Perhaps you are one of the hundreds of millions of people worldwide who have a mortgage on their home. This does not mean that a person should wait until the day it's paid off. One can always opt to refinance their loan.
Indeed, it's surprising to see how many opportunities this option offers. It's both practical and profitable if you know where the potholes are. Before embarking on the process of refinancing, a borrower should consider the reasons for their decision. Usually, problems arise when a person is not informed sufficiently and not prepared.
In this article, you will find easy to follow guide on what and how to do when deciding and applying for the new loan.
Reasons to Refinance Your Mortgage
Mortgage refinancing is a good move in many circumstances – we have collected the most common:
These are just some of the reason one might consider before refinancing your debt.
Lower Interest Rates
No matter how low the rates on your loans are, you always wish them to be lower. Let's imagine you have taken out a mortgage, but the interest rates have been reduced since then. Why not refinance your mortgage and enjoy the benefits?
White House statistics showed that the average homeowner could save $3,000 a year by refinancing their mortgage. This money could be your tropical summer holiday.
Good Credit Score
Has your credit score skyrocketed?
This would be great because it may guarantee a homeowner better loan terms, even if the interest rates have not gone down. If not, read Baruch's great post about the different ways to increase your credit score.
Lower Monthly Installments
Who doesn't want to pay less each month for their credit? Sometimes, whatever the reason, you cannot qualify for better terms. If you can refinance your mortgage to be repaid for a longer period of time, this will definitely reduce the amount of money you pay each month.
However, issuing a new debt means that you will pay for your house even longer than previously expected. Consider the interest paid already and how much you will pay in the future on the new loan. Which is the perfect scenario? Reduction of the loan term and lower interest rates, which could substantially reduce your monthly payments.
These are the so-called cash-out refinances. The value of the new loan exceeds that of the old one and the difference is cash you can use if needed. However, this money should be paid back, with an interest.
Unlike taking out a separate home equity loan, a cash-out refinance replaces your current mortgage with a new mortgage.
Keep in mind, this option is super risky – If you’re unable to repay your loan, you could lose your home.
In addition, You’ll restart the clock on all of your housing debt, so you’ll increase your lifetime interest costs (borrowing more also does that).
Refinance Your Mortgage: 9 Steps
Everything in this world is a two-edged sword.
Often, homeowners who've decided on taking this step are not prepared or ill-informed. Do not make this blunder. Now, let's assume you have a solid reason for refinancing your mortgage and you have decided to do it.
Below you will find an easy to follow guide divided into 9 tips.
1. Prepare Your Documents Is Your Credit Score Good?
Before putting your signature on the papers, make sure your credit score is really good.
For a refinance additional factors to your credit score play into whether or not you may get approved. These factors include the equity you have in your home, the type of mortgage you currently have, your saving and overall debt, your debt-to-income ratio or DTI and your loan-to-value ratio or LTV.
You'll need to prepare things such as verification of employment and pay stubs in order to prove continuity of income.
If that's not the case, the chances are slim for the borrower to get a lower interest rate, which in a way makes the refinancing pointless.
It's advisable to consult with a loan officer and determine whether it's beneficial or not.
2. Estimate Your Home's Value
Logically, if a bank lends money for a property, it needs to estimate the value of it. Basically, this is what a mortgage is – money for your house's value. Homeowners tend to overestimate the real price of their home.
What should one do?
Find a place where you can compare the prices of your home to others with similar features that are currently in the market. This check will help you have a real idea of your home's worth.
3. Understand Your Current Terms
To some people, information is the most powerful thing in the world.
Being well informed is indeed key to succeeding in anything, notably financial matters. Go to your bank and get some crucial information on your current mortgage terms as well as the future one – monthly payment, interest rates, application fees and so on.
4. Use Tools to Calculate Your Mortgage
At this point in the process, you are well acquainted, your credit score is great and the value of your house is really what you've expected.
The next move is simple maths. This tool comes in handy – mortgage refinance calculator.
Pay attention that you have to be well aware of some data – your current monthly installments, your current rate, the years you have to pay, etc.
Not only will this give you the chance to know what to expect from your future refinancing but also you'll be able to compare different proposals and decide on which one you'd like to accept.
5. Shorter or Longer Term?
This is another aspect worth mentioning when choosing to refinance your existing loan.
Here you have two options – to shorten or to extend the term. For example, if interest rates have become lower, it's highly likely that your 30-year fixed mortgage can be shortened to 20- or 15-year term keeping the same interest without much change in your monthly installments.
On the other hand, extending your term is a good option if you face difficulties with your monthly payments.
Definitely, the extended period will decrease the amount you have to pay monthly, but generally, the interest on the loan will increase the total value of the debt substantially.
6. Accuracy and Precision on Applying
If you have followed the previous steps and everything seems as bright as an August day, then you are ready for the application process. You have to possess all the required documents and to fill in the application form correctly.
Do not make mistakes because even the most negligible one can be crucial and lead to a unanimous “No.”
You must have all the papers the bank wants in advance so that you can provide anything if asked to. Remember – accuracy and precision are of paramount importance when filling in your document.
7. Review Your Refinance Agreement
If you have been successfully approved, you will receive the so-called letter of approval before finally signing the contract and receiving the new loan.
There you will find the terms and conditions of the deal. Don't just scroll down and glance at it, examine all the points listed. Determine if this is what you have expected.
Once you sign, the process is irreversible.
8. Lock in Your Rate
Some people prefer to have a steady rate during the whole term.
A rate lock is when a lender has to agree on a fixed rate in advance notwithstanding the movement of the rate throughout the years. It's entirely up to the borrower whether to choose this option or not.
The last and final step is the closing procedure. If completed successfully it guarantees the borrower fresh funds. Before you sign the documents, keep in mind the following: if a lender has approved your refinancing, they will send you a commitment letter in which you could find all the conditions, terms and fees of the new debt.
Examine them carefully as you will be given several days to do so. On the closing day, do not fret (yes, legal documents are pretty tough to understand), again read and go over the papers and then put your signature. On the closing day, be ready and prepare some money to pay for various expenses related to the procedure.