- Extra cash by tapping into the available equity*
*Equity in any home loan means the unencumbered value of the property—i.e., the amount remaining after the mortgage balance is paid off. When you acquire a mortgage, your equity is the down payment you invest out of your savings. As you repay portions of the debt via amortized installments over the months, your equity holding increases bit by bit.
Source: Tierra Mallorca
In plain terms, a refinance home loan can be defined as a product that eliminates the old mortgage but not the debt per se. You still have to keep up with mortgage payments and pay off closing costs on the new loan. You’re practically shifting your outstanding liability to the new loan, which is why, as a borrower, you should be crystal clear on two aspects:
- Why are you going for the refinance?
- What type of refinance product would work for you?
Why Refinance a Home Loan?
The most common reason for refinancing a home loan is to reduce the monthly interest obligation. For example, you’re in year 10 of a 6%, 30-year mortgage plan with a $400,000 outstanding balance. You refinance with a similar plan but with a 5.5% interest rate. Even if you save around $2,000 for the remaining 20 years while paying $1,000 in closing costs—you’ve managed yourself a good deal.
Reducing the monthly interest burden is a one-dimensional usage of refinancing. Opportunistic borrowers have started deploying the tool to support a variety of other financial goals. Here are the five most common scenarios:
- Shaking off debt faster—A refinance loan with a shorter term helps you downsize your overall interest outflow, which translates into:
- More money saved
- Better debt-to-income (DTI) ratio and credit score
- Locking in an interest rate—If you have an adjustable-rate mortgage (ARM), you will likely be charged higher interest rates over time. Refinancing with a fixed-rate mortgage removes the uncertainty and stabilizes your interest payouts
- Canceling private mortgage insurance (PMI)—PMI is an unrelenting liability if you’re dealing with conventional loans. Homeowners who have built up enough equity see refinancing as a route to ditch unnecessary mortgage insurance costs
- Leveraging equity for extra funds—Cash-out refinance products allow you to borrow more than your existing mortgage debt based on your equity growth. You can use the extra funds toward:
- Home improvements
- Purchase of rental properties
- Investment avenues
- Emergency financial obligations
- Picking a better financier—Refinancing gives you an opening to choose a lender more aligned with your current goals. Many borrowers go for localized options like regional banks and hard money lenders that provide efficient services with low maintenance fees
What Are the Types of Loans for Refinancing?
If refinancing works for you (long-term or short-term), your next goal is to select an appropriate mortgage product. We have compiled the top home loan refinance options in the following table:
|Rate and term refinance||It is a generic refinance product that replaces your current mortgage with new interest rates and/or repayment terms. Your debt liability remains the same|
|Cash-out refinance||Cash-out refinance sets you up with a larger mortgage than your current one by leveraging your accumulated equity. The option is heavily used both by property investors and homeowners who want extra money without offering another collateral|
|Cash-in refinance||Cash-in refinance is the opposite of cash-out refinance—you pay off a large chunk of the loan in a go so that your new loan has a smaller principal sum and minimal closing costs|
|Reverse mortgage||A reverse mortgage is a refinancing product used mainly by cash poor-house-rich senior citizens. It enables the borrower to convert their home equity into cash and requires no monthly installments. The borrower can live in the house, and when they move out or pass away, the lender gets to keep or sell the property|
|No-closing-cost refinance||If you currently cannot afford the closing expenses on the new loan, opting for a no-closing cost refinance program is a viable choice. The cost is rolled into the outstanding principal or recouped via higher interest rates|
|Short refinance||Borrowers who default on their home loan prevent foreclosure by opting for short refinance. These loans are typically offered by hard money lenders who help out borrowers with poor credit|
Keep in mind that many lenders mix and match these products to create unique refinance packages.
Source: Yan Krukov
How To Refinance Your Home Loan—Process
Once you’ve set your refinancing goal, zeroed in on the kind of product you want, and chosen a fitting lender, you need to prepare for the application and screening process. The exercise is individual to the lender you pick, but in general, you can expect the following steps if you go to a bank or other traditional lender:
- Submit the loan application form along with documents requested by the lender, such as:
- Credit report
- Copies of existing mortgage documents
- Proof of income
- Statement of debt
- Tax returns
- Undergo a pre-approval screening—the lender will:
- Appraise your home
- Assess your financial health and associated risk factors
- Provide info about the closing costs, if they choose to refinance
- Evaluate the loan terms presented by the bank
- Accept the offer within the specified time frame to lock in an interest rate
- Pay the relevant fees and closing costs, depending on the product
Once you’ve completed your end of the deal, the lender will pay off your old loan. You’ll start accruing interest according to the new loan terms right after the closing date.
Where To Refinance a Home Loan
On a macro level, you can refinance your home loan with a traditional lender or a hard money lender. Both options work in different situations, but you need to do your homework before deciding on a specific lender.
Mortgage Loan Refinancing With a Traditional Lender
Traditional lender includes regional and national banks, credit unions, and other financial institutions offering loans within strict bureaucratic guidelines. The screening process for traditional refinance loans takes anywhere between 30 and 90 days.
You have to be ready for bulky documentation checks when applying for traditional loans. From your pay stubs to bank statements, the lender may ask for any financial record dating back several years to assess the lending risk. Your credit score also slips temporarily because the lender conducts a hard inquiry on your credit standing.
Traditional refinance is suitable if you’re looking for low interest rates or want long-term solutions like reverse mortgages, but they can be hard to qualify for.
Refinancing a Mortgage Loan With a Hard Money Lender
Hard money lending is a private and highly organized channel catering to borrowers who want efficient and bureaucracy-light loan services. A hard money refinance loan is similar to a traditional loan but with the following differences:
- Shorter tenures—Hard money loans are short-term, usually 1–5 years, so they are the perfect option if you want to wrap up your loan quickly. There’s also a chance you lower the lifetime borrowing cost (when compared to a 15- or 30-year product) and also benefit from the savings if the present value of the money concept comes into play
- Higher interest rates—Short-term loans come with higher interest rates to allow the lender to have an equalized annual yield on the transaction. Hard money refinance loans come with 8%–15% interest rates. On average, it’ll be about 1%–3% higher than the long-term refinance rates in your state
- Little to no credit check—Hard money loans are easy to qualify for as the lenders primarily focus on verifying the value of the property that will act as collateral. Since the risk is covered, the borrower’s credit history hardly influences the lending decision
- Less stringent paperwork—With hardcore credit checks out of the picture, the paperwork load is extremely light with this type of financing
- No impact on credit score—A borrower’s hard money loans are not reported to credit bureaus, so your credit score remains intact. You can, in fact, use these loans to consolidate or repay your existing debts and improve your credit standing
- Faster funding—Banks usually take awfully long to screen refinance applications. Since a hard money loan can be acquired within 2–3 weeks, it’s a great option if you’re looking for emergency refinancing
Hard Money Loan Solutions Enables Stress-Free Home Loan Refinancing
If you’re looking for quick, short-term home refinancing programs, reach out to Hard Money Loan Solutions (HMLS). The group services loans for all types of real estate properties, including:
- Single- and multi-family units
- Commercial and rental properties
- Bank-foreclosed and REO houses
- Special-use units
- Under-construction units
HMLS refinancing loans are customized to borrowers’ specific needs, which makes them work for both property investors and homeowners. The Florida-based group is manned by veteran investors and entrepreneurs who analyze deals based on the quality of real estate you bring them. If your collateral is healthy, and you hold decent equity in the property, you will qualify for the loan. You avoid the headache of:
- Voluminous paperwork (HMLS doesn’t ask for bank statements, tax returns, etc.)
- Painstaking bureaucratic screening
- Long wait time
HMLS refinancing packages are short-term and carry sensibly calculated interest rates. You pay only 9.99%—12% annually (fixed rate) and settle the loan within 1–3 years. Compared to a standard 30-year, 6% home loan, your overall cost of refinancing is substantially low.
You can opt for a regular refinancing package or go for other products like cash-out refinancing, short selling, and bridging. Contact Hard Money Loan Solutions to get a free consultancy on suitable short-term loans or refinancing products.
Source: Sebastian Herrmann
Why Get HMLS Refinance Home Loan Deals
Beyond the logistical benefits, HMLS offers a professional and customer-friendly experience to every client—the group’s personalized services have been rated 5/5 stars on Google. From the moment you place your loan application with HMLS, you get a team of seasoned lenders attending to your deal with a sense of urgency.
Source: Google Reviews
At HMLS, you can expect:
- Transparent processing
- Instant communications (for any decision impacting the borrower)
- Tolerance for low credit scores
- Minimal background check (foreign nationals can also apply)
- Legally compliant and easy-to-understand packages
- Guaranteed funding after approval
- Free consultancy throughout the loan tenure
HMLS follows the highest standards of ethical lending and expects clients to be truthful about their situation as well. If a borrower encounters a financial hardship down the line, they can talk to the lending team to tweak the repayment schedule or discuss alternate repayment strategies.
You can also apply for other HMLS loans based on your intent, such as rehabbing, business funding, house flipping, or buying residential or commercial real estate. Use the following table to gauge the standard lending terms at HMLS:
|Component||HMLS Lending Plan|
|(Loan-to-value) LTV ratio||Up to 70%—calculated as the lower of:|
Appraised value of the home
Latest purchase price
|Interest rate||9.99%–12% (depends on the LTV)|
|Origination fee||2 points or 2%|
|Closing time||3–14 days (on average, 10 days)|
|Prepayment penalty||No penalty if repaid after 6 months|
|Down payment||Not required|
How To Apply for a Refinance Home Loan at HMLS
You can apply for an HMLS home refinancing loan online by following these steps:
- Go to the dedicated HMLS loan application page
- Feed in basic personal info and contact details
- Enter your property or collateral’s address
- Provide the requested loan amount
- Add any questions or comments you may have (optional)
- Attach any relevant property document of your choice
- Submit the application
Your info is held in the highest confidence and used only for screening. If your deal makes sense, an in-house expert will call you to discuss the next steps. After a quick property appraisal and evaluation of the existing mortgage, HMLS will initiate the legal process to set up your loan package—you’ll enjoy access to the funds within a week or two of your application if you qualify.
Featured image source: RODNAE Productions