Let’s say you are five years into your new life as a homeowner.
Before the keys were handed over, you made the significant decision to own a home. As well as choosing a mortgage loan program, financing your down payment, setting aside closing costs and much more.
As the years pass by, you are more familiar with how much money is required to finance your home. From balancing mortgage payments, utility bills and maintenance costs, you know what to expect.
However, during the repayment term, some people need to financially change their plan.
This is when people turn to refinance their mortgage.
Refinancing is a popular financial strategy to lower monthly mortgage payments or shorten their loan’s term.
Mortgage lenders are specialized to help homeowners refinance their mortgage, so they can better manage their monthly payments.
First, you will need to identify why you want to refinance your mortgage.
Typically, people look to refinance to lower their monthly payments. People who decide to refinance their loans have evaluated their financial situation and concluded either:
- Their monthly payments were too expensive
- They wanted to cut back and save money
If you are thinking about refinancing, you will want to consider how much interest you have already paid on your old loan, in addition to the interest you will pay when you refinance.
Depending on your situation, refinancing may be a more beneficial strategy for you.
Planning and refinancing a mortgage loan is primarily based on choosing a comfortable loan term, while balancing affordable monthly payments and reducing borrowing costs.
Just like shopping for a conventional mortgage loan, you will need to shop smart and stay objective.
Whether you are shopping for a mortgage loan, car loan or student loan, they are all loaded with interest.
Generally, the longer you have been paying, the more each payment is going to be directed toward paying off the principle, which is also known as the total loan balance.
However, if you fight the urge to extend or reduce the term of your loan, you can significantly reduce the amount of interest you pay over the term of the loan.
The decision to refinance or not is an important financial decision. You will need to analyze your financial situation and budget accordingly without setting yourself back.
This is where your lender will come into play.
These trained professionals will be able to help you accurately choose a refinancing loan that best suits your needs.
Add it up
Once you have decided it is a logical and beneficial strategy to refinance your loan, it is also a good idea to use a mortgage refinancing calculator.
This is suggested because this helpful tool will give you a better picture of how you should shop for a mortgage.
If this is your first time using the calculator, it will need you to estimate fees, your new interest rate and your new loan amount, unless you already have this information from your chosen lender.
Once you have plugged these numbers into the calculator, it will estimate your new monthly savings, new payment, lifetime savings and the number of months it will take to pay off the loan.
Working with a calculator will provide you a clearer picture of what you can expect when you refinance.
Once you have this information regarding interest rates and fees from several lenders, utilize a mortgage refinancing calculator to help you see which lender is offering you the best deal.
Time to shop
Now a little more work is needed on your end.
As the shopper, you will need to research online or make some phone calls to several local lenders to see where you can get the best mortgage refinance rates.
Fortunately for you, as the shopper, each potential lender is required to give you an estimate within three days of receiving your information.
If you are looking to start this process sooner than later, you are in luck.
However, you will still need to be patient because refinancing a mortgage loan can require just as much time and paperwork as a conventional loan.
Each potential lender will give you several documents that will list the details of the loan terms, projected payments, estimated closing costs and other fees.
Carefully review these documents with your lender, accountant or lawyer so they can address any questions or concerns you may have.
Before choosing a lender blindly, evaluate and compare potential lenders, rates and other incentives in order to make the best decision.
This is where the refinancing mortgage calculator will be resourceful tool to use for your advantage.
How to refinance your mortgage – step by step
Now that you know why you should refinance your mortgage, we will discuss on how to refinance your mortgage.
1. Set your goal
First, set your goal.
Beginning here will help identify, target and successfully complete your goal of refinancing.
Depending on your situation, focus on shortening, or at least maintaining your current loan term, while lowering your interest rate.
With this mentality, it will be easier to tackle your goal of getting the best refinancing mortgage rate.
2. Check your credit score
Before you start shopping, know your credit score number.
Start familiarizing yourself by reviewing your credit history.
Evaluate your history and look for any errors that need to be corrected. If you see something questionable, call your bank or try to improve your score by paying off any debts or bills.
This will strengthen your credit score, which is more desirable in a lender’s eyes.
The better your score, the better rates and loan amount will be offered to you.
3. Home’s current value
Just like a conventional loan, you need to factor in your home’s current value.
When you refinance, you will need this information as well.
To get a better idea of your home’s current value, check out recent sales in the neighborhood.
You can also use websites such as Zillow’s home estimator, Zestimate, to see other surrounding home values to get an estimate of your own home’s worth.
Or, you can request another appraisal from a third-party company to get an unbiased opinion of your home’s worth.
4. Shop for rates
Before committing to a lender, shop around for rates.
Like mentioned before, you will want to talk to several lenders to get a better idea of what rates and loan are available to you.
You can submit online loan applications to see which lender can offer you the best mortgage refinances rates, so you can make an informed decision on where you do business.
5. Beware of other costs
Refinancing a mortgage loan can collect other additional costs, such as application fees, cost of an appraisal, origination fees, document processing fees, an underwriting fee, a credit report charge, title and research insurance, recording fees and tax transfer fees.
Although this is a lengthy list, each lender will give you an estimate of these additional costs.
Beware of the “no-cost to refinance” speech.
Your lender will move your up-front fees to your on-going costs which will hijack your interest rate of the loan.
If it sounds too good to be true, then it probably is.
6. Collect paperwork
Remember the first time around and how much paperwork stacked up and needed to be signed?
Well, refinancing requires the same amount of paperwork and then some.
And just like a conventional loan, your mortgage lender will need specific documentation in order to determine what refinancing loan you apply for.
That means, print out stubs, collect financial monthly statements, retrieve at least two years’ worth of W-2’s and other necessary paperwork before getting started.
7. Get locked in
Unfortunately, this is one of the more stressful parts of the refinancing process.
Deciding whether or not to refinance, and when to lock in on a mortgage refinance rate.
Lenders do not alert when rates have dropped or increased, so you will need to pay close attention to the market and decide when is the best time to get locked in and start your refinancing process.
8. Set cash aside
Just like your first closing process, your refinancing mortgage loan will require these finances as well.
Experts advise to set aside cash for closing costs and other expenses that are taken care of at this time.
This expense will also be listed in your loan estimate so there will be no hidden costs.
What are some refinancing options?
Just like conventional mortgage loans, there are several refinancing loan options available for current homeowners to take advantage of.
Rate and term refinance
This is the most common type of refinancing.
This approach takes your existing mortgage loan and changes the interest and/or the term without advancing new money on your loan.
This is an attractive refinancing strategy because it an lower interest rates compared to other refinancing options.
This refinancing option is designed to extract equity from the borrower’s home.
People use this approach when the new mortgage amount is greater than the existing mortgage amount, in addition to loan settlement costs.
Borrowers find this option attractive because they can access the equity in their home to pay down consumer debt.
Shorten the term
With low interest rates, it makes it easier for homeowners to reduce their mortgage payoff term.
However, with a shorter-term loan, monthly mortgage payments will increase by a couple extra hundred dollars compared to a longer-term loan.
In addition, your debt-to-income ratio must be low enough to show lenders you can handle a higher monthly payment.
This option allows borrowers to pay smaller monthly loan payments or pay down the loan for a lower loan-to-value ratio.
The loan-to-value ratio is calculated by taking your current mortgage and divide it by the value of your property.
This option is appealing to borrowers who plan to own their property for a long period of time, usually the same length of their loan.
Refinancing is a popular strategy to lower monthly mortgage payments.
Depending on your financial situation, refinancing can significantly help balance your financial obligations and keep you on track.
If you are not sure which route to take, one of our experienced Loan Officers will be more than happy to help guide you through this process.