The Complete Guide To Refinancing


Everything You Need To Know About Refinancing Your Mortgage

It doesn’t matter if you’re a homeowner who got stuck with a high interest rate, or one who shopped around for the best deal; refinancing your mortgage might be a good idea for you either way. After all, receiving extra cash while simultaneously reducing your debt, no matter how much or how little it is, is great for anybody. So, how can mortgage refinancing help you? Well, anyone who has borrowed money for a mortgage loan knows how expensive they can be. However, if the timing is right, refinancing can give you the chance to replace your current mortgage with one that has more favorable terms. In order take full advantage of this opportunity, though, you need to know more about it. Luckily, this guide has all the information you need to know about how a home loan refinance can help better accomplish your financial goals. SEE ALSO: What Your Mortgage Lender Isn’t Telling You

How It Works

The first thing you need to know about refinancing is how it works. In basic terms, you’re paying off your current mortgage and creating a new one. A mortgage refinance is based on the appraised value of your home, and most banks will lend you up to 80 percent of that amount. If your home’s value has changed since you first bought it, your new mortgage will have a different rate and term from your original loan. If your home equity is high enough, you could go with a cash-out refinance. This is where your new mortgage would be for a higher amount than your current outstanding principal balance. The refinance would pay off your loan, letting you pocket the remaining cash.

Why You Should Refinance

There are many different reasons for someone to refinance, but the main factor of all those motives is to get more out of your mortgage. A few examples of why you might want to refinance are to:
  • Lower the payment and principal of your mortgage: With a lower rate, you won’t have to pay as much monthly.
  • Switch to a different type of mortgage: Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or a different ARM with better terms, can lower your monthly payments.
  • Change/remove name on the title: If you’ve inherited a property or just been through a divorce and want to change the name on the mortgage to just your own, refinancing is a way to do that.
  • Cash-out: You can use the money your receive from cash-out refinancing to:
    • Consolidate your debt
    • Shorten the payback period of your loan
    • Buy other property
    • Pay off a personal/family emergency
Whatever your motivation and financial situation, you should evaluate all your options before going through with refinancing. The process can be costly and can take a few weeks to go through, so make sure it’s a viable option first.

The Best Time To Refinance

There are certain times and situations when refinancing will work best, and when it won’t help you at all. The most ideal time to refinance your home is when interest rates are lower than what you currently have, the value of your home is significantly higher than it was when you first got your mortgage, and your credit is good. This will make sure you get the highest loan with the lowest rate. Researching the market numbers as well as your own finances can help you determine if it’s a right time to refinance. However, you should also take into account the closing costs and fees for refinancing, which can be up to six percent of the loan’s principle, to make sure the process is worth it.

Going Through The Process

If you’ve evaluated your situation and decided that refinancing is worth your time, it’s time for you to start the process. Applying for a refinance is much like applying for a mortgage, so you’ll know what to expect. Even if you’ve been satisfied with your current lender, it’s still a good idea to shop around for the best offerings and the best options. You’ll also want to go over this checklist to help you better prepare for what’s to come:
  • Estimate your home’s value: This will determine how much you’re eligible to refinance.
  • Analyze your financial portfolio: If you spot something negative, like too much credit debt, try to take care of it to make sure you qualify.
  • Prepare all your documents: Have all your paperwork ready to make the application process quicker and easier. Here are some things you’ll need:
    • Income statements
    • Credit paperwork
    • Homeowner’s insurance
    • Appraisal and title insurance
    • Documentation of ownership papers on stocks, bonds, retirement accounts, IRAs, CDs, real estate properties
  • Pick your options: You’ll need to make a lot of choices about what type of refinance you want. Research all your options to find out which suits you best. Here are some things to consider:
    • Term: 15, 20, or 30-year term
    • Rate: Fixed or adjustable rate
    • Program: The federal government offers several programs to make refinancing easier, like the Home Affordable Refinance Program (HARP) or the Federal Housing Administration (FHA) loan.
SEE ALSO: Locating a Bank For An FHA Streamline Refinance

Getting The Best Deal

Although the process can be overwhelming, a little knowledge and preparation can raise your chances of scoring a great refinancing deal. If your credit isn’t so great, for example, try to repair it or settle any mistakes before you apply. Lenders tend to offer the best rates to borrowers with a credit score of 740 or higher. It’s also best to find out what type of fees and closing costs lenders charge to determine whether refinancing is even worth the trouble. Appraisal fees alone can cost around $300 to $400. As mentioned earlier, government assisted programs may help, so make sure to check if you qualify for any. If you’re a highly qualified borrower, finding a refinancing deal is not difficult if you do a little prep work beforehand. But even if your financials are less than perfect, knowing what to look for and how to remedy those issues now gives you an advantage. Refinancing your mortgage may not be a walk in the park, but if you’re patient and conscientious, you just may land a better deal than you ever thought possible.
Date of original publication:
Updated on: November 10, 2015

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