Refinancing your home at the right time can bring you great financial benefits, but the process can be a little intimidating for those who are refinancing for the first time, and even for those who have done it before in the past. Changing your mortgage loan to a different loan with different terms can get a bit confusing, and you might be afraid not to make any mistakes and end up doing the exact opposite of saving money.
There are consultants who can guide you through the refinancing process, and it’s not a bad idea to use them, but it’s important that you understand how refinancing works, from deciding to refinance to actually taking out the new mortgage loan. Understanding the refinancing process will help you avoid making simple, but expensive, mistakes, which can end up ruining your plans.
Deciding to Refinance
Home owners generally refinance when the interest rates are lower than they were when they took out their mortgage loan, but interest rates should not be the only deciding factors when you consider refinancing. First of all, the advertised interest rates are usually reserved for those who meet some very strict requirements, like having a perfect credit score. Anything less than a perfect credit score and you will find that the interest rate that you’ll be required to pay on your new loan is not that attractive anymore. Secondly, you should not be blinded by the low interest rates that lenders are willing to give you. The closing costs of refinancing can be very high, and might make the overall value of your new mortgage loan even greater than the value of your current loan.
Getting Prepared to Refinance
If you have decided that refinancing is the right step for you, and you will be saving money by doing it, then it is time to get prepared. Like most mortgage loans, refinancing will require a good credit score and a significant number of documents. Before talking to a lender, you should check your credit score, and make sure it’s in good shape, without any inaccuracies. You are entitled to one free credit report check per year, and you should report any erroneous information to the credit bureau. Also, having some of the paperwork ready before applying for a refinance will save you a lot of running around, and it will make the whole process go faster and smoother.
Choosing the Right Refinance Loan
There’s no perfect mortgage loan that will benefit everyone. Depending on your financial situation and many other factors, you should closely look at all loans that will be made available to you and decide once you find one that meets all your requirements. For example, you may want a lower monthly payment, in which case you should look at 30-year fixed-rate loans. Alternatively, you may want to pay off your mortgage sooner, in which case you should look at 15-year mortgages.
Applying for the New Mortgage Loan
Like we’ve mentioned earlier, preparing certain documents, such as personal tax returns, bank statements, pay stubs, and others, will make the refinance application process go by very quickly and, in some cases, you can even apply over the phone. The quicker you submit the required information, the faster will your new mortgage loan be approved.
Appraisal and Approval
After submitting your application, you will normally have to get your home appraised by a home appraiser. These appraisals usually cost a few hundred dollars and are paid by the borrower. The home appraisal is required in order for the lender to find out how much your home is worth and if you have enough equity in your home to support the new mortgage loan. All your paperwork, including the appraisal, will then be reviewed by the lender. If the lender comes to the conclusion that you are able to repay the new loan, your refinancing loan will be approved.
Locking in the Interest Rate
Once your new mortgage loan is approved, you will have the choice of locking in the interest rate or letting it float until closing. By locking in your interest rate, you are protected from an increase in interest rates before you close on the loan. If you don’t lock the interest rate, there is a chance that the rate on your new loan might increase, but there’s also a chance that it might decrease by closing time.
Signing the Loan Documents and Closing
At closing, you will be required to sign all of the loan documents. You should carefully review each document before signing, making sure they contain everything that was agreed upon. When closing, you will also be required to pay various closing fees, which can be pretty costly. However, some of these closing costs can be reduced at your request, or even waived, if you have a good relationship with your lender.
Refinancing is a pretty straight-forward process once you understand it, but you should still pay attention to the details. Refinancing can turn into a costly nightmare if you don’t carefully take all of the aspects into consideration. Doing your homework before refinancing will ensure that the whole process goes by smoothly and making your mortgage payments will be much easier.