Mortgage rates are still at historically low levels, offering homeowners who haven’t yet refinanced the option to do so. The mortgage refinancing procedure isn’t much different than when you first acquired your mortgage, but knowing how it works and what options you have will help you make a better-informed decision and receive the best rate.
Refinancing is a term used to describe the process of obtaining a loan that replaces your current mortgage, ideally with a reduced interest rate. Refinancing can help you reduce your monthly payment, save money on interest throughout the life of your loan, pay off your mortgage faster, and access the equity in your house if you need emergency funds.
What does refinancing entail?
Refinancing your mortgage means that your mortgage loan will have a varying interest rate and terms, and it doesn’t have to be with the previous lender with which you started your mortgage initially.
Furthermore, you are going to be restarting your payback clock with this new loan. Take for example if you have paid for 5 years out of your 30 years mortgage and you decide to refinance when you have 25 years left, refinancing will make you start the repayment all over again from the 30 years and if you would rather opt for a shorter number of years, you pay up your loan earlier.
However, determining if you are eligible for refinancing depends on the closing expenses such as discount points, origination fees, and appraisal fees, which range from 2% to 5% of your refinance loan amount.
Why you should consider refinancing your mortgage
There are various rationales for refinancing, the most important of which is to lessen your interest rate. Refinancing is generally worth it if you can cut your rate by one-half to three-quarters of a percentage point or more, as long as you anticipate staying in the property long enough to accumulate the closing expenses.
Refinancing helps you lower your interest rate and monthly mortgage payments, you can take out cash at closing to pay for home upgrades, consolidate debt, invest, or pay for a significant transaction if you’ve built up equity in your property, as well as to reduce the length of your loan and pay it off sooner, resulting in lower interest payments over time.
Additionally, if you have at least 20% equity in your house and have been paying private mortgage insurance, refinancing can nullify those repayments. Also, homeowners with a higher rate of interest on their present loan, are in a solid equity position, and require cash to cover unexpected family costs are the prime choices for refinancing.
Refinancing options for mortgages
Rate-and-term refinances either adjust the loan’s interest rate, term, or both, which helps you save money on interest and lower your monthly payment. Unless you roll some closing costs into the new loan, the total amount you owe will remain the same.
Cash-out refinances allow you to convert a portion of your home’s equity into cash although it increases your mortgage debt, it also provides you with money to invest or put towards a goal, such as a home renovation project. This type of refinancing also allows you to lock in a new term and interest rate.
Debt-consolidation refinances are similar to cash-out refinances in that the cash from the equity you’ve built is used to pay off other forms of debt that are not related to your mortgage, such as credit card debt. Although your mortgage debt will grow, mortgage rates are often lower than other lending rates.
The procedure for refinancing your mortgage
1. Put your finances in order
The first step is to do the math and be sure that going for refinancing is a good financial decision for you at the moment. Here are some considerations to look into before you start looking for prospects.
Be sure that your credit score qualifies for a new loan, make sure you have enough equity in your house to qualify for a new loan, look into current interest rates to see what’s available, and make sure you can afford the new payment.
2. Look for mortgage lenders in your area
You don’t have to refinance with the same lender that gave you your first loan, and shopping around for a loan is one of the greatest methods to ensure you receive the best bargain. Take the time to examine mortgage refinance offers from a few different lenders. It may be necessary to go through the preapproval process.
3. Compare rates and terms
After you’ve listed your refinance options, carefully consider each one. Of course, the interest rate is important, but don’t forget to look at the closing expenses and other loan terms as well.
4. Send in your letter of interest
Once you have concluded on the offer that suits you, the next thing is to fill out the application form and provide all the necessary documents required by the lender. When you apply for a refinance (rather than getting a preapproval or prequalification), the lender will look at your credit and financial status extremely carefully and if there is a need for more information, be ready to supply as promptly as you are contacted.
5. Set your rate of interest
Most mortgage providers will allow you to lock in your interest rate once your refinance has been approved, such that your rates will remain constant whether the market price falls or rises. Therefore, you can start planning your monthly budget after you’ve locked in your rate because you’ll know exactly how much your payments will be.
6. Get a house valuation
An evaluation of your house will be ordered by your mortgage lender to ensure that it is worth enough to secure the new loan. The appraisal is usually included in the closing expenses, but some lenders eliminate this fee for existing clients or other reasons, so make sure to ask if this is in the works.
7. Finalize the loan
If you don’t intend to roll your closing expense into the loan, come prepared on the day of finalizing the deal, with payment via cashier’s check, and bring along all the necessary documents requested by the lender.