There are several different reasons people choose to refinance their existing home mortgage. However, the most popular reason is the lowering of interest rates. If interest rates have dropped since you were granted your original mortgage, or even if your credit rating has improved, it might be a very good idea to refinance your current loan.
Whatever the reason may be, with the right guidance, research and preparation refinancing your home mortgage isn’t really that difficult a process, in fact its about the same as taking out your original mortgage. Here are some tips to help you through the process of refinancing your home mortgage.
What you need to do before contacting a lender
Have a defined goal
First, you need to ask yourself the question, what do you want to accomplish by refinancing your mortgage? Do you want to reduce your monthly payment. Are you looking to shorten the length of your loan? Do you want to change from an adjustable-rate mortgage to a fixed-rate mortgage? Do you want to borrow against the available equity that has built up in your home over the years, or combine a first and second mortgage?
After focusing on your goal, evaluate whether a refinance will improve your financial situation or not. There are several reasons to want to refinance your mortgage and there are benefits to doing it, but before you contact a lender, have a clear cut objective in mind.
Find out the value of your home
The value of your home will play a major role in deciding if a refinance is a good idea for your situation. Typically, 20% equity is the standard requirement for most lenders. However, if your home doesn’t meet this requirement don’t assume that a refinance is out of the question.
To find out the value of your home, contact a local appraiser and ask about sales of comparable homes in your area.
Check your credit
Even though a lender will check your credit score, it’s still a good idea to review the information for yourself beforehand. You can get your free credit report from an online credit service. This will allow you to check the accuracy before going to a lender, so there aren’t any surprises when a lender does run your credit report. However, if there are inaccuracies or surprises, be ready to give your lender explanations.
Assess the current status of your income and debts
Create a list of all your monthly debt payments, including mortgage, auto loans, student loans and credit cards.
Then, make a separate list of all your sources of monthly income and the amounts, just like you did when you originally applied for your mortgage.
The standard qualifications for a home refinance requires that no more than 36% of your income going toward debt, however, being above this cut off won’t automatically disqualify you.
Organize all your paperwork and documents
Even though you might not need all of these documents, it’s a good idea to have all of the necessary paperwork handy before you contact your lender, just in case they require them. These papers can include:
- W2s and tax returns for the past 2 years
- Current month’s mortgage statement
- Your pay stubs for the past month
- Home insurance declaration page and policy number
- Bank statements for the last 2 months for each active account
- Retirement statements
- Clear copy of your driver’s license and social security card
When you have all your papers collected and totals figured out, contact several lenders regarding interest rates and fees. Even though your best bet is to contact your current lender first, make sure you still do a thorough survey of several different lenders to make sure you are getting the best rate possible.
What to expect when you contact a lender
As in the case of applying for your original mortgage, it is a good idea to get a pre-qualification. During this process the lender will ask you for information to determine your eligibility for refinance. Prepare to share information about your debt and income situation, an estimate of your home’s value and your social security card so the lender can run a credit check.
After the lender reviews your initial information, they will contact you regarding the terms of the loan you qualify for. For instance, after the lender does their pre-qualification, discovery stage, it may be determined that you don’t have sufficient income to refinance a 30-year mortgage into a 15-year term, however, you may qualify for a 20-year home loan instead, or other refinance options.
The loan officer will discuss the options and fees associated with your loan during the application process. This is also when the mortgage company will be able to lock in your interest rate.
An appraisal of the property is required by most lending institutions. An appraisal usually costs between $350-$450 which is paid directly to the appraiser.
After your appraisal, if your property is within the parameters of the loan, the lender will grant the final loan approval. You will then receive a set of the loan documents to review.
Signing and settlement
When all the paperwork is processed, a settlement will be scheduled. On the date of the settlement you will sign all of your paperwork. At this time your old mortgage will be paid in full. After the settlement, you won’t have to make a mortgage payment to your new lender until the following month.
The refinancing process, even though it seems daunting, will go a lot smoother when you have a clear understanding of the steps involved. All it takes is a little research and preparation to be well on your way to achieving greater financial stability.