The Refinancing Process
Mortgages
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Refinance
Mortgage refinancing can be a great way to save on your home mortgage. Of course, you need to understand how the process works and evaluate whether you are suited for this type of transaction before proceeding with it. But in general, most people who refinance end up saving money because they get better terms or rates than what's currently available from their banks (and interest rates vary by state).
Here are some ways refinancing could help: paying off credit cards in full every month; getting rid of high-interest debts like student loans faster by using home equity as collateral against them; taking advantage of low rates for more extended periods than traditional mortgages allow because there isn't any risk involved on behalf of banks during this process.
If you’ve been considering refinancing your home, don't think of it as a challenge. The process works much similarly, whether applying for that first mortgage or updating an existing loan with new information and documents.
1. Verify Home Equity and Credit Score
The first step in refinancing is to assess your home's equity and get a credit report. To see if you have enough equity, lenders use the appraisal process to determine how much value has been added or reduced since they last looked at the property. This is done to ensure that you still qualify for the loan.
Lenders also look at your credit score as a measure of risk, which will determine how much interest you'll pay on your mortgage and what other fees may be added, such as closing costs (which vary by state). Be sure to check this ahead of time in case there are errors on your credit report you need to have removed.
2. Determine which Loan is For You
There are three types of loans that can be refinanced: cash-out, no cash-out, and rate & term. The type you choose will depend on your current financial situation but if possible, it’s best to get a loan with lower monthly payments because the APR is set up in such a way to pay off credit cards, etc.
Cash-Out Loans
This type of loan is ideal if you have a lot of high-interest debt and would like to consolidate them into one payment on your home's equity, which will significantly lower the monthly payments. In this case, lenders may ask that you prove that you can afford these new, more expensive terms by showing proof of income and other financial records.
No Cash-Out Loans
This type is suitable for those planning to stay in their home long term but need lower rates due to a change in circumstances, i.e., job loss, divorce, or illness that has caused you to lose your ability to pay on time each month.
Rate & Term Loans
This type of loan usually has a fixed rate and lower monthly payments than what's currently available on traditional mortgages, making it ideal for people who would like to free up some cash every month to pay off credit cards or build an emergency fund.
3. Collect Necessary Documents
Before you apply for a new loan, get together all documents required to prove your income and assets so that the process is as smooth and quick as possible:
Proof of Income: If you're self-employed or don't have a steady income, they may ask for more proof, such as bank statements and business plans to determine the amount of your monthly mortgage payment.
Proof of Assets: They'll generally ask for at least three months' worth of bank statements and to see your monthly bills like mortgage, credit card, utilities, etc.
Tax Returns: If you're self-employed, lenders may ask for a year of tax returns to get a more accurate picture of your income.
4. Use a Mortgage Calculator
One of the best ways to see which loan is perfect for you, start by using a mortgage calculator. These tools give lenders an idea of your current income and expenses to determine how much they're willing to lend, what kind of interest rate you qualify for, and whether or not you can make any prepayments from savings without incurring penalties.
5. Research Your Loan Options
Next, find a list of reputable lenders in your area who offer refinancing loans so you can compare loan options for the best results. You should also narrow down the types of offered products based on how much risk is involved (cash-out vs. no cash-out) and how long you want to be locked in at a fixed rate.
Also, make sure you get info from several different lenders because, in some cases, products can vary even with the same lender. For example, a HARP loan may be offered at one lender, but not another, or a cash-out refinance product might have different terms and rates depending on whether you've owned your home for more than two years.
6. Have Your Home Appraised
Before you can get a loan, your home must be appraised to determine its market value. The lender will use the appraisal results to calculate how much they're willing to lend against it and whether or not the property is worth more than what's owed on it. If so, then borrowers may have an opportunity for equity without refinancing their current loan.
7. Underwrite a Loan
The final step is to have your mortgage underwritten by a lender. This involves verifying all of the information you've given them, checking for any credit issues that might prevent approval, and determining the loan amount based on how much home equity they're willing to risk losing if you can't pay it back.
After all of this, you should hear back within a few days to answer your application and be prepared to sign some loan documents; if everything goes through smoothly, get ready for closing day!
8. Lock-In Your Rate
When it comes time for your loan approval, make sure you lock in the interest rate before signing anything; this is typically part of the process of refinancing mortgages after going through underwriting (more about that later). The final step is closing the deal and signing your loan documents.
9. Close The Loan
Once you're approved, your lender will work with a title company to handle the closing process. The date and time have been set once everything else is settled, so don't miss it! Closing costs such as fees for appraisals and other transactions can be included in the loan amount or paid by you upfront, but either way, these fees are non-refundable even if something goes wrong.
The good news is that you should have the title to your house by now. A new mortgage or deed and an official closing statement known as a HUD-1 form will be sent to you by your lender, which is for tax purposes only.
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