Refinancing your home replaces your current loan by paying off your existing debt with a new loan, ideally with better features that help improve your financial situation. Many consumers refinance their homes to save money, shorten the term of the loan, consolidate debt, or change the loan type.
With the Federal Reserve continuing to increase interest rates, fewer consumers find refinancing appealing. In fact, as of 2018, mortgage refinancing applications hit an 18-year low. Before refinancing it’s crucial that homeowners consider their options carefully. Understanding exactly what refinancing entails may help you determine if this is the right choice to help improve your finances.
Knowing the steps involved can help you make an educated decision, as follows.
Determine your refinancing goal
1. Why Refinance Your Home?
First, you will need to decide why refinancing may be a good option for your financial situation. Some of the most common reasons include:
• Refinance your home to use its equity: If you need to consolidate high-interest debt, pay off student loans, or pay for home renovations, you can apply for a cash-out refinance loan. This loan allows you to take out the equity you have built up in your home. You accept a larger loan amount in exchange for the cash you take from your equity.
• Refinance your home to find a lower payment: Lowering your monthly mortgage payments can free up extra cash to use toward your other financial priorities. You can lower your mortgage payment by receiving a lower interest rate, extending the term of the loan, or getting rid of mortgage insurance. There may be additional options for lowering your payment. Before moving forward with a mortgage refinance, check with your lender to see if they can offer a better payment option to fit within your budget.
• Refinance your home to shorten your mortgage term: Generally, shortening the term of your mortgage will lower your interest rate and decrease the amount of interest you will pay over time. Your monthly payment may increase, but the amount you pay over the term of the loan tends to be lower.
Now that you understand your motivation for refinancing, you need to figure out the right amount that will make sense to refinance. Prior to moving forward with the refinancing process, you need to determine the interest rate, term, or payment amount that will make the most sense to move forward and refinance.
Here is a refinance calculator that can help you determine your goal amount.
2. Get Prepared for Your Home Refinance
According to the Consumer Financial Protection Bureau, one of the top five complaints consumers have across the nation is the multitude of inaccuracies or errors on their credit reports. These negatively impact your credit score, resulting in higher rates from lenders and lower chances of approval for debt products.
Many people don't know, however, that they can review their credit history on any one of the many credit reporting sites, usually for free, and without it registering as a pull on their credit. Should they discover any inaccuracies or errors, these should you be disputed at least 60 days before applying for a mortgage refinance.
There are scores of other documentation that should also be gathered in advance, to streamline the home refinance process. Most lenders will ask for the following:
• Most current pay stub, showing 30 days and the year-to-date income
• Previous two years of tax returns
• Previous two years of W2s
• Two months of banking, investment, and retirement account statements
• Most recent mortgage statement
• Homeowners insurance declaration page
• A complete divorce decree or separation papers, if applicable
• Bankruptcy papers for consumers who have applied for bankruptcy at any time in the past
• Credit explanation letter, if disputing a stated inaccuracy on credit report
• Inquiry explanation letter if you applied for credit within the last 90 days
You may also want to prepare a list of questions for the loan agent regarding the mortgage products or programs they offer.
Before applying for a mortgage refinance loan, it's also important to know the exact value of the property, since this will impact your ability to refinance. A way to estimate your home’s value is to review home sales around your community (the more, the better), though your lender will likely require an appraisal unless the loan amount is significantly lower than the estimated value of the home.
3. Shop Around for Your Home Refinance Lenders
Many consumers make the mistake of automatically refinancing with their current lender, without taking the time to check if other financial institutions can offer better rates or terms. It’s in your best interest to shop around for different rates and fees with at least three different lenders.
Once you have several quotes, it's likely you'll be able to negotiate for lower rates or fees. Lenders want your business and if they see another institution offering a lower amount, they may be willing to haggle a bit.
You will also want to calculate each lender's closing costs and additional fees, (these are standard, though some lenders do waive them). Determining the total cost to refinance can impact your decision to move forward with the process. Fees can add up and end up costing you any savings you would otherwise obtain from moving forward with a mortgage refinance.
4. Complete Your Home Refinance Application
Once you've found a lender that meets all or most of your requirements, and have met with a loan agent, you'll still need to fill out the application. Make sure to carefully review it, ensuring that all the information matches the documentation you provided. Any inaccuracies could slow the underwriting process down or result in a denial. While that last scenario seems dire, there are some measures you can take if your loan is denied.
5. Review Your Home Refinance Loan Approval and Conditions
If the underwriter accepts your application, they'll send you an approval letter, listing the loan's terms and conditions, as well as any items the company still needs to review in order to complete the agreement.
Confirm that the approval letter matches your expectations for the loan. Carefully review the letter to ensure you’re happy with the underwriter’s requirements.
6. Lock in Your Home Refinance Rate
After both parties approve the terms and conditions of the loan, you'll want to lock in your interest rate. Generally, you can lock in your rate from 7 to 60 days. This lock time period will need to account for the time it will take to gather additional documentation or put together remaining conditions since it's quite common for delays to take place.
If you cannot get everything in order by your lock date, you may lose your interest rate and have to pay additional fees.
At this time you will also want to order your loan documents. You can ask your loan agent for a preliminary statement with all the closing costs you’re expected to pay. Carefully review this document to ensure there are no surprises when you head to the closing table.
If you do have questions, bring them up with your loan agent prior to closing. Make sure you feel comfortable with everything in the agreement before you sign on the dotted line.
7. Sign Your Loan Documents and Complete Your Home Refinance Closing
Finally, you will want to sign your loan documents, providing legal identification before you sign anything. Most of the time, a notary or attorney will be present during closing to help explain the documentation.
Take a close look at all the documentation one more time before you sign. The main document you will be signing is the closing disclosure. This will include:
• Your loan amount
• The interest rate
• The loan term
• Origination fees
• The title insurance amount
• Taxes and property insurance amount
• Homeowners insurance amount
You will also sign the deed of trust and a promissory note if required. Both documents are repayment agreements.
Once you have signed, you generally have three days to cancel this agreement. After the cancellation period expires, your lender will provide the loan, and then the closing agent will pay off your current loan.
The bottom line in Home Refinance
Before you move forward with refinancing your home, make sure this decision will boost your financial well-being. If you discover refinancing will help you achieve your financial goals, make sure you do your research and have a comprehensive understanding of your new agreement.
If you’re ready to begin the refinancing process, be sure to look into our list of the best mortgage refinance companies of 2019.