Refinancing can seem like a difficult task but with rates at historic lows this year, it makes sense to at least explore how much money you could save. Here are some easy steps to help you refinance with ease…
What is a Refinance? Refinancing is the process of replacing an existing mortgage with a new loan. The refinance loan pays off the old mortgage, but you still have to pay the new mortgage.
Refinancing your home mortgage can involve more paperwork than buying a home in the first place. But refinancing for the right reason, with a good rate and a suitable term, can be a big saver in the long run.
Some good reasons to refinance your mortgage include to lower your payment, to use your home equity to better manage debt, to pay off your loan faster, or to get a low rate for the life of your loan.
Typically, people refinance their mortgage in order to reduce their monthly payments, lower their interest rate, or change their loan program from an adjustable rate mortgage to a fixed-rate mortgage. Regardless of your goal, the actual process of refinancing works much in the same way as when you applied for your first mortgage: you’ll need to take the time to research your loan options, collect the right financial documents and submit a mortgage refinancing application before you can be approved.
Step One: Check your credit score and your home equity value
Your credit score has a huge impact on the rate you could get on your new home loan. So, before you even start your refinance, it’s a good idea to check your credit report to see where you stand. Check all three reports (Equifax, Experian, and TransUnion) for errors that could be bringing down your credit score, and if you find any, fix them. It’s recommended to do this at least two months ahead of time to make sure any errors get fixed before you apply for your refinance loan.
Find out how much you have left on your mortgage and get an estimate of your home’s value. Home equity that’s less than 20% usually means higher fees and interest rates.
Step Two: Determine the best type of loan for you
There are three types of refinance loans:
A cash-out refinance involves taking out a larger loan to pay off your current loan and capture some of the equity in your home. This loan can either have a shorter term, meaning you pay off the amount in less time, or it can have a lower interest rate. A cash-out loan is $2,000 or more, cash in your pocket, after the new loan is written. This extra money can be used to consolidate debt payments.
People with no cash-out refinances don’t take out more money than is required by the refinance. They can opt to add it to the loan balance or the money comes out of their own pockets and covers closing costs. This kind of refinance can give you a shorter term, lower interest rate, lower payment or a combination of all three.
Rate-and-term refinances change the interest rate of the loan or the term. Some people can change both. For example, someone may want to adjust the loan term from 30 years to 15 years and lower the rate to 2.25%. This refinance type is a common choice for people looking to save money in the long-run by eliminating the additional interest that is associated with the 30-year term.
Step Three: Gather all of your documents
Once you decided on the type of loan to apply for, it’s time to put together all the paperwork you’ll need. Documents needed will be very similar to when you purchased your home for the first time. This includes, but is not limited to:
- Pay stubs from the past month
- W-2s for the past two years
- Tax returns for the past two years
- Bank statements for the past two months
- Your most recent mortgage statement
- Your homeowners insurance policy
Step Four: Use a mortgage calculator
Using a mortgage calculator is also a good idea. We have an easy mortgage calculator you can try right here on our mortgage page. You’ll need to know the fees you’ll pay, your new interest rate, and your new loan amount. Once you input the data, the tool will calculate your monthly savings, new payment, lifetime savings, and the number of months until you break even, considering the costs of your refinance. Using a refinance calculator will give you a good idea of what to expect.
Step Five: Research your loan options with several different lenders
You want to shop for your best mortgage refinance rate and get a loan estimate from each lender. After assembling all the necessary documents, you can fill out your loan application. As you fill in the forms, take extra care to make sure all your information is accurate and complete. Any mistakes can slow down the loan process and possibly create problems when you get to the underwriting stage.
Each potential lender is required to issue an estimate within three days of receiving your basic information. The estimate is a document that details the loan terms, projected payments, estimated closing costs, and other fees. Compare the loan details from each lender and decide which one is best for you. When you have a few estimates from mortgage lenders, you can use the mortgage calculator explained above to help determine who offers the best deal.
Step Six: Get a home appraisal
The purpose of a home appraisal is to make sure your home is worth enough to qualify for your new loan. Your lender will arrange to have an appraiser come inspect your house, take pictures and notes, and write a report. You will be responsible for the cost of this process, which averages between $300 and $400. If the appraiser concludes your home is worth more or less than you thought, the lender might revise your loan estimate, and you will need to review it again.
Step Seven: Go through underwriting
Your loan must go through underwriting review. An underwriter carefully goes over all the documents you provided to make sure that everything is accurate and to verify that you can afford the new loan payments.
If the underwriter finds any problems, you may be contacted with questions or asked to provide additional documents. If the underwriter is satisfied, you’ll receive an approval letter with the final terms and conditions of your loan. Review it carefully to make sure it meets your expectations.
Step Eight: Lock in your rate
Once you’re satisfied with your loan approval and conditions, you’ll get a chance to lock in your interest rate. A rate lock guarantees that you’ll get the rate specified in your approval letter. You can actually lock in your rate sooner than this, but the lock is only good for a limited period of time – typically between one week and two months. Selecting a longer lock period adds to your closing costs, so it’s usually best to wait until about six days before closing to lock in your rate.
Step Nine: Close your loan
As soon as your loan rate is locked, you will get a preliminary closing statement that sums up your terms and closing costs. You should review it carefully. Your lender will tell you when and where to meet for the closing, where you will sign all of the final loan documents in the presence of a lawyer or notary public. After your closing, you have a three-day “right of cancel” period. If you change your mind about the refinance during this time, you can contact your loan agent and cancel the loan. Once these three days are up, your old mortgage will be paid off and your new one will go into effect. Your lender will send you a new mortgage or deed and an official closing statement, called a HUD-1 form. Hold on to this for tax purposes.
So What’s Next?
Take a look at our Best Picks for some Great Refinance Partners to choose from.
Best of luck in this journey and make sure to compare at least 3 or more mortgage lenders before locking into a rate and making a decision this big!