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Table of Contents

Refinance Process ChecklistRefinance Process TimelineRefinance to Lower Your Interest RateRefinance to Reduce Your Mortgage TermRefinance to Convert Your Adjustable Rate Mortgage (ARM) into a Fixed Rate MortgageRefinance to Consolidate High-Cost Considering Total Interest Expense When Refinancing Your Mortgage to Consolidate High Cost DebtCash-Out Refinancing OverviewComparing a Cash-Out Refinancing to a Separate Financing for a Major PurchaseExample: Comparing a Cash-Out Refinancing to a Separate Financing for a Major PurchaseComparing Refinancing to a Home Equity LoanCombining mortgage refinancing with the FREEandCLEAR Mortgage Acceleration StrategyRefinance Lender OptionsMortgage Application (Form 1003) OverviewHow to Use the Loan Estimate (LE) in a RefinanceHow to Compare Refinancing Proposals and Pick the Right One for YouGet Pre-Approved for Your RefinancingUnderstanding “No Cost” RefinancingsWhat mortgage program is right for me?Mortgage Refinance Assistance Programs SummaryShould I Pay Discount Points to Lower My Interest Rate?Should I Lock My Refinancing?Settlement Agent Opens EscrowTitle Report and Title InsuranceAppraisal Report Overview

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Table of Contents

How to Use the Closing Disclosure (CD)How to Compare the Closing Disclosure to the Loan EstimateReview Mortgage Documents During the Right of Rescission PeriodRecord Documents and Fund Refinancing

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You will likely have to provide extensive personal and financial documentation to refinance your mortgageThis is so the lender can verify your income and assets and evaluate your credit-worthinessThe documents requested may vary somewhat by lender but will likely include the items listed on the rightHaving these documents available and organized at the beginning of the refinancing process will make things go much smoother Reviewing your personal finances in advance of the refinancing process will help you identify and resolve potential issues such as missing documents or errors you may find This will help you avoid potential delays and ensure that your refinancing is processed as quickly as possibleThe lender will also order your credit report as part of the refinancing application processYou should review your credit score at the beginning of the refinancing process to make sure that there are no surprises when the lender does it

Refinance Process Checklist

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Refinance to Lower Your Interest Rate

One of the most common reasons to refinance your mortgage is to lower your interest rate and monthly mortgage paymentA frequent question that borrowers ask is how much lower than my current interest rate does the new interest rate have to be for it to make sense for me to refinance?A good rule of thumb to follow when refinancing is that the new interest rate should be a minimum of .75% lower than your existing interest rate So if your current interest rate is 5.0%, the new interest rate should be 4.25% or lowerA reduction in interest rate of .75% or more allows you to reduce your monthly mortgage payment and typically recover your refinancing costs in 30 months or lessThe amount of time it takes you to recover your refinancing costs based on the amount of money you save on your new monthly mortgage payment is called the breakeven point When you refinance your mortgage you want the breakeven point to be 30 months or lessThe example below illustrates how refinancing your mortgage into a lower interest rate can save you money on your monthly mortgage payment For the example below we are holding the mortgage amount constant and assuming that the borrower pays closing costs but does not pay any discount pointsThe example demonstrates that by refinancing the borrower is able to reduce his or her monthly mortgage payment by $170 and recover the cost of refinancing in twelve monthsYou can also check out our FREEandCLEAR to learn whether it makes sense for you to refinance your mortgage

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Refinance to Reduce Your Mortgage Term

Another compelling reason to refinance is to reduce the term of your mortgageBy reducing the term of your mortgage you can potentially save a significant amount of money over the life of your mortgage, even if the refinanced interest rate is not significantly lower than the original interest rateAlthough shorter term mortgages have lower interest rates than longer term mortgages reducing the term of your mortgage may not result in a significant reduction in your monthly mortgage payment because the mortgage balance is amortized over a shorter period of timeBy reducing the term of your mortgage, however, you can lower your interest rate and significantly reduce the number of monthly payments you make over the life of the mortgage, which will likely save you tens of thousands of dollars in interest expense If you can reduce your mortgage term and your interest rate by refinancing that is doubly goodThe example below illustrates the benefits of refinancing your mortgage to reduce the term of your mortgage. In this case, the mortgage term is reduced from 30 to 25 years We show a .50% reduction in interest rate, less than the .75% reduction in interest rate that typically justifies refinancing a mortgage We show the borrower refinancing the original mortgage after five years The refinanced mortgage has a lower mortgage amount than the original mortgage, reflecting the pay-down of principal in the first five years of the original mortgage In order to properly compare the original mortgage to the refinanced mortgage, we add the interest expense incurred during the first five years of the original mortgage to the interest expense incurred during the 25 year term of the refinanced mortgage. The combined total interest represents the true cost of borrowing the $380,000 mortgage amount We also assume that the borrower pays closing costs but does not pay any discount pointsThe example demonstrates that by refinancing the borrower is able to save almost $30,000 in total interest expense over the life of the mortgage and reduce his or her monthly mortgage payment by almost $100 and recover the cost of refinancing in less than 20 monthsYou can also check out our FREEandCLEAR to analyze how changing the term of your mortgage impacts your monthly mortgage payment and total interest expense over the life of a mortgage

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Refinance to Convert Your Adjustable Rate Mortgage (ARM) into a Fixed Rate Mortgage

One of the biggest risks of an adjustable rate mortgage (ARM) is that your monthly mortgage payment increases significantly if interest rates rise Refinancing an ARM into a fixed rate mortgage can protect a borrowers against potential future increases in his or her monthly mortgage payment and potentially save the borrower tens of thousands of dollars in interest expense over the life of the loanThe example below demonstrates the benefits of converting an ARM mortgage into a fixed rate mortgage in an increasing interest rate environmentIn the example, the original mortgage is a 7/1 ARM that the borrower refinances at the end of year five The interest rate on the original mortgage is fixed for the first seven years and then is subject to adjust on an annual basis in years eight

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Refinance to Convert Your Adjustable Rate Mortgage (ARM) into a Fixed Rate Mortgage (continued)

For the purpose of this example, we show the fastest possible increase in the ARM’s fully-indexed interest rate during the adjustable rate period until the interest rate reaches its life cap in year eight and remains at that level until the end of the mortgageAt the end of year five, the borrower refinances the original 7/1 ARM into a 30 year fixed rate mortgage with an interest rate of 5.0% The principal amount of the mortgage does not change when the mortgage is refinanced We also assume that the borrower pays closing costs but does not pay any discount pointsThe following chart compares monthly mortgage payment and total interest expense between the original 7/1 ARM and the refinanced 30 year fixed rate mortgageIn years six and seven, the interest rate and monthly mortgage payment for the fixed rate mortgage are higher than the ARM’sHowever, as interest rates increase when the ARM enters its adjustable rate period in year eight and beyond, the fixed rate mortgage offers the borrower lower monthly mortgage payments and lower total interest expense as compared to the ARMBy refinancing into a fixed rate mortgage at the end of year five, the borrower gains certainty over his or her monthly mortgage payment, reduces his or her monthly mortgage payment by $425 per month in years 8 through 30 and saves a total of $76,224 in interest expense over the life of the mortgageWhile this example shows the worst case scenario for the 7/1 ARM, it also shows the significant benefits of refinancing an ARM into a fixed rate mortgage if you think interest rates are going to increaseYou can also check out our FREEandCLEAR to learn whether it makes sense for you to refinance your mortgage

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Refinance to Convert Your Adjustable Rate Mortgage (ARM) into a Fixed Rate Mortgage (continued)

The table below compares the original 7/1 ARM to a refinanced 30 year fixed rate mortgage put in place at the beginning of year sixThe table illustrates the savings in monthly mortgage payment beginning in year eight and total interest expense over the life of the mortgage realized by refinancing into a fixed rate mortgage

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Refinance to Consolidate High-Cost

If you have recurring debt with a high interest rate, such as credit card debt, it may make sense for you to refinance your mortgage and consolidate your high-cost debt into your mortgageBy consolidating your high cost debt into your monthly mortgage payment, you may be able to lower your total monthly debt expenseThe example below demonstrates how refinancing enables you to use the equity in your house to eliminate expensive credit card debt and reduce your monthly debt expenseIn this example the borrower has a $380,000 fixed rate mortgage and $20,000 in credit card debtThe mortgage has an interest rate of 5.0% and the credit card debt has an interest rate of 18%The borrower is five years into the mortgage and has a mortgage balance of approximately $348,950The borrower refinances the mortgage at the original mortgage balance and uses the proceeds from the refinance of $31,050 (the difference between the amount of the refinanced mortgage and the current mortgage balance) to pay-off the high interest credit card debt and pay for the refinance costs. The borrower also keeps the $9,176 in proceeds leftover from the refinancingBy refinancing the original mortgage and consolidating the high interest rate credit card debt, the borrower reduces his or her monthly debt expense by $322You can also check out our FREEandCLEAR to determine whether it makes sense to do a debt consolidation refinancing

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Considering Total Interest Expense When Refinancing Your Mortgage to Consolidate High Cost Debt

It is important to consider total interest expense when you refinance your mortgage to consolidate high cost debtUnless you lower the interest rate of your mortgage when you refinance, you will pay more in total interest over the life of the refinanced mortgage, even if you lower your combined monthly mortgage and credit card payment by paying off your credit card debtBy refinancing five years into the original mortgage, you are extending the mortgage term The original 30 year mortgage essentially becomes a 35 year mortgage when you refinance The longer the mortgage term, the greater the interest expense unless you are able to lower the interest rateIn the example below we compare three cases: Not refinancing Refinancing at the same interest rate and paying off high-cost credit card debt Refinancing at a lower interest rate and paying off high-cost credit card debtFor each case we examine the combined monthly mortgage and credit card payment and total interest expense over the life of the mortgageIt is interesting to note that the refinance case where the interest rate is unchanged, the borrower reduces his or her combined monthly mortgage and credit card payment by $240 per month but pays $44,949 more in total interest over the life of the mortgage as compared to not refinancing – even though the expensive credit card debt has been paid off by refinancingIn the case where the borrower refinances at a lower interest rate, the borrower reduces his or her combined monthly mortgage and credit card payment by $465 per month and pays $36,051 less in total interest over the life of the mortgage as compared to not refinancingThe borrower’s primary goal may be to lower his or her total monthly debt expense, in which case both refinancing scenarios make senseIf the borrower is focused on both total monthly debt expense and total interest expense over the life of the mortgage then he or she should only refinance if the interest rate can be loweredYou can also check out our FREEandCLEAR to determine whether it makes sense to do a debt consolidation refinancing

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Cash-Out Refinancing Overview

Refinancing your mortgage may allow you to use the equity in your home to pay for a major expense such as college tuitionIn order to qualify for a cash-out refinancing you must have equity in your property, which means that the value of your property is greater than the amount of your current mortgage balanceIn a cash-out refinancing the amount of your refinanced mortgage is greater than the principal balance of your existing mortgage The borrower keeps the difference between the amount of the new mortgage and the principal balance of the existing mortgage and can use the money for a major expenseIn the example below we show a borrower that owns a property with a value of $400,000 who needs $50,000 to pay for college tuition The borrower originally took out a $300,000, 30 year fixed rate mortgage with a 5.0% interest rate to purchase the property The borrower is 10 years into the original mortgage and has a current mortgage balance of $244,000 The borrower has $156,000 in equity in the property $400,000 (property value ) - $244,000 (mortgage balance) = $156,000 in equityThe borrower refinances the original mortgage with a 30 year fixed rate mortgage with an interest rate of 5.0%, so there is no change in interest rateThe amount of the refinanced mortgage is $300,000, the same as the amount of the original mortgageBy refinancing, the borrower is able to take out $56,000 in cash – the difference between the amount of the new mortgage and the principal balance of the original mortgage – to pay for college tuition and refinancing costsBecause the interest rate and mortgage amount do not change, the borrower’s monthly mortgage payment does not changeUse the FREEandCLEAR to assess whether it makes sense to refinance your current mortgage to pay for a major purchase

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Comparing a Cash-Out Refinancing to a Separate Financing for a Major Purchase

In many situations it may not make sense to do a cash-out mortgage refinance to pay for a major purchase and instead it may make more sense to finance the purchase with a separate loanDepending on the interest rate and term that you are able to obtain for the separate financing, you may end up paying more in total interest when you do a cash-out refinancing This is because you are replacing short-term financing for the separate loan (for example, the length of a car loan is typically five-to-ten years) with long-term financing of a mortgage (the length of a mortgage is typically 15-to-30 years)The key factors that determine whether it makes sense to finance a major purchase separately or as part of a cash-out refinancing are the interest rates and terms of the mortgage and the separate financing plus the combined monthly payment of the financingsEven in some cases where your mortgage interest rate is lower than the interest rate for the separate financing you may end up paying more in total interest expense over the life of the refinanced mortgageIn evaluating whether it makes sense to do a cash-out refinancing to pay for a major purchase or to finance the purchase with a separate loan there may be a trade-off between having a lower monthly payment for a set number of years and paying more in total interest over the life of the mortgageIn an ideal scenario a cash-out refinancing will allow you to reduce your mortgage interest rate or term, enabling you to lower your monthly mortgage payment, reduce your total interest expense over the life of the mortgage and take enough money out for a major purchaseOtherwise, it may make more sense and save you money over the long term to keep your current mortgage in place and obtain separate financing for the major purchase

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Example: Comparing a Cash-Out Refinancing to a Separate Financing for a Major Purchase

In many situations it may not make sense to do a cash-out mortgage refinance to pay for a major purchase such as college tuition or remodeling your home and instead it may make more sense to finance the purchase with a separate loanDepending on the interest rate and term that you are able to obtain for the separate financing, you may end up paying more in total interest when you do a cash-out refinancing This is because you are replacing short-term financing for the separate loan (for example, the length of a car loan is typically five-to-ten years) with long-term financing of a mortgage (the length of a mortgage is typically 15-to-30 years)In the first example, the borrower needs to decide if the lower monthly payment for the first ten years of the refinanced mortgage is more important than paying $117,600 more in total interest expense over the life of the mortgage as compared to not refinancing and obtaining a separate college tuition loanIn the second example, it makes financial sense for the borrower to do a cash-out refinancing. Refinancing into a mortgage with a significantly lower interest rate enables the borrower to lower his or her monthly payment and reduce total interest expense over the life of the mortgage as compared to obtaining a separate college tuition loanYou can also check out our FREEandCLEAR to assess whether it makes sense to refinance your current mortgage to pay for a major purchase

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Comparing Refinancing to a Home Equity Loan

Borrowers looking to access the equity in their property to pay for a major typically decide between a cash-out refinancing or taking out a home equity loan or home equity line of credit The borrower may use the proceeds from a cash-out refinancing, home equity loan or home equity line of credit to pay for major expenses such as college tuition, home renovation, paying off credit card debt or buying a second home or investment propertyThere are pros and cons to both financing options and the right answer depends on the borrower’s financial situation and objectives Use our to determine whether it makes sense to refinance your current mortgage or obtain a home equity loan or line of credit to pay for a major purchaseThe interest rate and term for your existing mortgage and the length of time that you have been paying down your existing mortgage are all important factors in deciding what option is right for youThe key factors that determine whether it makes sense to finance a major purchase with a cash-out refinancing or a home equity loan or line of credit are the length of time you have been paying down the existing mortgage as well as the interest rates and terms of the existing mortgage and home equity loan or line of creditIn many situations it may not make sense to do a cash-out refinance to pay for a major purchase and instead it may make more sense to obtain a home equity loan or line of creditUnless you are able to reduce the interest rate and term of your existing mortgage it typically makes more sense financially for a borrower to select a home equity loan or line of credit than a cash-out refinancingThis is because by refinancing your existing mortgage, unless you reduce the term of the new mortgage, you are basically starting over in paying back the original mortgage, which will cost you thousands of dollars more in interest expense For example, you are ten years into a $200,000 30 year mortgage and you refinance your mortgage with a new $200,000 30 year mortgage you have essentially converted your original 30 year mortgage into a 40 year mortgage, which means you pay thousands more in interest expense over the life of the loan The longer the mortgage the more interest expense you payThe example below demonstrates how a home equity loan can save you hundreds of thousands of dollars in total interest expense as compared to a cash-out refinancing In this example the borrower is ten years into the original $300,000 mortgage and wants $50,000 for a major purchase The two scenarios below compare obtaining a separate 15 year $50,000 home equity loan and not refinancing the original mortgage (Scenario 1) to a cash-out refinancing (Scenario 2) In this example, the borrower does not reduce his or her mortgage term or interest rate by refinancing and replaces the original 30 year $300,000 mortgage with a new 30 year $300,000 mortgage and takes $50,000 in cash out by refinancing As demonstrated by this example, because the borrower does not reduce his or her mortgage term or interest rate by refinancing, a cash-out refinancing costs the borrower thousands more in total interest expense over the terms of both the original and new mortgages When you add the interest expense from the first ten years of the original mortgage to the new refinanced mortgage, the borrower spends $111,250 more in total interest expense as compared to keeping the original mortgage and taking out a home equity loan This is because the borrower effectively extended the term of the original mortgage by 10 years (so the borrower makes 10 extra years of mortgage payments in Scenario 2)

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Comparing Refinancing to a Home Equity Loan (continued)

If you are also able to reduce both your interest rate and term when you refinance, a cash-out refinancing can save you money in total interest expense in the long runThe second example below demonstrates how a cash-out refinancing can save you thousands of dollars in total interest expense as compared to keeping your original mortgage and obtaining a home equity loan if you are able to reduce your interest rate and term when you refinance In this example the borrower is ten years into the original $300,000 mortgage and wants $50,000 for a major purchase The two scenarios below compare obtaining a separate 15 year $50,000 home equity loan and not refinancing the original mortgage (Scenario 2) to a cash-out refinancing (Scenario 2) In this example, the borrower replaces the original 30 year $300,000 mortgage with a 5.00% interest rate with a new 20 year $300,000 mortgage with a 4.00% interest rate and takes $50,000 in cash out by refinancing As demonstrated by this example, because the borrower reduces his or her mortgage term and interest rate by refinancing, a cash-out refinancing saves the borrower thousands in total interest expense When you add the interest expense from the first ten years of the original mortgage to the new refinanced mortgage, the borrower saves $32,050 in total interest expense as compared to keeping the original mortgage and taking out a home equity loan Because the mortgage term was reduced from 30 years to 20 years, the borrower’s monthly mortgage payment increases from $1,610 with the original mortgage to $1,818 with the new refinanced mortgage even though the mortgage amount stayed the same and the interest rate decreased The shorter the mortgage term, the higher the monthly mortgage payment but the lower the total interest expense over the life of the mortgage The new monthly mortgage payment of $1,818 is less than the $2,032 combined monthly payment of the original mortgage ($1,610) and the home equity loan ($422)

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Comparing Refinancing to a Home Equity Loan (continued)

As these examples demonstrate, in comparing a refinancing to keeping your original mortgage and obtaining a home equity loan or line of credit there may be a trade-off between having a higher monthly payment for a set number of years (10 to 15 years for a home equity loan) and paying less in total interest over the life of the mortgageIn an ideal scenario a refinancing will allow you to reduce your mortgage interest rate and term, enabling you to lower your monthly mortgage payment, reduce your total interest expense over the life of the mortgage and take out enough money for a major purchaseOtherwise, if you can afford the higher monthly payment for a set number of years it typically makes more sense and saves you money in total interest expense over the long term to keep your current mortgage in place and obtain a home equity loan or line of credit Always remember to consider total interest expense when evaluating if you should refinance your existing mortgage or obtain a home equity loan or line of credit

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Combining mortgage refinancing with the FREEandCLEAR Mortgage Acceleration Strategy

If you are able to lower your interest rate and monthly mortgage payment by refinancing your mortgage you can apply the FREEandCLEAR mortgage acceleration strategy to save thousands of dollars in interest expense over the life of the mortgageThe simplest way to apply the FREEandCLEAR Mortgage Acceleration Strategy in combination with a refinancing is to continue to make the same monthly mortgage payment that you were making prior to refinancingBy paying more than the required monthly mortgage payment you accelerate the date when your mortgage is paid in fullAccelerating your mortgage can reduce the term of your mortgage by a number of years and save you thousands of dollars in mortgage paymentsThe example below compares the monthly mortgage payment, mortgage term and total interest expense between refinancing a mortgage and combining refinancing a mortgage with the FREEandCLEAR Mortgage Acceleration StrategyIn the example, the borrower is five years into a $300,000, 30 year fixed rate mortgage with and interest rate of 5.0% and refinances into a new 30 year fixed rate mortgage with an interest rate of 4.0%In the refinance-only scenario, the borrower saves $178 on his or her monthly mortgage payment but pays $8,000 more in total interest expense over the term of the mortgageIn the second scenario, the borrower combines the refinancing with the FREEandCLEAR Mortgage Acceleration Strategy and continues to make the same mortgage payment he or she made prior to refinancing as compared to the original mortgageThe borrower’s monthly mortgage payment does not change but paying more than the required monthly mortgage payment reduces the term of the mortgage by 69 months and saves the borrower $47,000 in interest expense over the life of the mortgage as compared to refinancing and not applying the FREEandCLEAR Mortgage Acceleration StrategyYou can also check out our FREEandCLEAR and FREEandCLEAR to understand the benefits of refinancing as well as the FREEandCLEAR Mortgage Acceleration Strategy

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Refinance Lender Options

It is important to realize that even though you have an existing mortgage and lender you have options when refinance. You can use these options to create competition for your refinancing and make sure you are getting the best terms for your new mortgageThere are several types of mortgage lenders including banks, mortgage brokers, mortgage bankers, credit unions and private investors and there are pros and cons to working with each type of lender. The table at the bottom of the page outlines your mortgage lender options and their positive and negatives Some mortgage lenders such as banks, mortgage bankers and credit unions are direct lender, which means they lend you money directly for your mortgage, potentially allowing them to offer you a lower interest rate Other lenders such as mortgage brokers do not fund mortgages directly but instead act as a personal mortgage shopper for borrowers and compare rates and fees from multiple funding lenders to find you the best terms for your mortgage, so you benefit from lender competition Private investors typically charge the highest interest rate and are used by borrowers who have poor credit or who are unable to qualify for a mortgage with other types of lendersTreat the refinancing process like you would any other major purchase, such as buying a car -- shop around, compare proposals from multiple lenders and negotiate the best terms for your refinancingIn addition to speaking with your current lender, we highly recommend that you speak to several lenders when shopping for your refinancing including one lender from each category There is almost never any unique advantage to refinancing with your current lender – select the lender that offers you the lowest interest rate with the lowest transaction costs Gathering and comparing mortgage proposals from several lenders will help ensure that you receive the best terms for your refinancing The table shows interest rates and fees for a selection of lenders in your area. You can also click to see a full list of lendersUse the to compare refinancing proposals and select the one that is right for you

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Mortgage Application (Form 1003) Overview

Just like when you obtain a mortgage to purchase a property, lenders require that borrowers submit a loan application when applying to refinance their mortgageMost lenders use a standard online or paper mortgage application but according to mortgage laws, if borrowers submit the following information they satisfy the legal definition of a mortgage application Name Income Social Security NumberBe it for a mortgage to purchase a property or a refinancing – almost all lenders use the same standard loan application form – referred to as a Form 1003 We have provided an example loan application so you can understand the information required when you submit a loan application

Property AddressEstimated Property ValueEstimated Mortgage Amount

The loan application contains a lot of questions about a borrower’s income, assets, debt and employment history Check out the FREEandCLEAR mortgage refinance checklist that lists the personal and financial documents you will likely have to provide to the lender when applying to refinance your mortgage. You will also use information from these documents to fill-out the loan application FREEandCLEAR recommends that you gather, organize and review these documents at the beginning of the refinance process The good news is that almost all lenders provide an online loan application which streamlines the process and allows you to submit the application from the comfort of your own homeIn most cases a loan application is required to receive refinancing proposals from lenders including the documents (Loan Estimate (LE) and Lender Fees Worksheet) that you can use to compare lenders and select your mortgage Lenders cannot charge borrowers a fee for submitting a mortgage application or for providing a Loan Estimate (LE). The lender must provide the borrower an LE that outlines a good faith estimate of key mortgage terms and costs within three business days of the borrower submitting a mortgage application. The only fee a lender can charge the borrower before providing the LE is a small credit report fee ($10 - $30) Lenders are not permitted to require the borrower to provide documents that verify the information on the borrower’s mortgage application before proving the LE If a lender attempts to charge you to take a mortgage application or provide an LE, immediately stop working with that lender and report the lender to the Consumer Finance Protection Bureau (CFPB) You can and should submit mortgage applications to multiple lenders so that you can review and compare multiple refinancing proposals to find the mortgage that is right for you It is important to highlight that just because you submit a mortgage application to a lender and receive an LE does not obligate you to work with that lender on your refinancing Comparing mortgage proposals from multiple lenders is one of the best ways to ensure that you receive the best terms for your refinancing and FREEandCLEAR recommends this approach even it requires additional effort by the borrowerClick to review interest rates for lenders in your area and contact them to apply for your refinancing

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After you finalize your lender selection you should move as quickly as possible to complete your refinancingAt this point in the process, the lender that you have selected for your refinancing will likely ask you for numerous personal and financial documents to finalize your mortgage applicationIn addition to requesting personal and financial documents, the lender will also order your credit report to include with your mortgage application FREEandCLEAR recommends that you review your credit score at the beginning of the refinance process to identify and address any potential issues before the lender reviews itThe lender will add your financial documents and credit report to finalize your mortgage application

Mortgage Application (Form 1003) Overview (continued)

Finalizing Your Mortgage Application

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How to Use the Loan Estimate (LE) in a Refinance

According to the TILA-RESPA Integrated Disclosure Rule (TRID), the lender must provide the borrower a Loan Estimate, also known as an LE, that outlines a good faith estimate of the key terms of the mortgage including interest rate, closing costs and mortgage features within three business days of the borrower submitting a loan application to the lender In a refinancing, the LE also indicates the cash-out the borrower receives or cash required from the borrower when the mortgage closes, including the pay-off of your existing mortgage or other debts

The LE is a powerful tool that borrowers can use to review and compare refinance proposals from multiple lenders and decide if they want to move forward with the mortgage processThe LE is a standard document that will be the same across all lenders. The figures may change as proposals vary across lenders, but the form itself will remain the same – this allows you to more easily compare proposals from various lendersYou can and should submit mortgage applications to multiple lenders so that you can review and compare multiple LEs to find the mortgage that is right for you Submitting a mortgage application and receiving an LE from a lender does not obligate you to work with that lender If a lender is unwilling to provide an LE this raises a significant red flag and you should consider working with other lendersWhen you compare LEs, you should focus on three key items that impact your up-front and long term mortgage costs: Interest Rate. This is the fee the lender charges you to borrow money until the loan is paid in full. The interest rate is on the top of page 1 of the LE. The lower the interest rate, the better. In some cases a lender will charge you a lower interest rate but higher closing costs so there may be a trade-off you have to consider. Additionally, different types of mortgages and mortgages with different lengths have different interest rates so make sure you are comparing mortgages with the same terms Closing Costs. Closing costs are the fees charged by the lender and numerous third parties to process and close your mortgage. The estimated closing costs figure is on the bottom of page 1 of the LE. In general, the lower the closing costs, the better but in some cases the lender may charge or the borrower may elect to pay higher closing costs to receive a lower interest rate Annual Percentage Rate (APR). In short, the APR represents what your interest rate would be if it included all up-front lender and closing costs so it is a way to use one figure to compare both the interest rate and closing costs for a mortgage. For example, if you have proposals from two lenders that are offering the same interest rate but one APR is higher than the other, then you know the lender with the higher APR is charging closing costs. The APR is on the top of page 3 of the LEYou can use our to compare mortgage proposals from numerous lenders to find the mortgage with the lowest combination of interest rate and closing costsAlthough it is not required by law, you should also ask lenders for a Lender Fees Worksheet, which provides an additional breakdown of all the costs and expenses associated with a mortgage that you can use to compare lendersSelect lenders from the table below or click to review lenders in your area and contact them about applying for your refinancing and receiving an LE. FREEandCLEAR recommends comparing LEs from three-to-four lenders to find the mortgage with the lowest rate and feesPrior to your mortgage closing, you can compare your LE with the Closing Disclosure (CD) document to ensure that your final, actual interest rate and closing costs did not increase significantly as compared to the initial estimate provided by the lender in the LE The CD is a document that the lender must provide to borrowers three days prior to the mortgage closing that details the final terms of your mortgage Significant differences between the LE and CD (e.g., an increase in interest rate or higher borrower costs), may be a sign that you are not getting the mortgage you thought you were. We go into this in more detail when we review the Closing Disclosure document

How Borrowers Can Use the Loan Estimate

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The LE must be delivered by the lender to the borrower in-person or by email or mail within three business days of the borrower submitting a mortgage application to the lender If the LE is provided by mail, it may take longer than three days for the borrower to actually receive it. For example, the lender may put the LE in the mail three days after the borrower submits a mortgage application and it may take an additional two-to-three days for the borrower to receive the documentLenders are not permitted to require the borrower to provide documents that verify the information on the borrower’s mortgage application before proving the LELenders cannot charge borrowers a fee for submitting a mortgage application or for receiving an LE The only fee a lender can charge the borrower before providing the LE is a small credit report fee ($10 - $30) If a lender attempts to charge you to take a mortgage application or provide a LE, immediately stop working with that lender and report the lender to the Consumer Finance Protection Bureau (CFPB)The LE must be provided to the borrower in writing -- a verbal LE is not permittedIf the lender provides the borrower a written estimate of the mortgage terms other than the LE, the estimate must include disclosure at the top of the estimate that indicates that the mortgage terms are subject to changeIf you are working with a mortgage broker either the mortgage broker or the funding lender may provide the LE but the funding lender is legally responsible for the LE documentLenders generally may not issue a revised LE because they made technical errors or underestimated fees. For example, if a lender makes a mistake on an LE, such as omitting a fee, the lender is responsible for the error and the borrower is not required to pay that feeLenders can only issue a revised LE when they receive new or updated information about the borrower or mortgage that causes the interest rate or fees to increaseCircumstances that may cause the terms of the mortgage to change include a revised credit report, receipt of the appraisal report, the borrower deciding to change the down payment or the borrower deciding to lock the interest rate during the course of the mortgage processA revised LE must be issued no later than three business days after the lender receives the updated information and no later than seven business days before the close of the mortgageFREEandCLEAR provides an example LE document as well as a detailed breakdown and explanation of the items on the LE

What Borrowers Should Know About the Loan Estimate

How to Use the Loan Estimate (LE) in a Refinance (continued)

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How to Compare Refinancing Proposals and Pick the Right One for You

You should treat the refinancing process like you would any other major purchase, such as buying a car -- shop around, compare refinancing proposals from multiple lenders and select the best proposal. Follow the steps below to negotiate the best terms for your refinancing: Gather refinancing proposals from at least four lenders, including one mortgage broker There are different types of lenders such as banks, mortgage brokers, mortgage bankers and credit unions and they are ALL competing for your refinancing business Some mortgage lenders such as banks, mortgage bankers and credit unions are direct lenders, which means they lend you money directly for your mortgage, potentially allowing them to offer you a lower interest rate Other lenders such as mortgage brokers do not fund mortgages directly but instead act as a personal mortgage shopper for borrowers and compare rates and fees from multiple funding lenders to find you the best terms for your refinancing, so you benefit from lender competition Gathering proposals from at least four lenders will ensure that you have a range of options, which puts you in a stronger position when you negotiate your refinancing Request a Loan Estimate (LE) and Lender Fees Worksheet from the lenders you contact According to federal law, the lender must provide the borrower a Loan Estimate (LE), that outlines a good faith estimate of the key terms of the mortgage including interest rate, Annual Percentage Rate (APR), closing costs and mortgage features within three business days of the borrower submitting a loan application. If a lender refuses to provide an LE, this is a red flag and you should contact other lenders. The LE is a standard document that will be the same across all lenders – this allows you to more easily compare refinance proposals from various lenders The Lender Fees Worksheet provides a detailed breakdown of all the costs and expenses associated with a mortgage refinancing including fees charged by lenders and other third parties. By law, the lender is not required to provide you with the worksheet, but will likely provide it to you if you ask Borrowers should use the information on interest rates and refinancing costs presented in these documents to compare refinancing proposals Please note that a lender cannot charge you to submit a mortgage application or to provide the LE and Lender Fees Worksheet Compare refinancing proposals When comparing mortgage proposals, we recommend that you focus on two key items that have the most impact on your up-front and long-term mortgage costs: 1) interest rate, and 2) closing costs. You can use the Loan Estimate (LE) and Lender Fees Worksheet to help with the comparison You can find the interest rate at the top of page one of the LE and the estimated closing costs at the bottom of page one. Page two of the LE provides a detailed, item-by-item breakdown of the all the mortgage closing cost items you are required to pay You should also use the Annual Percentage Rate (APR) on the top of page three of the LE to quickly compare and identify excessive closing costs. In short, the APR represents what your interest rate would be if it included all up-front lender and closing costs so it is a way to use one figure to compare both the interest rate and closing costs for a mortgage. If the APR is much higher than your interest rate then you know that the closing costs are relatively high and you may want to negotiate lower costs or change lenders. Additionally, if you have proposals from two lenders that are offering the same interest rate but one APR is higher than the other, then you know the lender with the higher APR is charging higher fees We outline these three items in the table below and tell you where to find them on the LE. Click on the LE rectangles under the cost items to see where each figure is located on the LE You can also use the Lender Fees Worksheet to perform a more detailed review of mortgage closing costs and negotiate specific cost items to reduce your overall mortgage costs When you compare refinancing proposals keep in mind that interest rates and closing costs vary by mortgage program. For example, a fixed rate mortgage typically has a higher interest rate than an adjustable rate mortgage. In some cases borrowers review different types and lengths of mortgages as part of their selection process so be sure you are comparing similar mortgage programs when selecting your lender

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Negotiate the best terms Some lenders may offer a lower interest rate with higher fees while other lenders may offer a higher interest rate with lower fees Use this information to your advantage to negotiate the lowest interest rate and fees for your refinancing by seeing if a lender is willing to match the interest rate or fees offered by another lender Additionally, you can use the Lender Fees Worksheet to perform a more detailed review and comparison of refinancing closing costs. For example, one lender may charge an appraisal fee of $600 while another lender may only charge $500. Use information from the Lender Fees Worksheet to negotiate specific cost items and reduce your overall refinancing closing costsIt takes extra time to compare and negotiate lender proposals but spending an extra hour or two can save you thousands of dollars over the life of your mortgage. For example, on a $300,000 30 year fixed rate mortgage, reducing your interest rate by just .125% will save you almost $8,000 in interest expense over the life of your mortgageOur enables you to take the information provided by lenders and input the interest rate and costs for multiple mortgages to compare them and select the refinancing that is right for you

How to Compare Refinancing Proposals and Pick the Right One for You (continued)

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Get Pre-Approved for Your Refinancing

It is important to seek lender pre-approval at the beginning of the refinance process to ensure that you qualify for the refinancingGetting pre-approved can help you determine if refinanicng your existing mortgage is possible so that you can avoid wasting time and money on up-front transaction costs that may be non-refundableUnderstanding your lender options, asking the right questions and getting pre-approved for your refinancing at the beginning of the process will enable you to address potential issues up-front and eliminate unpleasant and expensive surprisesThe pre-approval process focuses the loan-to-value (LTV) ratio of the refinanced mortgage LTV represents the amount of your mortgage divided by the value of the property that you are refinancing For example, if you want to refinance a $400,000 mortgage on a property valued at $500,000, the loan-to-value ratio is 80% ($400,000 mortgage ÷ $500,000 property value = .80 = 80%)It is important to understand if the value of your property has changed since you obtained your existing mortgage as this will impact the LTV ratio and potentially your ability to qualify for the refinancing You can check out real estate web sites like Realtor, Trulia and Zillow to get an initial estimate of your poroperty’s value Lenders may also have resources they can use to provide an initial estimate of the value of your property This will help determine if you have enough equity in your property to refinance your mortgageLenders will typically offer their best interest rates on mortgages with an LTV of 80% or less If the value of your property has declined, your LTV ratio may go up (and potentially be greater than 80%) depending on the mortgage amount you are seekingThe pre-approval process also focuses on borrower mortgage qualification, what size mortgage the borrower can afford and the borrower’s ability to make the monthly mortgage payment and pay back the mortgageGetting pre-approved typically requires a borrower to provide certain personal and financial information to a lender Lenders typically require that borrowers submit pay stubs, bank statements and other personal financial documents to verify your income and assets The lender will also review your credit score Your personal employment or financial situation may have changed since you obtained your original mortgage which could impact your ability to refinance your loan Although somewhat unusual, some lenders may require that borrowers submit a full loan application to get pre-approvedMortgage pre-approval is typically subject to the borrower finalizing his or her mortgage application as well as lender review of the property appraisal, title report or abstract and other documentation required to close your mortgageAdditionally, your mortgage pre-approval may also be based on a speciifc interest rate or mortgage program so if interest rates increase or you select a different mortgage program, it may affect your ability to receive final approval for the pre-approved mortgage amountIt is important to highlight that getting pre-approved for your refinancing is different than getting pre-qualified Pre-qualification is a preliminary assessment of what size mortgage you qualify for and typically does not require borrowers to submit documents to verify their income and assets. Additionally, lenders typically do not pull your credit score to pre-qualify you Because the pre-approval process requires you to provide more information than getting pre-qualified, being pre-approved is much more valuable and beneficial to the borrowerFinally, just because you are pre-qualified by a lender or submit a mortgage application to a lender does not obligate you to work with that lender to finalize your refinancing Even if you have been pre-qualified by a lender, FREEandCLEAR recommends that you compare refinancing proposals from multiple lenders to find the mortgage that is right for youClick to review lenders in your area and get pre-qualified

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Understanding “No Cost” Refinancings

Borrowers are often bombarded with marketing messages for “no cost” refinancing programs“No cost” refinancings promise the borrower the ability to refinance his or her mortgage without paying any out-of-pocket closing costs If you are interested in a no cost mortgage be sure to ask the lender up-front what costs you are required to pay, if any. Make sure that you are not required to pay any lender or third party closing costs including non-lender costs such as the appraisal, title and escrow fees In some cases with a “no cost” refinancing the lender requests that the borrower pay for non-lender closing costs such as appraisal, title, escrow and attorney (if applicable) fees. This is not truly a “no cost” refinancing In other cases “no cost” refinancings may require the borrower to pay certain costs, such as an appraisal fee, up-front, and then those costs are rebated to the borrower when the mortgage closes. This is considered a “no cost” refinancing because the borrower recovers the up-front costs when the mortgage closes Additionally, make sure that no costs are rolled into your new mortgage, which increases your mortgage amount and monthly payment. Rolling closing costs into the loan amount is a clever way for lenders to make borrowers pay closing costs without charging the borrower up-front Your loan amount when your mortgage closes should equal the loan amount you agreed to obtain at the beginning of the processThe important point to understand about a “no cost” refinancing is that although it does not require the borrower to pay any out-of-pocket transaction costs, it typically charges a higher interest rate which can cost the borrower thousands of dollars more over the life of the mortgage So even though the borrower does not have to pay any up-front costs to refinance his or her mortgage, he or she may end up paying a significantly greater amount of interest expense over the life of the mortgage than the amount of any up-front closing costs Be sure to understand the trade-off between not paying closing costs up-front and paying a higher interest rate which increases your monthly mortgage payment and total interest expenseOne way to check to see if a refinancing is truly “no cost” is to compare the interest rate to the Annual Percentage Rate (APR) found on page three of the Loan Estimate (LE) The Loan Estimate (LE) outlines a good faith estimate of key mortgage terms and features including the Annual Percentage Rate (APR). The lender is required to provide an LE to the borrower within three days of the borrower submitting a loan application In short, the APR represents what your mortgage interest rate would be if it included all up-front lender and closing costs If a refinancing is truly “no-cost” then the APR should equal the interest rate. If the APR is higher than the interest rate then you know the refinancing is not “no-cost” and you will be required to pay certain closing costsThe example below shows a case where the borrower ends up paying over $12,000 more in total interest expense over the life of the mortgage by choosing a “no cost” refinancing. This is because although the borrower saves $3,500 up-front by not paying closing costs, he or she pays the higher interest rate of 4.25% as compared to 4.00% over course of the mortgage which costs the borrower more money in total interest expense

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Understanding “No Cost” Refinancings (continued)

Use our to compare mortgages with different combinations of interest rates and closing costs including “no cost” refinancings

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What mortgage program is right for me?

When you speak with lenders about your refinancing it is helpful to have an idea of the type of mortgage program that is right for you When you refinance you may consider changing what type of mortgage you have when you refinance your mortgage. For example, you may want to convert an adjustable rate mortgage (ARM) into a fixed rate mortgage when you refinanceThere are three main types of mortgage programs Fixed Rate Mortgage Adjustable Rate Mortgage (ARM) Interest Only Mortgage The chart below summarizes and discusses the main pros and cons for each type of mortgage program. As illustrated by the chart, each program is suitable for a specific type of borrower in a specific situation The most common type of mortgage program is a fixed rate mortgage because it involves the least amount of risk This is because the monthly mortgage payment for a fixed rate mortgage can never increase and stays constant over the life of the mortgage The primary reason to select an adjustable rate mortgage (ARM) is because the interest rate and mortgage payment are lower than a fixed rate mortgage during the initial fixed rate period of the loan Another reason to select an ARM is if you think interest rates are going to decline significantly in the future although ARMs also carry the risk that your mortgage payment will increase if interest rates rise in the future Interest only mortgages are the riskiest and least common type of loan program. The primary reason to select an interest only mortgage is because the mortgage payment during the initial interest only period of the loan is lower than the mortgage payment for a fixed rate mortgage or an ARM (because you are not paying principal). Additionally, you can typically qualify for a larger mortgage amount with an interest only mortgage The downsides to an interest only mortgage are that your mortgage payment typically increases after the initial interest only period when you start paying both principal and interest plus your interest rate can increase in the future, which could also cause your mortgage payment to go upSo what program is right for you? It all depends on you risk profile and financial goals If you are looking for certainty, then a fixed rate mortgage probably works best If you have a higher tolerance for risk and are looking for a lower monthly payment or larger mortgage amount, than an Adjustable Rate Mortgage or Interest Only Mortgage may be right for you Additionally, if you know you are going to sell your home before the adjustable rate period for an ARM or an Interest Only Mortgage, they could be the right program for you That way you benefit from the lower monthly mortgage payment during the initial period of the mortgage but you are not exposed to a potential increase in interest rates and mortgage payment during the adjustable rate period This approach is not without risk either, as there is no guarantee you could sell your property for more than you paid for itReview the chart on the following page to learn about each type of mortgage so you can choose the program that best meets your financial objectives

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What mortgage program is right for me? (continued)

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Mortgage Refinance Assistance Programs Summary

There are multiple conventional and government-backed refinance programs available to borrowers Except for the Fannie Mae programs, all of the mortgage assistance programs listed below are backed by the governmentPrograms include the FHA and VA Streamline Refinance Programs that allow individuals with FHA and VA mortgages to refinance their mortgages with less paperwork than conventional mortgage refinancings The FHA 203(k) Home Loan Program enables borrowers to finance the purchase or refinancing of a home as well as the cost of a significant home rehabilitation project with a single FHA mortgage, eliminating the need for the borrower to obtain a separate construction loanAdditionally, there are multiple programs designed to help individuals refinance an underwater mortgage such as the Home Affordable Refinance Program 2.0 (HARP 2.0)The table below summarizes numerous conventional and government refinance programs.

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Mortgage Refinance Assistance Programs Summary (continued)

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Should I Pay Discount Points to Lower My Interest Rate?

Most lenders offer the borrower the option to pay a discount point or points to obtain a lower interest rate than he or she would otherwise receive A discount point is an up-front fee that equals 1% of the mortgage amount For example, if your mortgage amount is $300,000, one discount point would cost the borrower $3,000 A discount point should not be confused with an origination point, which is a fee that some lenders charge to process and close your mortgage. To reiterate, it is completely up to the borrower to decide if they want to pay discount pointsWhich leads to one of the most common (and confusing) questions that people ask when evaluating lender proposals is “Should I pay discount points to lower my interest rate?”In short, if you are paying discount points on your mortgage then your interest rate should be lower than if you are not paying points, so there is a trade-off between the twoBut how do you compare the cost of a discount point, a one-time up-front fee equal to 1% of the mortgage amount, with the benefit of a lower interest rate, the ongoing cost of your mortgage?As a rule of thumb a half of a point is equivalent to .125% (1/8th of 1%) in interest rate, so a full point is equivalent to .250% (1/4 of 1%) in interest rateFor example, if you receive a refinancing proposal with a 4.00% interest rate plus one discount point, this equates to refinancing proposal with a 4.25% interest rate with zero discount points

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It is important to understand how long it takes you to recover the cost of paying for discount points In this example, in the scenario where the borrower pays one discount point, the borrower saves $44 per month with the lower interest rate, so if you divide the up-front discount point cost of $3,000 by $44 per month, it takes more than 68 months, or more than five and a half years, to recover the cost of the discount point Which highlights an important rule of thumb when you are considering paying points – if you plan on owning the property you are refinancing for less than five years it typically does not make sense to pay any discount points because you are not able to recover the up-front cost in that time periodTo summarize, if you are planning on owning the property you are refinancing for more than five years and the interest rate when you pay a discount point is at least .250% less than if you do not pay a discount point, you can save money on your monthly mortgage payment and on total interest expense over the life of the mortgage by paying discount pointsYou can use our to review the monthly mortgage payment and total interest expense for mortgages with different interest rates and discount points

The example below compares a scenario where the borrower pays a discount point to a scenario where the borrower does not pay any discount points and shows the difference in discount point cost, monthly mortgage payment and total interest expense over the life of the mortgage for the two scenarios The example looks at a $300,000 30 year fixed rate mortgage In scenario #1 (no points scenario), the borrower pays an interest rate of 4.25% and no discount points In scenario #2 (one point scenario), the borrower pays an interest rate of 4.00% and one discount point In the scenario where the borrower pays one discount point, the borrower pays an extra $3,000 up front but saves $44 per month on their mortgage payment and $15,685 in total interest expense over the life of the mortgage by paying for a discount point to lower the interest rate from 4.25% to 4.00%

Should I Pay Discount Points to Lower My Interest Rate? (continued)

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Should I Lock My Refinancing?

By locking your mortgage, you eliminate the risk that your interest rate goes up over the course of processing and closing your mortgageAs the name suggests, by locking your mortgage the lender agrees to set the terms of your refinancing, including interest rate and origination fees, for the timeframe of the lock periodDepending on the length of the lock period, locking your refinancing can come at a cost to the borrower. The longer the lock period, the greater the cost in terms of a higher interest rate and / or more pointsTypical mortgage lock periods are for 12, 21, 30, 45 or 60 daysThe 12 day lock period is typically provided by the lender free of charge (because it is so short) and is utilized when the borrower has satisfied all funding conditions and the refinancing is ready to closeIn a declining or static interest rate environment, the borrower will want to utilize the 12 day lock period, or no lock at all. This is called “floating” the mortgageIn a rising interest rate environment, the borrower will want to lock the refinancing over the period necessary to process the mortgage. The borrower should always do diligence at the beginning of the refinancing process to understand how long it takes the lender to process, approve and fund the refinancing A typical refinancing takes approximately 30-60 days to complete after your loan application has been accepted by the lenderGenerally speaking, the longer the lock period, the higher the interest rate Although it may come at a cost to the borrower in terms of a higer interest rate, the insurance you receive by locking your refinancing (as compared to a greater increase in interest rate due to market conditions) can save you thousands of dollars over your mortgage Be sure to discuss the interest rate environment and pros and cons of locking your refinancing with your lender at the beginning of the refinancing process The graphs on the next page demonstrate how the longer the lock period is, the higher the interest rate isIf you decide to lock your loan, you should request that your refinancing terms are locked immediately after the lender accepts your loan application, so at the beginning of the refinancing processBe sure that the length of your mortgage lock period is long enough to process and close your refinancingIf the time it takes the lender to process your refinancing exceeds the rate lock period it may be possible to ask for a rate lock extension. In a rising interest rate environment a lender may be unwilling to provide a rate lock extension or may try to charge the borrower for a rate lock extension. These fees are relatively uncommon and should be avoidedBe sure to ask your lender at the beginning of the refinancing process if they charge rate lock extension fees. If the answer is yes, consider working with a different lenderClick to review interest rates for different loan lock periods from lenders in your area

The charts on the next page provide an example of how interest rates increase as the length of the mortgage lock period increases The charts show the interest rates for different lengths of lock periods for a 30 year fixed rate mortgage and a 15 year fixed rate mortgage The charts also show the interest rate with no discount points as compared to the interest rate with one discount point for each lock period length Lenders offer borrowers the option to pay a discount points to lower their interest rate when getting a mortgage The charts show a relatively small difference in interest rate between the shortest lock period (12 days) and the longest lock period (60 days) -- .125% (1/8 of 1%) These example charts are based on a relatively stable interest rate environment. In a rising interest rate environment the difference in interest rate between the shortest lock period and the longest lock period would be greater

Mortgage Lock Example

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Should I Lock My Refinancing? (continued)

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Settlement Agent Opens Escrow

The refinancing closing process is administered by a settlement agent who handles the transfer of funds through an escrow or trust account. A settelement agent is also known as a closing agent In the western U.S., the settlement agent is typically an escrow company In the eastern U.S., an attorney typically serves as the settlement agent At the bottom of the page, we provide a diagram that illustrates the role of the settlement agent in the refinancing processWhen this escrow or trust account is opened, it is often referred to as “opening escrow”Additionally, the settlement agent typically provides the Closing Disclosure (CD) to the borrower that discloses the final, actual terms of the mortgage, although the lender is legally responsible for the content of the CD. The CD must be provided to the borrower at least three days prior to the mortgage closingAll funds involved in the mortgage process are deposited into an escrow or trust account administered by the settlement agent and distributed to the appropriate parties at the closing of the transaction The settlement agent provides escrow instructions to ensure that all third parties, such as the lender, receive their fees and commissions and that the lender holding the existing mortgage is repaid in fullThe escrow account is typically open for a fixed period of time – 30, 45, 60 or 90 days. If the refinancing is not completed during this fixed period of time it may be necessary to extend the escrow and refresh some of the documentation, such as the title reportTechnically, the borrower has total control in selecting the settlement agent. In practice, however, the choice of settlement agent for a refinancing is typically made by the lender

As depeicted in the chart below, the settlement agent administers the refinancing closing process and manages the transfer of funds and properties to all involved parties

Settlement Agent Role Diagram

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Title Report and Title Insurance

At this point in the process, the closing agent will order a title report, sometimes referred to as a title search or title abstract (in the South), from a title companyIn short, the title report makes sure that the property you are refinancing actually matches the property you own in terms of property lines, type, ownership, zoning and any easements An easement is a right to use the property by a third party, typically involving access to another piece of landA title company or attorney examines county records to determine the legal ownership of the property and identify any recorded property liens or easementsThe title report makes sure that there are no current liens against the property, such as an outstanding property tax bill, that could interfere with your ability to refinance the propertyAll of this information is included in the title report (or title search or abstract) provided to you by the title company or attorneyA clear title report indicates that the property is free of all liens and clears the way for the refinancingIncluded in the title fee paid by the borrower is the title report as well as title insurance for the lender, which insures the lender in the rare event that there are defects or errors in the property’s title and a party makes a claim against the property at some point in the futureIt may seem weird and redundant (and annoying) that you have to pay for a title report when you refinance a property that you already own but lenders require it in case there have been any changes to the property title since you purchased it (such as an unpaid property tax bill)Similar to selecting the closing agent, the choice of title company or attorney in a refinancing is typically made by the lender although technically the borrower has the right to make the selectionIn some areas of the country, including parts of New York state, borrowers and lenders do not obtain title insurance but instead rely on a real estate attorney to provide an opinion on the title of the property

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Lenders typically expect a loan-to-value (LTV) ratio of 80% or less. LTV is the ratio of the mortgage amount to the value of the property you are buying and the lender uses the appraisal to determine the property value used to calculate the LTV ratio If the appraised value of the property is less than expected, it could result in an LTV ratio above the lender’s acceptable limit When the appraised value of the property is less than expected, this is known as the appraisal “coming up short.” On the following page, we review an example of this scenario and what a borrower can do if the appraisal comes up shortAlthough the lender selects the appraiser, unless you are getting a “no cost” refinancing, the borrower typically pays the appraisal fee (it is one of the closing costs listed on page two of the Loan Estimate (LE)) The appraisal fee generally costs $400 - $750 depending on the approximate value of the property being refinanced If you are working with a mortgage broker then the funding lender (the company the mortgage broker is using to lend you the money for your mortgage), not the mortgage broker, selects the appraiser In some “no cost” refinancings the borrower pays the appraisal fee up-front and the fee is refunded to the borrower upon closingOne point to note is that the appraisal can be transferred to a different lenderSo if you decide to change lenders in the middle of the refinancing process, after the appraisal has been submitted, then your new lender can use the existing appraisal Check out our example appraisal to see what kind of analysis and information it contains

The value of your property may have changed since you obtained your existing mortgageIf the value of your property has declined since you obtained your existing mortgage then the appraisal may “come up short” which means that the appraised value of the property is less than expected and the loan-to-value (LTV) ratio, or the ratio of the mortgage amount to the value of the property you are buying, may be pushed above the lender’s maximum LTV limit, which is typically 80% This can create some serious challenges when trying to refinanceThere are several potential outcomes if the appraisal comes up short: You can reduce your loan size so that the LTV ratio is less than 80%, which may not be possible, depending on the size of your existing mortgage (your new mortgage amount must be large enough to pay-off your existing mortgage plus any refinancing closing costs) The lender may ask you to purchase private mortgage insurance (PMI), which is an additional monthly cost to you If your LTV ratio is greater than 80%, lenders typically require the borrower to purchase private mortgage insurance (PMI). PMI is insurance against loss from mortgage default provided to the lender by a private insurance company. PMI typically requires that the borrower pay an ongoing annual fee, paid on a monthly basis

Appraisal Report Overview

The appraisal is one of the most important parts of the refinancing process and can make or break the entire transactionThe appraisal, provided by an independent third party called an appraiser, is a comprehensive analysis of the value of the home you are seeking to refinanceThe appraisal can be a source of uncertainty and stress because the value of your property may have changed since you obtained your existing mortgageThe appraiser’s valuation analysis is usually based on recent property sales in an area (known in the business as “comparables”), current listings in the area, the condition of the neighborhood in which the property is located and other factors such as property square footage and amenitiesThe lender wants to make sure that that value of the house exceeds the value of the mortgage it is providing to you (so that the lender can recover its money in the unfortunate case when the borrower cannot repay his or her mortgage)

What Happens if the Appraisal Comes Up Short

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The lender may decide to decline the loan, in which case you may be out the cost of the appraisal as well as a lot of time and effort You can ask the lender to review the appraisal or request an additional appraisal although there is no guarantee that the new appraisal will produce a higher estimated value for the home, or if it does, the lender may not use the higher property value for its underwriting processThe best way to avoid having your appraisal come up short is to try to assess the value of your property at the beginning of the refinancing process or when you get pre-qualified by a lenderYou can do your own research on property values on web sites like Realtor.com, Trulia and Zillow to determine if you have sufficient equity in your property to refinance your mortgageYour lender may also have resources they can use to provide an initial assessment of the value of your property This way you can avoid unnecessary surprises or complications in the refinancing process

Appraisal Report Overview (continued)

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How to Use the Closing Disclosure (CD)

According to the TILA-RESPA Integrated Disclosure Rule (TRID), the lender must provide a Closing Disclosure, also known as a CD, to the borrower that outlines the final, actual terms of the mortgage including interest rate, closing costs and mortgage features at least three business days prior to the close of the mortgageTypically the borrower receives the CD when he or she signs loan documents prior to the mortgage closingBecause the CD must be provided no less than three days prior to mortgage closing, it could extend the amount of time it takes to process and close your mortgage For example, all parties may be ready to close the mortgage but if the CD has not been delivered to the borrower then the mortgage cannot be finalized Borrowers should keep in mind the three day CD waiting period when determining how long it will take to process and close their loans

The borrower should use the Closing Disclosure document to verify that he or she is receiving a mortgage at the terms agreed to at the start of the processAt the beginning of the mortgage process the lender provides the borrower a Loan Estimate (LE) that outlines a good faith estimate of key mortgage terms such as interest rate and closing costsPrior to your mortgage closing, you should compare the CD with the LE to ensure that your final, actual interest rate and closing costs did not increase significantly as compared to the initial estimate provided by the lender in the LE FREEandCLEAR provides a detailed explanation of how to compare the CD and the LE including an outline of what mortgage terms and costs can change and by how muchIf there are meaningful discrepancies between the CD and LE and the final mortgage terms have changed or increased significantly, then ask the lender for an explanation as this could be a sign that you are getting ripped offYou should cancel (also known as rescind) the mortgage if you are not satisfied with the lender’s explanation and the discrepancies cannot be resolved. You can cancel your mortgage at any time before you sign loan documents and you are free to work with a different lenderPlease note, that for a mortgage to purchase a home, borrowers cannot cancel the mortgage after they have signed loan documentsAlthough you may be out non-refundable costs such as your appraisal fee and certain lender fees, canceling a bad mortgage will save you much more money over the life of the mortgageOne way to avoid potential negative surprises is to lock your mortgage. That way, all key terms and costs are agreed to by you and the lender at the start of the process and remain unchanged through the closing of your mortgageThe CD contains much of the same information as the LE although the information is presented in a somewhat different layout. We summarize each page of the CD below:

Summary information about the borrower and the mortgageKey loan terms such mortgage amount, interest rate and monthly principal and interest (P&I) paymentProjected payment included taxes and insurance and if this payment can change over timeCosts at closing which includes the final closing costs and cash to close figures

A breakdown of all transaction costs including all closing costs. In a purchase transaction this page also includes costs typically paid for by the seller including property transfer taxes and real estate commissions

How Borrowers Can Use the Closing Disclosure

Page 1 of the Closing Disclsoure

Page 2 of the Closing Disclosure

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A Calculating Cash to Close table that outlines the total amount of money including total closing costs and down payment that the borrower must contribute to close the transaction. This table also indicates if the figures changed as compared to the LEA Summaries of Transactions Table that outlines the transaction from the perspective of both the buyer and seller including the total amount of money required from, or received by, each party at closing

Page 3 of the Closing Disclosure

How to Use the Closing Disclosure (CD) (continued)

A summary of loan disclosures that outline the key features of the mortgage including:A Summaries of Transactions Table that outlines the

Page 4 of the Closing Disclosure

Summary contact information about the key parties involved in the transaction including the lender, mortgage broker (if applicable), real estate brokers and settlement (closing) agentA summary of loan disclosures including information about the appraisal report, mortgage contract, foreclosure liability, refinancing the mortgage and the interest expense tax deductionA table that summarizes the total amounts the borrower pays over the course of the mortgage including:

Page 5 of the Closing Disclosure

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The Closing Disclosure must be delivered by the lender to the borrower in-person or by email or mail at least three business days prior to the mortgage closingIf mailed or emailed, the consumer is considered to have received the CD within three business days after the document is delivered or placed in the mailThe settlement agent (also known as a closing agent) that administers the mortgage closing process and transfer of funds may provide the CD to the borrower on behalf of the lender; however, the lender is legally responsible for for the CDThe CD must be provided separately to each borrower who has the legal right to cancel or rescind the mortgage prior to closingLenders are required to issue a revised CD if certain changes occur to the mortgage terms after the first CD was issued that cause it to become inaccurateChanges that occur before mortgage closing that require a new three business day waiting period after issuing the revised CD: The APR increases by more than 1/8 of a percent for a fixed rate loan or 1/4 of a percent for adjustable loans. An increase on APR could be caused by an increase in interest rate or closing costs The loan product changes. For example, the borrower switches from a fixed rate mortgage to an adjustable rate mortgage A prepayment penalty is added. Adding a prepayment penalty at the end of the mortgage process is a red flag for borrowersAll other changes changes that occur before closing require a revised CD to be issued but do not require a new three day waiting periodLenders must issue a revised CD if an event occurs within 30 days of the mortgage closing that causes the CD to be inaccurate and results in a change to a cost paid by the borrower The revised CD must be provided to the borrower no later than 30 calendar days after the lender becomes aware that the event occurredFREEandCLEAR provides an example Closing Disclosure for you to better understand the information contained in the document

Page 5 of the Closing Disclosure

How to Use the Closing Disclosure (CD) (continued)

What Borrowers Should Know About the Closing Disclosure

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How to Compare the Closing Disclosure to the Loan Estimate

At the beginning of the mortgage process, the lender is required to provide the borrower a Loan Estimate (LE) that outlines a good faith estimate of key mortgage terms such as interest rate and closing costs within three business days of the borrower submitting a mortgage applicationAt the end of the mortgage process, the lender is required to provide the borrower a Closing Disclosure (CD) that outlines the final, actual terms of the mortgage at least three business days before the mortgage closesThe borrower should compare the CD with the LE to ensure that your final, actual interest rate and closing costs did not increase significantly as compared to the initial estimate provided by the lender in the LE The key items to review when comparing the CD and LE are interest rate (middle of page one of CD) and total closing costs (bottom of page one of CD)If the figures and information in the CD and LE match or are relatively close, then you are all set to close your mortgageSignificant differences between the CD and LE (e.g., an increase in interest rate or higher borrower costs) may be a sign that the lender has “bait and switched you” -- promised you one set of terms but delivered another set of terms that cost you more moneyIf there are meaningful discrepancies between the CD and the LE, ask the lender for an explanation and do not sign the loan documentsYou should cancel (also known as rescind) the mortgage if you are not satisfied with the lender’s explanation and the discrepancies cannot be resolved. You can cancel your mortgage at any time before you sign loan documents and you are free to work with a different lenderPlease note, that for a mortgage to purchase a home, borrowers cannot cancel the mortgage after they have signed loan documentsAlthough you may be out non-refundable costs such as your appraisal fee and certain lender fees, canceling a bad mortgage will save you much more money over the life of the mortgageOne way to avoid potential negative surprises is to lock your mortgage. That way, all key terms and costs are agreed to by you and the lender at the start of the process and remain unchanged through the closing of your mortgage

Comparing the CD to the LE: What Mortgage Costs Can Change and by How Much?

In addition to the borrower performing a general comparison of the Closing Disclosure and Loan Estimate documents, according to TRID, the rule that governs the mortgage process, there are specific rules about how mortgage costs can change and increase from the beginning of the mortgage process to the end of the mortgage processIn general the interest rate and closing costs outlined in the LE should match the CDA lender may charge the borrower higher costs than the amount disclosed on the LE when a changed borrower or mortgage circumstances requires a revised LE or CD that permits the cost to increase. Examples of these circumstances include: An event beyond the control of the the borrower and the lender occurs; Information the lender relied upon is inaccurate; or The lender finds new, material information about the borrower or mortgage such as an updated borrower credit score or a revised property value after receiving the appraisal report

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How to Compare the Closing Disclosure to the Loan Estimate (continued)

For the following items the lender may charge the borrower more than the amount on the LE without any limit: Prepaid interest: this is interest the borrower pays in advance at the time the mortgage closes and depend on the date the mortgage closes Homeowners insurance premiums: the borrower typically selects the homeowners insurance company so he or she is responsible for potential changes to the premium cost Amounts placed into an escrow, impound or trust account: The lender may require the borrower to place money into an escrow, impound or trust account to cover one-to-four months of property taxes and two months of homeowners insurance and mortgage insurance (if applicable) Services required by the lender if the lender permits the borrower to shop and the borrower selects a third party service provider not on the lender’s list of service providers: Because the borrower has selected service providers not on the lender’s “wish list” he or she is responsible for cost increases even though the services are required by the lender Charges paid to third-party service providers for services not required by the lender: In some cases the borrower may elect to hire service providers to perform services not required by the lender, such as a property inspection. The borrower is responsible for these costsFor the following items, the lender may charge the borrower more than the amount disclosed on the LE as long as the total sum of the costs added together does not exceed the sum of the costs disclosed on the LE by more than 10 percent: Recording fees: fees paid to local governments to record the mortgage Charges for third-party services where the charge is not paid to the lender and the borrower selects a service provider on the lender’s wish list: Examples of these cost items include title insurance and settlement agent feesFor all other cost items, lenders are not permitted to charge consumers more than the amount disclosed on the LE under any circumstances other than changed circumstances that permit a revised LE. The cost items include: Fees paid to the lender or mortgage broker: examples include the interest rate and any lender fees Fees paid to a third party service provider if the lender did not permit the borrower to shop for the service provider: Examples include the appraisal report fee, credit report fee and tax service fee Transfer taxes: This is a tax paid to a local government when a property is transferred from one owner to another owner. This fee is usually paid for by the property sellerIf the actual closing costs paid by the borrower at closing exceed the amounts disclosed on the LE beyond the limits and rules outlined above, the lender must refund the excess costs to the borrower within 60 calendar days of the mortgage closing

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Review Mortgage Documents During the Right of Rescission Period

Under the terms of the right of rescission period for a refinancing, the borrower has three business days after signing loan documents to cancel the mortgage The purpose of the right of rescission period is to protect the borrower against lender fraud and deceit The three day wait acts as a “cooling off” period so that lenders cannot force borrowers to close on a bad mortgage if the terms have changed to the detriment of the borrower At the time the settlement agent provides loan documents for the borrower to sign, included in these documents are two copies of the notice of the right to rescind. If the borrower decides to rescind (cancel) the mortgage, the borrower must provide a signed copy of the notice to the lenderAdditionally, the lender is required to provide a Closing Disclosure (CD) to the borrower that outlines the final, actual terms of the mortgage including interest rate, closing costs and mortgage features at least three business days prior to the close of the refinancing. Although the lender is legally responsible for the CD, it is typically provided by the settlement agent along with the other loan documentsWe highly recommend that the borrower use the three day right of rescission waiting period to carefully review the Closing Disclosure (CD) to ensure that he or she is receiving the mortgage terms promised by the lender at the start of the refinancing process We provide a detailed explanation of how to compare the Loan Estimate (LE) provided by the lender to the borrower at the beginning of the mortgage process to the Closing Disclosure (CD) provided by the lender at the end of the mortgage process to determine if the terms of your mortgage have changed significantlyIn the event that the terms of the refinancing changed significantly, the right of rescission period provides the borrower with the opportunity to cancel the loan -- remember, for a refinance the borrower has up to three business days after signing loan documents to cancel the mortgage Significant changes could include an increase in interest rate or closing costsIf you decide to cancel your mortgage you are free to start the process over with a different lender. Although you may be out non-refundable costs such as your appraisal fee and certain lender fees and starting the process over requires more time, canceling a bad mortgage will save you money over the life of the mortgagePlease note, the day that you sign your loan documents, holidays and Sundays do not count against the three day right of rescission period. Saturdays do count against the three days as long as it is a normal business day for the lenderAdditionally, the right of rescission period only applies to refinancings of owner occupied properties and not non-owner occupied properties

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Record Documents and Fund Refinancing

The settlement agent manages all of the logistics that are required to record documents and fund your refinancingAfter you have reviewed all of the loan documents related to the refinancing process, the final step is for those documents to be recorded and made official and for your refinancing to fundBe sure to review the Closing Disclosure (CD) carefully prior to finalizing your mortgage. The lender must provide a Closing Disclosure to the borrower that outlines the final, actual terms of the mortgage at least three business days before the close of the mortgage. If your final interest rate or closing costs have increased significantly without explanation you should cancel, or rescind, your mortgageFor a refinance, you can cancel your mortgage up to three business days after signing loan documents and then you are free to work with a different lender; however, we recommend that you do not sign your loan documents if you identify any significant issues or discepenciesIf you are comfortable moving forward with your refinancing you sign the closing documents and then the lender wires funds to the settlement agent. The settlement agent then sends the deed of trust (or mortgage, if you are in the Southern U.S.) to the local county recorder officeAfter the transaction has been recorded, the settlement agent then distributes all of the funds in the escrow or trust account, including your mortgage proceeds, to the appropriate partiesYour current mortgage balance is paid-off in full, third party service providers such lenders receive their fees and the borrower receives whatever money remains after everyone else is paid (if the borrower is taking cash-out from your refinancing)You now officially have a new mortgage. Congratulations!!!

Now that your refinancing has closed it is time to celebrate but before you pop the champagne there are a couple of last minute items to rememberBe sure to review the first payment letter, which notes your monthly mortgage payment amount and when the payment is dueThe last thing you want to do is pay a late fee because your were late with your first mortgage payment

Key Points to Remember When Your Refinancing Closes