With interest rates hovering near historic lows, more and more homeowners are looking to lock in lower monthly payments by refinancing their mortgages. If you’re thinking of refinancing your mortgage loan, here’s how to approach the process.
Step 1: Establish a financial goal
You should have a clear reason for refinancing your mortgage, whether it’s tapping equity for debt repayment, shortening the term of your mortgage, or reducing your monthly payments. Bear in mind that refinancing doesn’t always save you money in the long run. If you’re lowering your interest rate but restarting a 30-year mortgage, you could end up paying less per month, but more over the full term of your loan. This is because most of your interest charges occur in the early years of a mortgage loan. Be sure you will be able to achieve your financial goal before you start the refi process.
Step 2: Know your credit score and payment history
To qualify for mortgage refinance you will need approval from your lender. The better your credit score, the more likely you are to get approved. You will also enjoy better interest rates if your credit score is high and your payment history is sound. It may make sense to spend a few extra months improving your credit score before you begin the refi process.
Step 3: Figure out your established home equity
Your home equity is the current value of your home minus what you still owe on your mortgage. To determine yours, get your current outstanding balance from your mortgage loan statement. Then, get a local real estate agent to run an analysis to determine your home’s current estimated value. Your equity will be the difference between the two. For instance, if you still owe $225,000 on a home that’s worth $300,000, your equity will be $75,000.
Although you might be able to refinance your loan with as little as 5 percent equity; you will get better rates and have to pay fewer fees if you have at least 20 percent equity. When it comes to equity, the more you have, the less risky the loan is from the viewpoint of your lender.
Step 4: Compare lenders
You can save thousands of dollars during the refi process by getting quotes from several different lenders. Once you settle on a specific lender, ask when it will be best to lock in your interest rate, so you won’t lose money if rates start to climb before your loan closes.
In addition to comparing lender interest rates, inquire about fees and ask if they will be rolled into your new mortgage or due upfront. It’s not uncommon for some lenders to offer “no-closing-cost loans” that ultimately add to the loan balance or come with higher interest rates.
Step 5: Document your finances
Your lender will want documentation that gives clear insight into your finances. Gather bank statements, recent pay stubs, federal tax returns and anything else your lender needs to process your application. Your lender will also look at your net worth and credit history, so be prepared to disclose your liabilities and assets upfront. By having all of your documentation available upfront, you can streamline the refi process.
Step 6: Prepare for the home appraisal
In some instances (but not always), your lender may require an appraisal to determine the property’s current market value. If so, you should expect to have to pay a few hundred dollars for the appraisal. Be sure to let the lender know of any repairs or improvements you’ve made since buying your home since this could lead to a higher appraisal.
Step 7: Raise some closing cash
Although you may be able to lower your monthly costs by refinancing your mortgage, it will cost you some money in the short-term. The loan estimate and closing disclosure should list how much money you are expected to pay out of pocket to close on your new mortgage. You can finance your closing costs, but this will generally result in a higher rate on your loan.
Step 8: Monitor your new loan
Once you close on your new mortgage loan, be sure to store copies of your closing paperwork. You should also consider setting up autopayments to make sure you always remain current on your loan. Some lenders will even give you a lower rate if you agree to sign up for auto-payments.
Bear in mind that some lenders will resell loans on the secondary market after closing or, in certain instances, years later. This means you will owe mortgage payments to a completely different company, so watch for any mail notifying you of such changes.
With six decades of collective experience, The Wheaton Team provides expert advice and invaluable guidance for clients. Our team specializes in residential real estate throughout the Tri-Lakes area and all of Colorado Springs. We can guide you through the complex buying, selling and financing process, so you can bring your vision to life.