Technology is constantly changing! That means that aspects of life are changing as well. For example, let’s look at a mortgage refinance. Traditionally, refinances were done in-person with a financial institution that the borrower chose. These institutions were typically close to someone’s home so that it could be easily accessible. However, now that technology is in the picture, it is possible to refinance your mortgage online! This opens up a world of opportunities for lending.

What is a Mortgage Refinance?

A mortgage refinance is the process of getting a new mortgage loan to replace an existing one. When you begin your refinance, you will need to apply for another home loan just like you did when you originally got your home. However, instead of the funds from the loan going towards the purchase of a home, they will be used to pay off the existing mortgage. This effectively “replaces” the loan with the new one. There are a variety of different types of refinances but four popular options are:

• Rate-and-Term Refinance
• Cash-Out Refinance
• Cash-In Refinance
• No-Closing-Cost Refinance

Rate-and-Term Refinance

This is what most homeowners think of when it comes to a conventional refinance. With a rate-and-term refinance, a homeowner can get an updated interest rate and updated loan terms. Oftentimes this type of refinance is done to change when the loan must be repaid, to get a better interest rate, and to get an updated monthly payment.

Cash-Out Refinance

This refinance can provide homeowners the option to not only get an updated interest rate and updated loan terms, but also get cash out of their home. Homeowners can get cash out of their home by tapping into their available equity. Instead of the new loan being based on the original loan amount, it takes out a larger loan. The extra funds from the larger loan is what the borrower will receive at the time of closing. Lenders typically have limits on how much equity a homeowner can access.

Cash-In Refinance

In this type of refinance, the borrower will pay more to the lender during closing. This extra money will reduce the overall amount that the borrower owes the lender which can improve their loan-to-value (LTV) ratio.

No-Closing-Cost Refinance

Even though this refinance is advertised as having no closing costs, that is not entirely true. While closing costs will not be due during closing, lenders make up for it in different ways. For example, if a borrower has to pay $5,000 in closing costs, that amount would be rolled into the overall loan. Every lender is unique and has their own set up for a no-closing-cost loan but you can expect to see the closing costs be due in one way or another, even if not upfront.

Does Refinancing Hurt Your Credit?

Unfortunately, it could. Refinancing can negatively impact your credit in a couple ways:

• Hard Inquiry on Your Credit Report
• Closing an Active Account

Hard Inquiry on Your Credit Report

There are two types of inquiries; a hard inquiry and a soft inquiry. When a company like a lender wants to review your credit report, they will request a hard inquiry. They have to request this type of inquiry and the borrower must sign off on it to provide consent. Hard inquiries can have a negative impact on your credit by up to 5 points.

On the other hand, a soft inquiry will not have any impact on your credit score. These types of inquiries do not require written consent and are used to provide companies a best estimate of your credit health.

When getting a refinance, you will likely need to get a credit check (depending on the type of refinance you choose). However, when reviewing your lending options you want to make sure you don’t rack up a bunch of hard inquiries across a bunch of lenders. You should try to see if any of the lenders can provide a pre-approval before you submit a full application. This will help reduce the amount of overall impact on your credit.

Closing an Active Account

Your credit score is impacted by a bunch of factors. One of the factors is the average age of your credit. The average age of your credit can be determined by taking the average of all of the accounts within your credit report. However, when you refinance, you close the original loan since it is paid off by the new loan. Closing a long-standing account will reduce the overall age of your credit which can have a negative impact. If you want to reduce the impact of the closed account, then the health of the account is important to keep in mind. The better the health of the account then the less of an impact it will have on your score!

Reasons to Refinance Your Mortgage

There are plenty of reasons that people may look into getting a mortgage refinance. However, just because it is a reason, that doesn’t mean it is a good one. It is important to make sure you know your motivation to refinance because not only can it show you which type of refinance you should get, but it also shows you if you have the right intentions with your refinance.

Beneficial Reasons to Refinance

There are plenty of beneficial reasons to refinance your mortgage. Keep in mind that your financial situation is unique so you want to make sure that your reason (even if not stated on this list) still makes sense. Beneficial reasons to refinance include:

• Improve Monthly Payment
• Get a Better Interest Rate
• Debt Consolidation
• Get Rid of Private Mortgage Insurance (PMI)

Improve Monthly Payment

There are a variety of ways that a borrower can improve their monthly payment when they refinance their mortgage. It is important to do this in a smart way. Some homeowners try to reduce their monthly payment by increasing their mortgage repayment term. While this can have a better payment every month, it can lead to more interest paid over the course of the loan. Better ways to improve the monthly payment include getting a cash-in refinance to reduce the overall amount due to the lender.

Get a Better Interest Rate

Your interest rate is an important piece of your mortgage because it is extra money that you are responsible for paying. The interest rate acts like a fee charged by the lender in return for being a borrower. Every person has their own financial situation which means they will see different possibilities when it comes to the interest rate they will get. However, a mortgage refinance can provide the opportunity to get a better interest rate which can reduce the overall amount due over the course of the loan.

Debt Consolidation

If you currently have debt, especially debt with a high interest rate, then you may benefit from getting a mortgage refinance. A cash-out refinance provides extra funds to the borrower during closing. These extra funds can go towards paying off debt which consolidates them onto one account. While this can be a great way to improve the manageability of your finances, there is a drawback to be aware of. One downside of using funds from this type of refinance for debt consolidation means that you will not be able to deduct the mortgage interest paid on the cash-out funds. You have the option to deduct the mortgage interest that is paid on the funds if they are used towards home improvements, and debt consolidation is not a form of home improvement.

Get Rid of Private Mortgage Insurance (PMI)

Some home loans may require the borrower to have PMI. Refinancing a mortgage may be able to provide the borrower the chance to get rid of this PMI which can reduce their payment every month. Again, every lender and refinance type is different but a good rule of thumb is that the PMI can be dropped after the homeowner reaches at least 20% equity in their home.

Are There Online Refinance Lenders?

Yes! There are online companies that specialize in mortgage and refinancing. This online platform can provide the borrower the best of both worlds with convenience and automation in the mortgage process. In fact, online borrowers may even be able to save money and still could provide the beauty of dealing with a person directly even if they are online.

Top 5 Digital Refinance Lenders

Nerdwallet did a review of popular digital refinance lending options. From that list, five of the top rated lenders include:

• Better
• NBKC Bank
• Guaranteed Rate
• Rocket Mortgage
• Quicken Loans

Better 

This online lender is a great option for those that want a nice online experience for their refinance. Better offers human help as needed and is easy to use. The best part? They even offer pre approval letters in as little as 24 hours that have been reviewed by an underwriter! Even though this is a great lender for a bunch of loan options, it is not good for those that have VA or USDA loans.

NBKC Bank

Borrowers that have a good credit score and want to have a responsive online lender may benefit from choosing NBKC Bank as their lender. This option can be especially useful to those that have a VA loan. Other benefits of this lender include the fact that they offer affordable rates and fees, full online capabilities with the refinance process, and customized information. However, disadvantages of this lender to be aware of include:

• Equity lines and construction loans are only available in a specified area.
• Renovation loans are not offered by this bank.

These disadvantages are usually small enough that they don’t impact a majority of users.

Guaranteed Rate

This lender is a nice option for homeowners that want to refinance either a conventional, FHA, or VA mortgage. Guaranteed Rate can offer the ability to handle documentation online and even provide detailed sample rates for a variety of their loan products. Even though this can be a great option for borrowers, they may charge an application fee.

Rocket Mortgage

Rocket Mortgage is a convenient online lender that has an easy-to-use smartphone interface and online platform. Powered by Quicken Loans, this lender can be especially beneficial to those that like the refinance process done online, appreciate loan estimates with a quick qualification time frame, and documentation retrieval capabilities. However, this is a predominantly online lender and dealing with a person is only done when necessary. Those that want a customized interest rate quote will need to go through a credit check.

Quicken Loans

This is a popular online lender that many people have likely heard of! Quicken Loans is a great option for people that want to either go through the refinance process online with or without a mortgage advisor. This lender can verify income and employment instantly, and provide custom fixed-rate loan terms between 8 to 30 years. The best part? This lender offers a bunch of loan types, including government-backed mortgage products! Even though Quicken Loans has a bunch of benefits, they do not offer home equity loans or home equity lines of credit (HELOC). Another downside is the fact that the lender fees can be kind of pricey and may not be able to make up for the fact that they offer low interest rates.

Is it Better to Refinance Online?

While going online for your refinance can be beneficial, it doesn’t necessarily mean better. Some benefits of refinancing your mortgage online include:

• Faster Pre-Approvals
• Easy Documentation Uploads
• Reduced Paperwork Holdups

While these are some enticing benefits of speeding up the refinance process, there are also some disadvantages to be aware of. Some disadvantages of refinancing online include:

• Harder Eligibility
• Increased Rates in Exchange for Convenience

Every lender is different which is why it is important to make sure that the lender you choose is beneficial for your specific type of financial situation. For example, if you choose an online lender that specializes in VA loans, then you may not be able to benefit as much if you have a conventional loan and are not a veteran.

Overall

Refinancing online can be a great way for people to get the benefits of a refinance and the convenience of doing it digitally. There are four popular types of refinances which include:

• Rate-and-Term Refinance
• Cash-Out Refinance
• Cash-In Refinance
• No-Closing-Cost Refinance

These refinances can be a great way for people to achieve their goals like:

• Improve Monthly Payment
• Get a Better Interest Rate
• Debt Consolidation
• Get Rid of Private Mortgage Insurance (PMI)

There are a bunch of online lenders that you can consider when it comes to refinancing your home. 5 popular lenders are:

• Better
• NBKC Bank
• Guaranteed Rate
• Rocket Mortgage
• Quicken Loans

Each of these lenders have their own pros and cons which is why it is important to research your options before beginning the refinance process. A common misconception that people have is that online lenders are cheaper than “traditional” lenders but that’s not the case. Online doesn’t necessarily mean cheaper and in fact can mean more expensive due to more convenience that these types of lenders may be able to offer. It’s important to review all of your options from an online to an in-person standpoint. You may be surprised at who can benefit your specific refinance goals and financial situation the most!

Article References

https://www.experian.com/blogs/ask-experian/how-many-points-does-an-inquiry-drop-your-credit-score/

https://www.nerdwallet.com/best/mortgages/online-mortgage-lenders