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<p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>scyther5/Getty Images</span></p><p class="caption">Always compare origination fees as they can have a big impact on how much you pay overall.</p></div><p></p></div></div></p><ul class="summary-list"><li><a href="https://www.businessinsider.com/best-personal-loans-with-no-origination-fees-in-2019-2019-7">Origination fees</a> are upfront costs that lenders charge for the administrative costs of processing a loan.</li><li>Lenders may charge a flat origination fee or the fee could be based on a percentage of the total loan amount.</li><li>A <a href="https://www.businessinsider.com/should-i-pay-for-a-lower-interest-rate-mortgage">discount point</a>, another type of origination fee, is a voluntary fee that borrowers can pay to <a href="https://www.businessinsider.com/how-to-get-a-lower-mortgage-interest-rate">reduce the interest rate</a> on their loan.</li><li>Read more coverage from <a href="https://www.businessinsider.com/category/personal-finance-how-to">How to Do Everything: Money</a></li></ul><p>There are different ways for a lender to make a profit on a loan. One of the ways that most of us are familiar with is by charging interest. But another way is by charging origination fees upfront.</p><p>When you're shopping for a loan, you'll want to be sure to compare origination fees (sometimes considered "hidden" fees) as they can have a big impact on how much you pay overall. Here's what you need to know.</p><h2>What is an origination fee?</h2><p>An origination fee is what a lender charges for the administrative costs of providing the loan for the borrower.</p><p>"Some lenders will break that down into one fee. And some lenders will break it down into separate items, such as an underwriting fee, a processing fee, or preparation fee," said <a href="https://www.regions.com/Locator/MLO/mortgage-loan-officer-Donna-Snow-New-Smyrna-Beach">Donna Snow</a>, a mortgage lender for Regions Bank.</p><p>For a mortgage, the origination fees can be found in the top left-hand corner of Section A on page two of your Loan Estimate. </p><p>Lenders are required to send your Loan Estimate within three business days of receiving your application. And while certain parts of your final Closing Disclosure could differ from your Loan Estimate, generally the origination fees must stay the same.</p><h2>How much does a loan origination fee cost?</h2><p>Many mortgage lenders charge a flat origination fee. For example, Snow said that Regions Bank currently charges a flat $1,397 for its origination fee. Other mortgage lenders may charge a percentage of the loan amount, generally 1% or less. </p><p>For <a href="https://www.businessinsider.com/how-do-personal-loans-work">personal loans</a>, however, you could pay 1% to 8% of your loan amount in origination fees. The percentage that you're charged for a <a href="https://www.businessinsider.com/best-personal-loans-with-no-origination-fees-in-2019-2019-7">personal loan origination fee</a> can depend on a variety of factors, including:</p><ul><li>Your credit score</li><li>Your income</li><li>Your loan amount</li><li>Your loan length</li><li>You need a co-signer</li></ul><p>Some personal loan lenders allow for the origination fee to be deducted from your loan amount. </p><p>For example, let's say you need to take out a $20,000 personal loan to pay for a medical bill and the loan comes with a 5% origination fee ($1,000). </p><p>If the origination fee is deducted from your loan, your actual payout will be only be $19,000 ($20,000 - $1,000). So if the full $20,000 is needed for your medical bill, you'd need to take out a slightly larger loan.</p><h2>Should you buy discount points?</h2><p>"With mortgages, a borrower can also pay a point, or a fraction of a point, to buy down their interest rate," said Snow. These are often referred to as discount points.</p><p>One discount point will generally cost you 1% of your total amount. So for a $200,000 mortgage loan, one discount point would raise your origination fee by $2,000 (1% of $200,000). And two discount points would raise your origination fee by $4,000 (2% of $200,000).</p><p>You can typically expect to earn a 0.25% interest rate deduction for every point that you pay. So if you were originally quoted an interest rate of 4.50%, paying for two discount points could drop your rate by 0.50% to a flat 4.00%.</p><p>If you're trying to decide whether or not paying discount points would be worth it, consider how long you plan to stay in your home. </p><p>For example, let's say you paid $2,000 for a discount point and your lower APR will save you $50 per month on your mortgage. In that case, it will take you 40 months to break even on the decision ($50 x 40 months = $2,000).</p><p>The longer you plan to stay in your home, the more rewards you'll get out of paying for discount points. But short-term homeowners may want to stick with their original quoted rate.</p><h2>What about lenders that don't charge origination fees?</h2><p>A common marketing tactic in the lending industry is to advertise loans that come with "no origination fees." But before you get too excited, make sure that you're not paying for the lender's services in other ways.</p><p>"The main concern with these lenders," said Snow, "is that they may be charging a higher interest rate than a competitor. They simply absorb their cost in the rate."</p><p>That's another reason why it's important to shop around with multiple lenders before you take out a loan. </p><p>"You can take a loan estimate from one lender to your own bank and see if they can match it," Snow explained. So don't be afraid to give lenders a chance to compete against one another. </p><h2>The bottom line</h2><p>While origination fees are important, they need to be considered in light of other loan factors. For example, it may be worth it to pay a higher origination fee to secure a fixed interest rate on your loan as opposed to a variable rate.</p><p>Above all, don't allow lenders to rush you into making a quick decision. Take your time comparing loan offers. And always consider how the origination fee will affect what you pay over the life of the loan.</p><h3>Related coverage from <a href="https://www.businessinsider.com/category/personal-finance-how-to">How to Do Everything: Money</a></h3><ul><li><h3><a href="https://www.businessinsider.com/how-to-get-a-lower-mortgage-interest-rate">How to get a lower mortgage interest rate</a></h3></li><li><h3><a href="https://www.businessinsider.com/how-to-use-personal-loan-to-pay-off-credit-cards">How to use a personal loan to pay off credit cards</a></h3></li><li><h3><a href="https://www.businessinsider.com/how-do-personal-loans-work">How do personal loans work?</a></h3></li><li><h3><a href="https://www.businessinsider.com/borrow-money-credit-card-or-personal-loan">How to decide whether you should use a credit card or a loan to borrow money</a></h3></li></ul>    <div class="margin-top">        <h3>NOW WATCH: <a href="https://www.businessinsider.com/where-run-hide-earthquake-occurs-2017-6">Here's where you should really go to stay safe during an earthquake</a></h3>        <div>                    </div>    </div>

Many loans charge "hidden" fees, but that's not necessarily a bad thing

<p></p><div class="KonaFilter image-container display-table"><div><div class="image on-image"></div><p></p></div></div><ul class="summary-list"><li><strong><a href="https://movement.com/lo/heidi-gage/"></a>One option for <a href="https://www.businessinsider.com/how-to-buy-a-house-step-by-step-guide">homebuyers taking out a mortgage</a> is to pay for a lower interest rate upfront, or "buy it down."</strong></li><li><strong>While the ability to do this, and the impact of the payment, will vary by lender, buying down your rate means paying for mortgage "points" (fees) at the start of the loan to lower your interest rate and thus decrease your monthly payments going forward.</strong></li><li><strong>Should you pay for a lower interest rate? It depends. This strategy usually works best for someone who will be in the home for at least five years, because that's about how long it usually takes to break even on the upfront cost from the monthly interest savings.</strong></li><li><strong>Make sure to run the numbers, and to shop around for mortgage offers from different lenders to <a href="https://www.businessinsider.com/how-to-find-the-best-mortgage-rate">find the best rate for you</a>.</strong></li><li><strong><a href="https://www.businessinsider.com/yourmoney?utm_source=bullet">Read more personal finance coverage.</a></strong></li></ul><p>If you're shopping for a mortgage and not 100% satisfied with your interest rate, one option is to buy it down. "Buying down" your mortgage interest rate is a simple concept: You pay more money upfront to have a lower interest rate, and therefore pay less every month.</p><p>You're paying for a lower interest rate by buying what's called "points," which are fees paid directly to the lender in order to eliminate some interest over the lifetime of the loan. Usually, one "point" costs 1% of your total mortgage, or $1,000 for every $100,000. You can also buy fractions of a point, like a half point or a quarter point, for a lesser impact on your monthly interest rate.</p><p>Exactly how much your upfront payments impact your interest rate going forward will vary by lender, so it's worth exploring your options to find the best rate for you.</p><p>The impact of a lower interest rate can be huge. Run your numbers through a <a href="https://smartasset.com/mortgage/mortgage-calculator">mortgage calculator</a> to see exactly how much it will change your lifetime payments. For instance, one point on a $300,000 loan costs $3,000. Let's say paying for that point decreases your interest rate for a 30-year fixed-rate mortgage (using a 20% down payment) with a hypothetical lender from 4.0% to 3.5%.</p><p>Buying that point will save you $49 a month ... or $14,326 in interest over 30 years (provided you don't refinance).</p><h2>Should I pay for a lower interest rate on my mortgage?</h2><p>Before paying for a lower interest rate, calculate when you will break even.</p><p><a href="https://movement.com/lo/heidi-gage/" rel="nofollow">Heidi Gage</a>, a loan officer with over 20 years of experience in the mortgage industry, says buying down a mortgage interest rate with points usually makes sense when a borrower will be in the house for more than five years. That's because it usually takes at least five years to "break even" on what the borrower paid to lower the rate and actually start making back the difference.</p><p>In our hypothetical example of a $300,000 loan, the borrower will break even right around the five-year mark. To determine that timeline, divide the upfront cost of the point ($3,000) by the monthly savings ($49) to get 61.2 months, or about five years until the savings match the upfront cost.</p><p>Aside from planning to be in the home at least five years and calculating when you'd break even, there are also few more things to consider if you're thinking of buying down your rate:</p><h3>What is your ideal mortgage amount and monthly payment?</h3><p>You only want to pay down your mortgage if it's going to benefit you and secure a better rate. To figure out whether it will, make sure you know:</p><ul><li>How much of a down payment you want to pay</li><li>How long you want your mortgage term to be</li><li>What interest rate you're aiming for</li><li>What monthly payments you can afford</li></ul><p>Once you have an idea of what your <em>ideal</em> is, you'll be better prepared to know if buying down is a good option when you shop for your best rate.</p><h3>Do you have enough in emergency savings?</h3><p>Buying down your payment is probably not a good choice if you don't have a solid <a href="https://www.businessinsider.com/how-much-money-to-save-in-emergency-fund-rules">emergency fund</a> saved for unexpected expenses. Experts generally recommend an emergency fund have three to six months' living expenses stored somewhere accessible, like a <a href="https://www.businessinsider.com/why-open-high-yield-savings-account-now-interest-rates-down">high-yield savings account</a>. If paying down your mortgage decimates your savings and leaves you without a safety net, you'll never be in the black.&#xa0;</p><h3>Is there a way to reduce closing costs?</h3><p>Oftentimes, says Gage, the seller can assist with closing costs and help the buyer offset the cost of the point. You may want to speak with your realtor and your attorney (if you're in a state that requires one) about where the seller might be able (and willing) to pitch in.</p><p>There is a lot to consider when shopping for a mortgage. Whether you want to buy down your rate or not, Gage says that communication between the borrower, the lender, the realtor, and the seller is hands-down the best way to make home-buying go smoothly.</p><h3>Related coverage from <a href="https://www.businessinsider.com/category/personal-finance-how-to">How to Do Everything: Money</a></h3><ul><li><h3><a href="https://www.businessinsider.com/pay-off-mortgage-early-or-invest-calculation-financial-planner">Should you pay off your mortgage early or invest? We did the math to find out which nets a greater return</a></h3></li><li><h3><a href="https://www.businessinsider.com/how-to-get-a-lower-mortgage-interest-rate">How to get a lower mortgage interest rate on your home</a></h3></li><li><h3><a href="https://www.businessinsider.com/how-to-prepare-credit-for-a-mortgage">How to prepare your credit for a mortgage to get the best possible rate and save thousands</a></h3></li><li><h3><a href="https://www.businessinsider.com/fixed-rate-mortgage-vs-adjustable-rate-mortgage">Fixed-rate vs adjustable-rate mortgage: How to decide which one you should get</a></h3></li></ul><p class="tagline"></p><p style="font-size:14px;"><em>Personal Finance Insider offers tools and calculators to help you make smart decisions with your money. We do not give investment advice or encourage you to buy or sell stocks or other financial products. What you decide to do with your money is up to you. If you take action based on one of the recommendations listed in the calculator, we get a small share of the revenue from our commerce partners.</em></p><div></div>    <div class="margin-top">        <h3>NOW WATCH: <a href="https://www.businessinsider.com/why-tesla-model-3-received-5-star-crash-test-rating-2019-10">Why Tesla's Model 3 received top crash-test safety ratings</a></h3>        <div>                    </div>    </div>

You can pay for a lower interest rate on your mortgage upfront, but whether you should depends on the math

<p></p><div class="KonaFilter image-container display-table"><div><div class="image on-image"></div><p></p></div></div><ul class="summary-list"><li>Refinancing a mortgage can help you secure a <a href="https://www.businessinsider.com/how-to-get-a-lower-mortgage-interest-rate">lower mortgage interest rate</a>, reduce your monthly payments, or access some of your home's equity.</li><li>To qualify for the best rates, you'll need to have <a href="https://www.businessinsider.com/what-is-a-good-credit-score">a good credit score</a>. If your credit score is low, you can work on <a href="https://www.businessinsider.com/how-to-prepare-credit-for-a-mortgage">improving it</a> before applying for a refinance.</li><li>When comparing lenders, make sure to consider closing costs and think through how long it will take you to "break even" after refinancing.</li><li><a href="https://www.businessinsider.com/category/personal-finance-how-to">Read more coverage from How to Do Everything: Money</a></li></ul><p>When you <a href="https://www.businessinsider.com/things-ive-learned-from-refinancing-my-mortgage">refinance a mortgage</a>, you take out a new loan to replace your old one. In many cases, homeowners refinance their mortgage to <a href="https://www.businessinsider.com/how-to-get-a-lower-mortgage-interest-rate">get a lower interest rate</a> and monthly payment. You can also use a refinance to change the length of your mortgage or <a href="https://www.businessinsider.com/how-to-use-a-home-equity-loan">access some of your home's equity</a>.</p><p>If you've never been through the process of refinancing a mortgage before, you may have no idea where to start. How do you go about refinancing a mortgage and how can you make sure that you're getting the best deal?&#xa0;</p><h2>How to refinance a mortgage</h2><h3>1. Check your credit score and report</h3><p>Your <a href="https://www.businessinsider.com/what-is-a-good-credit-score-to-buy-a-house">credit score</a> plays a major role in the mortgage interest rate that lenders will offer you. In fact, a difference of only 100 to 150 points could make a big difference.</p><p>For example, <a href="https://www.myfico.com/loan-center/home-mortgage-rate-comparison/default.aspx">MyFICO says</a> that borrowers with scores from 620-639 could qualify today for an interest rate of just over 5% for a 30-year mortgage. But borrowers with scores from 700-750 could qualify for rates as low as 3.71%. And a FICO score of 760-850 could earn you a 3.49% rate.</p><p>That means your interest rate could improve by 1.3% to 1.5% by simply improving your score 80 to 150 points. And that could make a big difference in your total cost over the life of the loan. For this reason, you'll want to make sure that your credit is in good shape before you begin the refinancing process.</p><p>Check with your bank or credit card issuer to see if they'll provide your credit score for free. Or you can use a free tool like <a href="https://creditkarma.myi4.net/gVnNA">Credit Karma</a> or <a href="https://www.creditsesame.com/">Credit Sesame</a>. And you can access your full credit report from all three credit bureaus for free once every 12 months at <a href="https://www.annualcreditreport.com/index.action">annaulcreditreport.com</a>.</p><h3>2. Think through your financial goals</h3><p>If your credit is in good shape, then it's time to begin thinking about your refinancing goals.&#xa0;</p><ul><li style="font-weight: 400;">Is your primary goal to save on interest?&#xa0;</li><li style="font-weight: 400;">Or are you just looking to improve cash flow by lowering your monthly payment?</li></ul><p>Your answers to those questions will influence how you approach your mortgage refinance. For instance, let's say you've already made 10 years of payments on your original 30-year mortgage. In that case, you have at least three refinancing options:</p><ul><li style="font-weight: 400;"><strong>Refinance to a new 15-year mortgage</strong>: You'll have a higher monthly payment, but you'll pay the least in interest.</li><li style="font-weight: 400;"><strong>Refinance to a new 20-year mortgage</strong>: If you qualify for a lower interest rate, you'll have a lower monthly payment and will pay less interest overall.</li><li style="font-weight: 400;"><strong>Refinance to a new 30-year mortgage</strong>: In most cases, you'll have a significantly lower monthly payment, but you'll pay the most overall in interest.</li></ul><p>If saving on interest cost is your primary concern, then you'll want to choose a loan with a similar or shorter term than what you have now. But if cash flow is your primary concern, a longer term could make sense.</p><p>Finally, are you hoping to use some of your home equity to fund a home renovation or some other major expense? If so, then a cash-out refinance could make sense. That's when the new loan you take out is for more than you owe on your original loan, and you take the difference in cash.&#xa0; But keep in mind that you'll be adding more debt overall.</p><h3>3. Get multiple quotes</h3><p>Once you've decided your purpose for refinancing, it's time to start shopping around for a loan. Make sure to get quotes from at least three qualified lenders.</p><p>Worried that getting multiple quotes will hurt your credit score? Don't be. Many lenders will be able to give you a quote while only performing a soft pull on your credit. In this case, the hard pull wouldn't come until you decide to move forward with an actual application.</p><p>But even if a few hard inquiries hit your credit report, that isn't something to panic about. Both FICO and VantageScore treat multiple inquiries within the span of 14 days as one inquiry. So get as many quotes as you need to make sure you're getting the best deal.</p><h3>4. Pay attention to closing costs</h3><p>While the <a href="https://www.businessinsider.com/how-to-find-the-best-mortgage-rate">mortgage interest rate</a> you're quoted for a refinance is important, you'll want to consider closing costs as well. One lender may charge significantly more closing costs than another simply because they throw in a bunch of "junk fees." Look for terms like application fee, processing fee, underwriting fee, document-preparation fee, or administrative fee.</p><p>Ask the lender you're working with to send you a "loan estimate." This should give you an idea of what you'll be expected to pay at the closing table.&#xa0;</p><p>Some lenders may advertise "no closing costs" refinances. But keep in mind they may charge higher interest rates in return. You may also have the option to roll your closing costs into the new loan, but know that this will increase interest costs over the life of the loan.&#xa0;</p><p>Once you know how much you'll be charged in closings costs, think about how long it will take you to "break even" on the refinance.&#xa0;</p><p>For example, let's say you'll save $150 on your monthly payment after refinancing and you'll pay $4,500 in closing costs. In this example, it would take you 30 months to break even on the loan because it would take that long for your $150 monthly savings to add up to $4,500 overall. If you plan to move earlier than your break-even point, then you may want to hold off on the refinance.</p><h3>5. Gather the necessary documents</h3><p>Once you've filled out your refinancing application, your loan will enter the underwriting stage. This is when the lender decides if there's a likely chance you'll be able to repay the loan.</p><p>To make an informed decision, most lenders will ask for various financial documents. At the least, you can expect them to ask for your last two or three tax returns, several recent pay stubs, and three to six months of bank statements.</p><p>To help the underwriting process go smoothly, try to gather as many of these documents ahead of time as you can. And if your lender asks for more documentation, get it to them as quickly as possible.</p><h3>6. Complete a home appraisal</h3><p>For most mortgage refinances, your home will need to be appraised in order for the loan to be approved. The lender will want to make sure that they're not lending you more than your home is worth.&#xa0;</p><p>Your home's appraisal will also determine how much equity you can pull out during a cash-out refinance. For example, let's say that you owe $100,000 on your original mortgage and your home appraises for $200,000. In that case, you have $100,000 of equity in your home.&#xa0;</p><p>To access some of that equity, your new loan would need to be larger than $100,000. For example, if you took out a new loan for $150,000, $100,000 would go to pay off your original loan and the other $50,000 would go directly to you. You'll still be paying off the full $150,000 over the life of the loan, but you can get an injection of cash if you need to make a big repair or fund some other large expense.</p><h3>7. Close on the new mortgage</h3><p>Once your loan has passed through the underwriting stage and has received final approval, all that's left to do is close the loan.</p><p>If you're using a local lender, you may need to drive to their office or to a title company for the closing. Or the lender may send a mobile notary public your way. And, in that case, you'll be able to sign all the mortgage paperwork from the comfort of your home.</p><p>Once all the documents have been signed and closing costs have been paid, your work is done! Moving forward, you'll send your mortgage payments to your new lender.</p><h2>The bottom line</h2><p>Refinancing a mortgage can be a great way to reduce your interest costs, lower your monthly payment, or get your hands on some of your home's equity.</p><p>But refinancing won't be right for everyone - especially if you have damaged credit or plan to move soon. Before you go through with a mortgage refinance, make sure the numbers make sense. And be sure to shop around for the best deal.</p><h3>More coverage from <a href="https://www.businessinsider.com/category/personal-finance-how-to">How to Do Everything: Money</a></h3><ul><li><h3><a href="https://www.businessinsider.com/how-to-prepare-credit-for-a-mortgage">How to prepare your credit for a mortgage</a></h3></li><li><h3><a href="https://www.businessinsider.com/how-to-find-the-best-mortgage-rate">How to find the best mortgage rate</a></h3></li><li><h3><a href="https://www.businessinsider.com/how-to-get-a-lower-mortgage-interest-rate">How to get a lower mortgage interest rate</a></h3></li><li><h3><a href="https://www.businessinsider.com/what-is-private-mortgage-insurance-definition-cost">What is private mortgage insurance?</a></h3></li></ul><p class="tagline"></p><p style="font-size:14px;"><em>Personal Finance Insider offers tools and calculators to help you make smart decisions with your money. We do not give investment advice or encourage you to buy or sell stocks or other financial products. What you decide to do with your money is up to you. If you take action based on one of the recommendations listed in the calculator, we get a small share of the revenue from our commerce partners.</em></p><div></div><div></div><div></div>    <div class="margin-top">        <h3>NOW WATCH: <a href="https://www.businessinsider.com/safest-walk-ice-penguin-2017-2">The safest way to walk on ice is to impersonate a penguin</a></h3>        <div>                    </div>    </div>

How to refinance your mortgage and save money every month

<p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Courtesy Ashley Abramson</span></p><p class="caption">The author's house in the Minneapolis suburbs.</p></div><p></p></div></div></p><ul class="summary-list"><li>My husband and I <a href="https://www.businessinsider.com/things-i-wish-id-known-before-i-bought-a-house">bought a house in 2017</a> in hopes of paying less every month for a mortgage than we were spending on rent.</li><li>With <a href="https://www.businessinsider.com/what-is-private-mortgage-insurance-definition-cost">private mortgage insurance</a> and a 4.25% interest rate, though, our monthly spend was still high.</li><li>This year, we were able to refinance our mortgage and we're now spending $200 less per month, but I wish I'd known a few things before I started the refinance process.</li><li><a href="https://track.flexlinkspro.com/a.ashx?foid=1067927.139118873&amp;foc=1&amp;fot=9999&amp;fos=1&amp;fobs=bipfi_refi_abram">Credible can help you refinance your home loan. See if you can lower your monthly payment today »</a></li></ul><p>When my husband and I <a href="https://www.businessinsider.com/things-i-wish-id-known-before-i-bought-a-house">purchased a house in the Minneapolis suburbs in 2017</a>, we were basically trying to get out of an expensive apartment in the city where our rent was $2,200 a month.</p><p>Because we had been spending half of our monthly income on rent, we couldn't save much for a down payment - but we also didn't want to keep spending money on an apartment without building equity. So we decided, with the little money we had set aside to put down, to buy a house.</p><p>The home we bought was in our price range - it was listed for $265,000, and we were pre-approved for $275,000 - but we were surprised by the amount of our monthly payments. We ended up with a house payment of $1,767, which increased to $1,790 when our property taxes went up this year.</p><p>On top of our principal (which is higher because we put less down), the biggest components in our payment were our <a href="https://www.businessinsider.com/how-to-get-a-lower-mortgage-interest-rate">mortgage interest rate</a> (4.25%) and our <a href="https://www.businessinsider.com/what-is-private-mortgage-insurance-definition-cost">private mortgage insurance</a> ($165), which is required if you put down less than 20%.</p><p>After we paid off some credit card debt and started to earn more money, we wondered if we could refinance to save on our monthly payment. Luckily, our persistence in lowering our debt-to-income ratio paid off, literally: We just closed on our new, refinanced mortgage, and our house payment will soon be around $1,550.</p><p><a href="https://track.flexlinkspro.com/a.ashx?foid=1067927.139118873&amp;foc=1&amp;fot=9999&amp;fos=1&amp;fobs=bipfi_refi_abram"><em><strong>See how much you could save by refinancing your mortgage with Credible. Get a quote today »</strong></em></a></p><p>Saving more than $200 per month is a great perk of refinancing, but I'm also surprised by how much I learned during the process (and how little I knew when we started).</p><h2><strong>You're not locked into your mortgage interest rate </strong></h2><p>This may seem obvious, but when we bought the house in 2017 I assumed we were stuck with that interest rate. It wasn't necessarily a bad rate, but it was representative of where we were financially at the time.</p><p>Fortunately, we've made some significant strides in paying down debt, and my husband and I both make quite a bit more money than we did when we took out our first mortgage.</p><p>While we were technically locked into our interest rate with the first loan, I didn't realize another company could buy and pay off that loan, offering us a much better rate based on our financial state and the state of the market.</p><p>There was a lot of paperwork involved, but refinancing for a lower rate was worth the savings - our interest rate is now 3.375%.</p><h2><strong>Your PMI can significantly decrease when you refinance</strong></h2><p>Because our down payment was less than 20%, we got stuck having to pay private mortgage insurance on our loan.</p><p>I thought we'd pay that $165 every month until we paid 20% of our loan off, but when we refinanced, that amount decreased significantly - our new PMI payment will be $39 per month.</p><p>It's cheaper now for a few reasons: With our new loan, we'll have more equity in our house. We also got a lower PMI because our credit score is better and our debt-to-income ratio is a lot less than when we initially bought the house.</p><h2><strong>An appraisal amount doesn't have much to do with your home's market value </strong></h2><p>I was shocked when our house was appraised for $306,000 - so much so I thought maybe we should put our house on the market to make some fast cash! Our loan officer quickly explained that what a home appraises for isn't necessarily what it will sell for.</p><p>Your house is ultimately "worth" what someone will give you for it. If you live in a high-demand neighborhood where houses are getting multiple offers, you might sell your house for more than the appraised value.</p><p>The inverse can also be true: Our house might be "worth" $306,000 based on the appraiser's research and comparable homes in the area, but I doubt anyone would actually pay that much for it since it only has one bathroom and our neighborhood isn't in ultra-high demand at the moment.</p><h2><strong>Your loan amount can actually go up</strong></h2><p>Another thing I didn't know: I assumed the only way to save money on a refinance would be with a smaller loan, but there are a lot of other factors at play.</p><p>In our case, since our appraisal value increased, our loan amount did, too. But we're ultimately saving money every month because our interest and PMI decreased so much.</p><h2><strong>You might not want to refinance if you plan to move soon</strong></h2><p>Around the time we began refinancing, my husband and I were entertaining the idea of selling our house in the next year or two - but our loan officer advised us against it.</p><p>When you refinance a home, just like buying a house, there are significant closing costs, which many borrowers roll into their loan rather than paying up front. If we were to sell our house with a $250,000 value, we wouldn't make as much money. In many cases, it's smarter to wait until you build more equity on the new loan before selling.</p><h3><a href="https://track.flexlinkspro.com/a.ashx?foid=1067927.139118873&amp;foc=1&amp;fot=9999&amp;fos=1&amp;fobs=bipfi_refi_abram">Credible can help you refinance your home loan. See if you can lower your monthly payment today »</a></h3><ul class="read-more-links"><li>More <a href="https://www.businessinsider.com/category/personal-finance-insider">personal finance</a> coverage</li><li><a href="https://www.businessinsider.com/best-airline-credit-card-comparison-delta-united-american">What's the best airline credit card?</a></li><li><a href="https://www.businessinsider.com//best-cash-back-credit-cards">The best cash back credit cards</a></li><li><a href="https://www.businessinsider.com/are-cds-a-good-investment">Are CDs a good investment?</a></li><li><a href="https://www.businessinsider.com/when-to-save-money-in-high-yield-savings">When to save money in high-yield savings</a></li><li><a href="https://www.businessinsider.com/best-rewards-credit-cards">Best rewards credit cards</a></li></ul><p class="tagline"><p style="font-size:14px;"><em>Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.<em></em></em></p></p>    <div class="margin-top">        <h3>NOW WATCH: <a href="https://www.businessinsider.com/what-happens-when-run-marathon-2017-5">4 terrible things that happen to your body when you run a marathon</a></h3>        <div>                    </div>    </div>

Refinancing my mortgage lowered my monthly payment by $200, but I wish I'd known 5 things beforehand

<p></p><div class="KonaFilter image-container display-table"><div><div class="image on-image"></div><p></p></div></div><ul class="summary-list"><li>If you have cash to spare and are considering whether to <a href="https://www.businessinsider.com/pay-off-mortgage-early-or-invest-calculation-financial-planner">pay off your mortgage early or invest</a>, look at the interest rates, says a financial planner.</li><li>If the rate on your mortgage is higher than investment return estimates, pay down the debt first.</li><li>But if you're open to <a href="https://www.businessinsider.com/things-ive-learned-from-refinancing-my-mortgage">refinancing your mortgage</a>, that's usually the best option. Your interest rate will then be lower than what you could earn in the markets and you can invest the savings from monthly payments plus any other extra income.</li><li>For a more conservative approach, still refinance for a lower interest rate, then pay the mortgage off more aggressively before investing.</li><li><a href="https://smartasset.com/retirement/find-a-financial-planner?utm_source=businessinsider&amp;utm_medium=cpc&amp;utm_campaign=bus__falc_bicontent&amp;utm_content=pay-mortgage-or-invest-interest-rates" rel="nofollow">Need advice on your personal situation? SmartAsset's free tool can find a financial planner to help »</a></li></ul><p>If you have a <a href="https://www.businessinsider.com/fixed-rate-mortgage-vs-adjustable-rate-mortgage">mortgage</a> and cash to spare, you've probably considered paying off your loan early.</p><p>To be unencumbered by debt feels good, but paying down a mortgage years before you need to may not be the best way to build wealth, if that's your goal. Brian Fry, a certified financial planner who founded&#xa0;<a href="https://safelandingfinancial.com/">Safe Landing Financial</a>, says making the right decision boils down to interest rates.</p><p>"If you project a higher rate of return for your investments than your mortgage's interest rate, then you should invest the savings," Fry says. "If you project your mortgage's interest rate to outperform your investments, then you should pay the mortgage off aggressively."&#xa0;</p><p>In essence, you want your money to earn more than it would cost you elsewhere. Fry <a href="https://www.businessinsider.com/pay-off-mortgage-early-or-invest-calculation-financial-planner">ran a simulation</a> for Business Insider comparing different scenarios for a hypothetical homeowner. The homeowner just got a raise that will net them an additional $24,000 a year after taxes. They are 15 years into their mortgage and have a remaining balance of $282,221 at an <a href="https://www.valuepenguin.com/mortgages/historical-mortgage-rates">interest rate of 5.84%</a>.</p><p>They have an established&#xa0;<a href="https://www.businessinsider.com/how-to-grow-your-emergency-fund">emergency fund</a>&#xa0;and no other debt, and they're already maxing out their&#xa0;<a href="https://www.businessinsider.com/how-to-invest-in-a-401k-for-retirement">401(k)</a>&#xa0;and&#xa0;<a href="https://www.businessinsider.com/how-to-open-an-ira-for-retirement">IRA</a>. Their nest egg is diversified, and they are looking to make the best financial decision about how to use the extra income to maximize their wealth. This is important, as Fry doesn't recommend paying down a mortgage aggressively or investing more aggressively until the rest of your financial house is in order.</p><p>For the investment fund, Fry used the <a href="https://markets.businessinsider.com/funds/vanguard-total-stock-market-index-fund;admiral">Vanguard Total Stock Market Index Fund</a>, which has a long-term annual return of 5.38%, according to JPMorgan estimates. He said it's important to remember that the market doesn't go up by the same percentage every year: Some years offer better returns, while others may have negative returns.</p><p>In a simple comparison of interest rates, paying off the mortgage early wins. "A 5.84% interest rate on the loan is higher than the market's expected rate of return. If the homeowner is locked into a higher interest rate, it's best to pay off the debt first," Fry says.</p><p>However, that's not the best possible option. Since interest rates today are lower than the homeowner's current rate, the homeowner would benefit from <a href="https://www.businessinsider.com/things-ive-learned-from-refinancing-my-mortgage">refinancing</a> their mortgage, he says.</p><p><em><strong><a href="https://smartasset.com/retirement/find-a-financial-planner?utm_source=businessinsider&amp;utm_medium=cpc&amp;utm_campaign=bus__falc_bicontent&amp;utm_content=pay-mortgage-or-invest-interest-rates" rel="nofollow">Need advice on your personal situation? SmartAsset's free tool can help you find a financial planner to help »</a></strong></em></p><h2>Pay off mortgage early or invest: The best actions you can take</h2><p>Fry says the homeowner can refinance to a 15-year <a href="https://www.businessinsider.com/fixed-rate-mortgage-vs-adjustable-rate-mortgage">fixed-rate mortgage</a> at an interest rate of 3.19% - over 2.6% lower than their current rate.</p><p>According to his calculations, if the homeowner refinances their mortgage and invests what they save on monthly payments plus $24,000 a year, in 15 years they will have paid off their loan and have an investment account balance of $623,701. Fry says this is the best option for the hypothetical homeowner, who already has an emergency fund and is maxing out their retirement accounts. If you don't have your savings in order, take care of that first.</p><p>But unfortunately, investing in the stock market is a gamble and returns aren't always consistent year after year. If the homeowner still refinances for the lower interest rate, but wants to act more conservatively, "they can pay off the mortgage and then invest and still come out OK," Fry says. Their investment account balance at the end of 15 years would be $599,662.</p><h2>Pay off mortgage early or invest: The worst actions you can take</h2><p>Fry says the worst financial decision the homeowner could make would be spending their extra income and not refinancing their mortgage or investing. Since the goal is to build wealth, spending cash won't move the needle.</p><p>The second worst option, according to Fry, would be ignoring the opportunity to refinance. Refinancing to lock in a lower interest rate can lower your monthly payments significantly, saving you thousands of dollars in interest over the life of the loan. As outlined above, whether you decide to pay off your mortgage more aggressively or invest aggressively, refinancing saves money.</p><p>Refinancing is best for people who aren't planning to move any time soon, in part because there are closing costs that run between 1.5% to 4% of the remaining mortgage balance.</p><h3><a href="https://smartasset.com/retirement/find-a-financial-planner?utm_source=businessinsider&amp;utm_medium=cpc&amp;utm_campaign=bus__falc_bicontent&amp;utm_content=pay-mortgage-or-invest-interest-rates" rel="nofollow">Need advice on your personal situation? SmartAsset's free tool can find a financial planner to help »</a></h3><ul class="read-more-links"><li>More&#xa0;<a href="https://www.businessinsider.com/category/personal-finance-insider">personal-finance</a>&#xa0;coverage:</li><li><a href="https://www.businessinsider.com/best-airline-credit-card-comparison-delta-united-american">What's the best airline credit card?</a></li><li><a href="https://www.businessinsider.com//best-cash-back-credit-cards">The best cash-back credit cards</a></li><li><a href="https://www.businessinsider.com/are-cds-a-good-investment">Are CDs a good investment?</a></li><li><a href="https://www.businessinsider.com/when-to-save-money-in-high-yield-savings">When to save money in high-yield savings</a></li><li><a href="https://www.businessinsider.com/best-rewards-credit-cards">Best rewards credit cards</a></li></ul><p class="tagline"></p><p style="font-size:14px;"><em>Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.<em></em></em></p><div></div>    <div class="margin-top">        <h3>NOW WATCH: <a href="https://www.businessinsider.com/this-mom-is-winning-halloween-with-movie-inspired-crocheted-costumes-2018-10">This mom is winning Halloween with her movie-inspired crocheted costumes</a></h3>        <div>                    </div>    </div>

If you're deciding whether to pay off your mortgage early or invest, it boils down to one thing: interest rates

<ul class="summary-list"><li><keyword id="12212082" type="UNKNOWN" weightage="60" keywordseo="mortgage" source="Orion">Mortgage</keyword>-backed securities (MBS) are bonds that use groups of mortgage loans as collateral.</li><li>An MBS can be issued by a government agency, government-sponsored entity, or a private institution.</li><li>Unlike most other bonds, mortgage-backed securities make monthly payments of interest and principal.</li></ul><p>Mortgage-backed securities are bonds that use a pool of real estate loans, including residential mortgages, as collateral. Once created by a bank or investment company, the pool is sold to a federal agency, government-backed institution, or securities firm where it is then used as collateral for a mortgage-backed security. </p><p>Investing in an MBS can be a complicated process for investors. It's important to find trustworthy issuers and to understand the rules that determine your <a href="https://www.businessinsider.com/roi" target="_blank" rel="noopener">investment return</a>. </p><h2><strong>How mortgage-backed securities (MBS) work </strong></h2><p>Mortgage-backed securities are created when a bank or other financial entity that owns mortgage loans pools several mortgages together based on their similar characteristics, such as interest rate and repayment period. Fixed-rate mortgages, adjustable-rate mortgages, and residential mortgages may make an MBS. </p><p>Once a pool is created, it is then sold to an MBS issuer to securitize the pool and create an MBS. Issuers include government agencies (like Ginnie Mae), government-sponsored institutions (like Fannie Mae and Freddie Mac), or private securities firms (known as private-label MBSs). Government agencies offer the strongest guarantee to make payments on their MBSs than private or government-sponsored entities.</p><p><strong>Quick tip:</strong> Buying an MBS from a government agency is the safest option, as it will be backed by the "full faith and credit" of the federal government. Government-sponsored entities also have some Treasury backing, but not quite as much security.</p><p>Afterward, you can then buy an MBS through a <a href="https://www.businessinsider.com/what-is-broker" target="_blank" rel="noopener">broker</a>.</p><p>"When you're investing in mortgage-backed securities, you're lending money to home buyers," says Lyle Solomon, a bankruptcy attorney with Oak View Law Group in California. "So, in return, you have the right to the money (or the mortgage amount for a home buyer) you are lending." </p><p>Essentially, MBS bondholders are rewarded with monthly payments of both interest and principal. In the early days of MBS investment, the monthly payments consist mostly of interest. As time goes on, they include more principal in the amount.</p><p>An MBS makes payments to investors each month because the homeowners of the collateralized mortgages are making their mortgage payments monthly. Much like mortgage payments, MBS payment amounts vary from month to month.</p><table><tbody><tr><td><p><strong>Issuers</strong></p></td><td><p>Federal agencies, government-backed institutions, and private securities firms</p></td></tr><tr><td><p><strong>Minimum investment</strong></p></td><td><p>Usually $10,000, but varies by issuer</p></td></tr><tr><td><p><strong>Interest payment</strong></p></td><td><p>Monthly in variable amounts, along with principal</p></td></tr><tr><td><p><strong>Bond interest rate</strong></p></td><td><p>Varies by MBS, determined when MBS is created</p></td></tr><tr><td><p><strong>Pricing information</strong></p></td><td><p>Available through your broker</p></td></tr><tr><td><p><strong>How to buy</strong></p></td><td><p>Through a broker or financial advisor</p></td></tr></tbody></table><h2><strong>Types of mortgage-backed securities </strong></h2><p>The two main types of mortgage-backed securities are pass-throughs and collateralized mortgage obligations (CMOs). </p><p><strong>Pass-throughs</strong> are a standard MBS where the issuer collects mortgage payments in a trust and distributes — or passes through — the money to investors. Pass-through MBSs typically have maturities of five, 15, or 30 years. But on average, they last much less than the stated maturity since the payouts depend on how the underlying mortgages are being paid down.</p><p><strong>Collateralized mortgage obligations</strong> are more complicated because they comprise several pools of securities, called tranches or slices, rather than one pool of similarly characterized mortgages. Each pool in a CMO has its own characteristics including interest and principal distribution rules. These payments are made to the different classes of securities according to a certain priority of payments.</p><p><strong>Quick tip:</strong> You'll likely need financial expertise to help you with an MBS investment, but you'll definitely want professional guidance with a collateralized mortgage obligation MBS.</p><h2><strong>Pros and cons of mortgage-backed securities </strong></h2><p>Mortgage-backed securities can offer some great diversification to an investment portfolio. They're an investment that also provides monthly payouts, which can appeal to investors who want some extra income each month. But these payments vary in amounts, which doesn't offer the consistency that some investors may want from their income streams. </p><p>MBSs are subject to the risks that stem from the collateralized mortgages. Homeowners may refinance their loans, which could result in prepayment, or paying out principal to investors earlier than planned. As an investment, an MBS also exposes investors to market and liquidity risk. </p><table><tbody><tr><td><p><strong>Pros</strong></p></td><td><p><strong>Cons</strong></p></td></tr><tr><td><ul><li>Offer portfolio diversification</li><li>Provide a monthly income stream</li><li>Government issuers offer full faith and credit of the US government</li></ul></td><td><ul><li>High minimum investment requirement for everyday investors</li><li>Payment amounts inconsistent from month to month</li><li>Complex considerations around return on investment and issuers' creditworthiness </li></ul></td></tr></tbody></table><h2><strong>MBSs vs bonds</strong></h2><p>MBSs largely differ from other <a href="https://www.businessinsider.com/what-is-a-bond" target="_blank" rel="noopener">bonds</a> in their payment structure. Bonds typically make payments of the principal semiannually or at maturity, while MBSs make payments of both interest and principal monthly. </p><p>Government bonds, such as Treasury and ​​Series EE savings bonds, tend to have lower investment thresholds. For example, a <a href="https://www.businessinsider.com/treasury-bonds" target="_blank" rel="noopener">Treasury bond</a> requires a $100 minimum to purchase and an EE bond requires as low as $25 to buy. MBS are known for higher minimum investment requirements, typically around $10,000. </p><table><tbody><tr><td><p><strong>Mortgage-backed securities</strong></p></td><td><p><strong>Bonds</strong></p></td></tr><tr><td><ul><li>Monthly payouts of interest and principal</li><li>$10,000 likely minimum purchase </li></ul></td><td><ul><li>Lump-sum payout at maturity</li><li>Lower minimum purchase ($100 for Treasury bonds)</li></ul></td></tr></tbody></table><h2><strong>The financial takeaway</strong></h2><p>Mortgage-backed securities are complex investments that require plenty of research and due diligence. You first want to make sure you're buying from a legitimate issuer. You may also want to enlist the help of an <a href="https://www.businessinsider.com/what-is-a-registered-investment-advisor-ria" target="_blank" rel="noopener">investment professional</a> so you can find an MBS that can provide the returns you want. </p><p>You will also need a sizable amount to buy an MBS, which makes these bonds tricky for very beginner investors.</p>

Mortgage-backed securities are bonds that are secured by home and real estate loans

<ul class="summary-list"><li><keyword id="12554546" type="UNKNOWN" weightage="60" keywordseo="underwriting" source="Orion">Underwriting</keyword> is the process of taking on risk in a financial transaction, typically a <keyword id="6360217" type="UNKNOWN" weightage="60" keywordseo="loan" source="Orion">loan</keyword>, insurance, or investments.</li><li>Underwriters assess risk, determine how much to assume, and at what price.</li><li>Underwriting helps set rates for loans, premiums for insurance policies, and the cost of risk in securities markets.</li></ul><p>Underwriting determines how risky a financial venture such as a loan, insurance policy, or investment is and whether to accept that risk. If the risk is considered worth taking, the underwriting process determines how much to charge.</p><p>"Underwriting is basically just verifying all of the information the borrower has provided on their loan application — their income, their tax returns, their bank accounts and other assets," says Mayer Dallal, managing director at <keyword id="12212082" type="UNKNOWN" weightage="60" keywordseo="mortgage" source="Orion">Mortgage</keyword> Bank of California. "[Lenders] look at debt-to-income ratio — basically, how much you owe versus how much you earn. [Lenders] also check credit scores — it's difficult to overstate the importance of a credit rating to the process. Then we get an appraisal of the property to see if the loan amount is appropriate, and do a title search to make sure there are no liens on the property."</p><h2><strong>How the process of underwriting works </strong></h2><p>The main goal of underwriting is to determine risk. Knowing the amount of risk involved in a financial venture allows for pricing and finally a decision to accept or reject the applicant or venture.</p><p>The underwriting process varies somewhat depending on the type of underwriting being done, but in general terms here's how it works:</p><p>Step 1: Review and evaluate the application or other paperwork to determine creditworthiness, medical history (life insurance), financial soundness (investment), or other other factors that vary with the type of risk.</p><p>Step 2: Obtain an appraisal of property, evaluation of securities, or require a medical exam as required to help further determine risk.</p><p>Step 3: Process all gathered information and make a decision to:</p><ul><li>Accept: Approval involves other decisions including loan rates, terms, premium amounts, or price to pay for securities, depending on the type of underwriting decision being made.</li><li>Deny: Denial results when the various factors show unacceptable risk in the eyes of the underwriter.</li><li>Pending: A decision to hold the application typically means the underwriter doesn't have enough or the right information to make a firm decision.</li></ul><p><strong>Note: </strong>The term 'underwriting' is <a href="https://thebasispoint.com/where-the-term-underwriting-comes-from/" target="_blank" rel="noopener">believed to have originated</a> in the early days of Lloyd's of London when risk takers (underwriters) wrote their names below (under) the total amount of risk they were willing to undertake, such as a voyage of a merchant ship for example, in exchange for a specified premium.</p><h3>What is the role of an underwriter?</h3><p>The role of an underwriter is to protect the financial interests of the lender, insurer, or investor by assigning appropriate risk and compensation for assuming that risk. Underwriters work in a variety of financial industries including banking, insurance, investing, and more. In fact, anything that involves a combination of risk and money, probably has an underwriter somewhere in the process.</p><p>In their role of evaluating financial risk, depending on the type of risk, underwriters investigate all financial aspects of an applicant or investment. Medical history and health come into play when someone applies for life insurance. Appraisal or evaluation is also part of the process when you are buying a house, car, boat, or even investing in real estate or a major project.</p><h2><strong>Types of underwriting </strong></h2><p>Each type of underwriting comes with specific risks. Underwriters generally specialize in one of several risk types.</p><h3>Loan underwriting</h3><p>If you've ever applied for a personal, car, or home loan, you've likely heard the term "underwriting" as part of the application process.</p><p><strong>Personal and car loans</strong>, compared to mortgage loans, are relatively simple. The risk to the lender is that you will not pay back the loan. <a href="https://www.businessinsider.com/personal-finance/how-to-get-a-car-loan" target="_blank" rel="noopener">These types of loans</a> are often underwritten using a computer and strict modeling algorithms. That is not to say they are "untouched by human hands" just that the process is not as complex as with other types of risk.</p><p><strong>Mortgage/real estate loans </strong><a href="https://www.businessinsider.com/personal-finance/mortgage-underwriting-process" target="_blank" rel="noopener">are more complicated</a>, mostly because the thing you are trying to buy is more expensive and the risk to the lender is greater. As noted above, a home or other real estate loan involves a deep dive into your personal finances including income, assets, debt, and general ability to repay the loan. In addition, the asset (home/real estate) must be appraised, evaluated to make sure you are not overpaying. Other research involves making sure the seller actually owns the property, such as a title search.</p><p>"Many people don't realize how tricky underwriting can be for a self-employed person or an entrepreneur who's applying for a loan at a big bank," notes Dallal. He blames it on automated underwriting that looks for a W-2 and when none is found, rejects the applicant. </p><p>"But there are mortgage lenders who take a more individualized approach to loan qualification, rather than the cookie-cutter approach old-school lenders use," Dallal adds, advising borrowers to seek out those lenders.</p><h3>Insurance underwriting</h3><p>Insurance underwriting involves evaluating an applicant for life or property insurance. It determines the risks of filing large or frequent claims and assessing how much coverage a person can be given, how much they should pay and how much an insurance company is likely to pay to cover the policyholder.</p><p><strong>Life insurance </strong>underwriting involves assessing the risk of the potential insurer by evaluating age, occupation, health, family medical history, lifestyle, hobbies, and other traits. </p><p><strong>Property and casualty insurance</strong> underwriting requires inspection of homes and rental properties for deterioration, crumbling foundations, damaged roof or anything that poses a risk to the insurer.</p><p><strong>Note: </strong>Before the Affordable Care Act (ACA) took effect in 2014, health insurance sold in the individual market in most states was medically underwritten to include consideration of pre-existing conditions. Since 2014, however, pre-existing conditions may no longer be considered. Health insurance must now by guaranteed issue, regardless of pre-existing condition status.</p><h3>Securities underwriting</h3><p>In <a href="https://corporatefinanceinstitute.com/resources/knowledge/finance/underwriting-overview/" target="_blank" rel="noopener">securities underwriting</a>, the process involves the sale of stocks or bonds to investors, often in the form of <a href="https://www.businessinsider.com/what-is-ipo" target="_blank" rel="noopener">Initial Public Offerings (IPOs)</a> by an underwriter (bank). In this case the bank relies on a cadre of underwriters who help the bank assess risk, plan for, and execute the agreement to underwrite the IPO and sell securities to fund the IPO.</p><h1>How long does underwriting take?<strong> </strong></h1><p>It should be no surprise that the amount of time it takes to underwrite a financial transaction depends on the type and complexity of the transaction. Underwriting a personal loan or even a car loan can be completed in minutes using a computer and software. Mortgages and life insurance take longer. Securities underwriting, for example for an IPO, is likely to take the longest.</p><p><strong>Personal loans</strong> or car loans often take a week or less. In some instances, underwriting and approval can be almost instantaneous, happening in minutes.</p><p><strong>Mortgages</strong> often take 30 to 45 days for full approval, although the underwriting process is only part of that timeline and is usually complete in about 72 hours after the underwriter has all the information they need.</p><p><strong>Life insurance </strong>underwriting might be one of the least predictable when it comes to a timeline. Many life insurance policies undergo underwriting and approval in as few as 24 hours. Depending on health and other issues, however, the process can take a month or more.</p><p><strong>Property and casualty</strong> insurance is typically approved as fast as a personal loan, that is in one to seven days. The effective date of insurance, however, is after your payment is received. Being approved for homeowners insurance doesn't mean you have it.</p><p><strong>Securities</strong> underwriting as part of the IPO process typically happens within the six to nine months it takes for a company to transition from private to public. Since underwriters are involved at every step in the process on behalf of the bank, their work is not complete until the IPO is complete.</p><h2><strong>The financial takeaway</strong></h2><p>Underwriting is all about risk and determining the cost (value) of that risk. With a loan, the risk is whether the borrower will repay or default and the cost is the amount of interest charged. With insurance, the risk is whether too many policyholders will file claims at the same time. To mitigate that risk, the cost is the premium charged to each policyholder. With securities, the risk is that the underwritten investment will not make a profit. The cost is the difference between the amount the underwriter pays for the shares and the amount the public pays when the shares are sold.</p><p>The role of underwriting and the underwriter cannot be understated. Without some assessment of risk, all financial transactions would be a matter of "guessing." Underwriting removes guesswork and replaces it with a process designed to be fair to both the lender and the borrower; the insurer and the insured; the investor and the investment.</p><p>Lenders want to lend, insurers want to insure, and investors want to invest. Conversely, borrowers want to borrow, individuals want insurance, and IPOs want investors. No matter your role in any financial interaction, know that the underwriter is there to ensure fairness.</p><a data-type="618e6c8bd5155d73e6369c15">IFRS: The accounting framework that sets the rules for most non-US companies' financial reporting</a><a data-type="6185865e9a6f0261a113f16a">What are assets? The building blocks of wealth for individuals and profits for businesses</a><a data-type="6149f6636bf54a3a6e5d45a2">A CFP is an advisor armed with extensive education and ethical standards to help you manage your money</a><a data-type="61325cb22864564f1529e118">What to know about actuaries — the professionals who predict the financial future of companies with math and science</a>

Underwriting: The risk-assessment process used in everything from IPOs to life insurance

<div type="image" title="lake hamilton" height="2184" width="2913" msid="78025658" hostid="261"></div><ul class="summary-list"><li>If you're considering buying a second home, there are four signs you can afford it. </li><li>Those signs include being on track with your retirement savings and saving for other important goals. </li><li>Another sign that you can afford a second home is that you don't need to rent out the home in order to afford it. </li><li>You'll also need to be able to afford the maintenance and any emergency expenses on both of your homes.</li></ul><p><a href="https://www.businessinsider.com/my-cfp-gave-me-3-part-strategy-for-buying-my-second-home" target="_blank" rel="noopener">Buying a second home</a> is a major purchase. While it's a nice idea to own a place for a weekend getaway or a month-long stay, <a href="https://www.businessinsider.com/personal-finance/asked-myself-questions-before-buying-a-second-home" target="_blank" rel="noopener">knowing if you're ready to buy</a> can be complicated. </p><p>Financial planner <a href="https://lifelongadvisors.com/andrew-rosen" target="_blank" rel="noopener">Andrew Rosen</a> has worked with a number of professionals, executives, and retirees over his nearly 20-year <keyword id="25456" type="ORGANIZATION" weightage="60" keywordseo="financial-planning">financial planning</keyword> career. "A second home is something that comes with a lot of costs and a lot of blood, sweat, and tears," he says. </p><p>But if renting a vacation home isn't the move for you, there are a few signs that you can afford to take the plunge and spring for a second home of your own. </p><h2>You're on track for retirement and other financial goals</h2><p>Before considering anything else, you have to be on track for your other financial goals, <a href="https://www.businessinsider.com/8-signs-youre-on-track-for-retirement-even-if-it-doesnt-feel-like-it-2016-8" target="_blank" rel="noopener">especially retirement</a>. </p><p>"If you know that you're on track financially for retirement through your current financial plan and savings rate, and there's enough discretion there that you can afford a second home, then I'd just look at it like another expense to plan for," says Rosen. </p><p>Before your home purchase, it might be a good idea to <a href="https://www.businessinsider.com/personal-finance/how-to-find-a-financial-planner-where-to-start" target="_blank" rel="noopener">check in with a financial planner</a>. They can help you figure out whether you're saving enough for retirement, and determine if you need to save more in advance of this big commitment. </p><h2>You can afford the upkeep and maintenance</h2><p>One thing about homeownership is that things go wrong, and <a href="https://www.businessinsider.com/personal-finance/surprise-costs-owning-home-repairs-maintenance" target="_blank" rel="noopener">it's your responsibility to fix them</a>. </p><p>"We see what goes wrong with our normal homes, but [imagine] this at a home that you're not there for 300 days a year," Rosen says. When you're away from the property often, something is bound to go wrong, and it could be even worse than it would be in your first home since you're not there to catch the problem in its early stages.</p><p>Given that, you'll have to save cash to keep up with the maintenance. It's not uncommon for financial planners to advise <a href="https://www.businessinsider.com/personal-finance/how-much-money-save-for-home-repair-2019-7" target="_blank" rel="noopener">saving 1% to 4% of a home's value</a> in a high-yield savings account to keep up with ongoing maintenance costs and any surprises. </p><h2>You don't need to rent it out to keep up with payments</h2><p>While many people find it logical to <a href="https://www.businessinsider.com/personal-finance/renting-my-place-airbnb-for-3-months-pays-mortgage-for-the-year" target="_blank" rel="noopener">rent out a property that they're not living at</a> through a <a href="https://www.businessinsider.com/personal-finance/airbnb-host-lessons-learned-advice-side-job-2019-6" target="_blank" rel="noopener">homesharing site</a>, it's not something you should count on. </p><p>"Make sure that you can afford it without any other income stream for it," Rosen says. </p><p>There's nothing wrong with choosing to rent out a second property, but making your payments shouldn't rely on rental income, since rental income isn't guaranteed. Choose a second home that you can afford without any rental income to make sure that you won't fall behind. </p><h2>You can meet the tighter mortgage standards for a second home</h2><p>Getting a mortgage for a second home isn't like getting a mortgage on a first home. "They'll look at you more strictly for sure on a second home," says Rosen. </p><p>That might mean that you need to have a higher credit score or a larger down payment to qualify. <keyword id="423121" type="PERSON" weightage="60" keywordseo="mortgages">Mortgages</keyword> for properties tht aren't a primary residence often aren't eligible for loans that have low down payment options, like <a href="https://www.businessinsider.com/personal-finance/fha-loans-what-are-the-pros-and-cons" target="_blank" rel="noopener">FHA loans.</a> </p><p>Prepare to pay a higher interest rate on a second property, too. According to online mortgage lender and real estate information news site <a href="https://themortgagereports.com/60975/second-home-vs-investment-property-mortgage-rates-rules" target="_blank" rel="noopener">The Mortgage Reports</a>, loans for <keyword id="2399191" type="PERSON" weightage="60" keywordseo="second-homes">second homes</keyword> and investment properties typically have an interest rate 0.5% to 0.75% higher than the typical primary residence mortgage. </p><ul class="read-more-links"><li>More coverage from <keyword id="9177069" type="UNKNOWN" weightage="60" keywordseo="milestone-moments">Milestone Moments</keyword>:</li><li><a href="https://www.businessinsider.com/personal-finance/things-that-change-when-own-home-2020-7" target="_blank" rel="noopener">4 things that change when you go from renting to owning a house</a></li><li><a href="https://www.businessinsider.com/personal-finance/strategies-dual-income-couples-manage-money-2020-6" target="_blank" rel="noopener">5 strategies any dual-income couple can use to manage their money</a></li><li><a href="https://www.businessinsider.com/personal-finance/how-to-invest-for-retirement-decades-before" target="_blank" rel="noopener">How to invest if you have 30 years before retirement</a></li><li><a href="https://www.businessinsider.com/personal-finance/what-to-do-with-money-after-six-figures" target="_blank" rel="noopener">3 smart things to do with your money when you start making 6 figures</a></li></ul>

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