Refinancing is when you get a new mortgage to replace your existing mortgage. Most of the time, people refinance their mortgage when they are looking to reduce their monthly payments using the equity on their home (the difference between the amount owed and how much the home is currently worth).* Other reasons include changing from an adjustable-rate to a fixed-rate mortgage; avoiding balloon payments; cashing out to consolidate debt; consolidating a mortgage and a home equity line of credit; and even addressing family matters such as divorce. When you refinance, your first loan is paid off allowing the new mortgage to be created and placed as a first lien on the property.
Is Refinancing Right For Me?
If you think refinancing your home loan is something you might be interested in, ask yourself the following questions to see if refinancing is a good option for you:
– How long do I plan to stay in my current home?
– How much do I owe on my home?
– What is my interest rate and what are the current interest rates available?
– Can I afford to pay the costs associated with refinancing?
– Why do I want to refinance?
Once you have asked these questions, it’s time to assess your situation. You must check your equity, debt, and available cash, as these 3 items can greatly impact your ability to refinance your home. Here are the reasons why these 3 items are often problems for homeowners who wish to refinance:
No Equity in Home – If you have little or no equity in your home, refinancing may not be the best option for you. Another term for this is the Loan to Value (LTV) ratio of your home. If you have less than 10% equity, or a 90% LTV, it will not be easy to refinance.
Unpaid Debt – If you have other debts on top of your mortgage, they can impact your ability to refinance. If you are paying more than 38% of your income towards debt, you may not be able to refinance, and if you do refinance, you may not get the best rates.
No Cash – In order to refinance successfully, you should have some cash set aside for emergencies and or to cover closing costs. Some programs require up to three months cash reserves of principal, interest, tax, and insurance payments, also known as PITI. These funds also need to be seasoned for two months in an account prior to refinancing.
When and How to Refinance
Ideally, you only want to refinance your current loan once. Usually, you have to plan to be in your house for a while for refinancing to make sense. You also have to figure out where you stand with your current mortgage and investigate whether or not your loan has a prepayment penalty (where you are charged a fee when you pay off your mortgage early). Furthermore, consider how long it will take you to recoup the closing costs of the new mortgage. Even though you will be making lower payments, extending your mortgage term can wind up costing you more in the long run. Make sure the timing and circumstances allow this to be the right time to refinance your mortgage.
If you believe you are ready, follow these 5 simple steps to refinance:
Know Your Credit – As a consumer, you are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian, and TransUnion. This free credit report may not contain your credit score, but it can be requested through the following website: www.annualcreditreport.com. Once you receive a copy, check to make sure your information is correct and remember to follow up on any discrepancies you find.
Gather Your Paperwork – Mortgage lenders will require paperwork in order to get the refinance started. Having these items ready will move the process along faster. Items include: driver’s license, Social Security Number, paystubs, tax returns, bank statements, debts, homeowner’s insurance policy, etc. To see a full list, click here.
Apply – Research your lender options and make sure you chose a company that you trust and feel comfortable with before you apply. Once you are ready, contact a Loan Originator who will help you navigate through your loan options.
Stay Informed – The more you know the better. Don’t be afraid to ask questions!- How much can I borrow?
– What interest rate do I qualify for?
– What are the fees and other costs, and how much are they?
– What terms are available?
– How much will my monthly payment be? How much will I be saving?
– Is there a fee if I pay my mortgage off early?
– Am I eligible for any special refinancing programs, such as government sponsored programs?
Choose a Loan and Close The Deal – Once you are approved and are informed about your options, take the time to select the loan program that best suits your needs. Make sure you keep in close contact with your Loan Originator and get them any additional paperwork they may need in order to schedule your closing.
If you are ready to refinance your current mortgage, have any questions regarding the process, or want to find out if refinancing is right for you, please contact one of our Licensed Mortgage Loan Originators by clicking here.
*Refinancing an existing loan may result in the total finance charges being higher over the life of the loan.