Refinancing a mortgage. Yes, some folks are considering that after the last year. When rates are low, it can seem like the ideal time to refinance your mortgage. After all, who doesn’t like a lower interest rate? There are lots of good reasons to refinance your mortgage, such as adding on or trying to streamline your expenses, but what’s really involved in the process?
Refinancing a Mortgage: The Basics
Perhaps the best news any homeowner can get when it comes to a refi is that it’s not likely to be nearly as difficult as getting the original loan was. Breathe a big sigh of relief if you need to; this is the time for it.
Many homeowners look to refinance for a few specific reasons. These may include reducing mortgage interest, dropping mortgage insurance, or cashing out for a remodeling expense. When rates are low and values are high, a refinance can provide a dual benefit. Dropping any mortgage insurance you’re currently on the hook for can make a big dent in your house payment. This is especially true when waiting for it to fall off naturally would take several more years. And, of course, a lower interest rate also means you’re paying less money towards interest over time.
When you combine the two and it can mean big savings. Especially when it’s a home you plan to hold over the longer term. Remodeling may be a valid and effective way of adding value. Which is another reason some owners choose to refinance. In short, there are tons of ways a refi can be helpful to your financial welfare.
Related: What is a HELOC?
Marry the Home and Date the Rate
A new term folks have used about refinancing a home is “Marry the home and date the rate”. This is a concept rapidly gaining favor.
In short, buy the home now – even if you feel rates are high. If rates go even higher, then you saved yourself a lot of money. However, if rates come down, refinance at a lower rate (which would generally means higher sales prices anyways) and benefit that way. Either way, you come out ahead and own the home you want.
According to Charity Bond of EPiQ Lending, “We have a great program for those who want to ‘date the rate’. It’s called “Rate Rebound”. If the mortgage rates go down by .5% or more within the first 5 years, we will refinance your mortgage with no lender fees. We are offering this to home buyers who purchase by March 31, 2023.”
Refinancing a Mortgage: The Process
Just like when you got your initial loan, your mortgage banker or broker will examine your financial history. They will also look at your longer term prospects. This may include your work history, to ensure you’re financially stable. Your debt to income ratio will be reexamined as well. Although these are closely scrutinized, many banks will grant a bit more wiggle room than they did for initial mortgages. This is especially true for homeowners who have a lot of equity already established.
Once approved for your loan, you’ll choose when to lock in your rate. Interest rates can vary from day to day. So, it’s important to pay close attention to both the current rate being offered and your lender’s advice in the matter. If they have noticed rates are going up, locking right away makes a lot of sense. However, if you’re the gambling sort and rates are trending down, you may want to float your rate a few days to see if you can do any better. Remember, though, this is a bet that you’re taking that the rate will drop, and it won’t always pay off.
Related: Choosing the Right Loan
Documents You’ll Need
Just like with the initial mortgage, you’ll need to prove you are who you say you are and that you have the income you claim, among other things. Your banker will almost certainly ask for the following types of paperwork:
Proof of income. Tax statements and tax stubs are big favorites for proof of income. If you own a small business, you may also be asked for a profit and loss statement, so get to work on preparing that now.
Credit score. Your lender will run your credit (and the credit of any co-applicants) in order to determine if you remain credit-worthy. Don’t worry, they can’t revoke your current mortgage if things have gotten a little rocky in that department; they just won’t write you a new loan. Pulling a credit report can also inform your lender about your debts.
Other legal paperwork. Divorce decrees and support payment documentation are helpful for your lender to determine what liabilities you have, if any, in relation to those former legal relationships. If you receive support, it can sometimes be figured into your income calculation.
And Perhaps Also:
There are time you may need to provide more information. For instance, if you are drawing out cash. For those times, you may need to provide the following information as well.
Asset information. If you have a retirement account like a 401(k), stocks, bonds, or even a checking or savings account, your lender will want to know about it. These accounts, plus the equity you have in your home and other assets, figure into the equation when lenders are trying to assess your risk of default. They can also serve as sources of collateral, should you need it.
Once your lender has reviewed your paperwork and determined they’re willing to refinance your loan, they’ll order an appraisal of your home. Typically, an inspection won’t be needed, unlike with a purchase. In many cases, a drive-by appraisal will be adequate, especially if it’s very clear at a glance that you’ve maintained the property. However, there are times where the lender may just do an automated value. This would mean the appraisal would not be needed.
Related: 5 Things That Can Ruin Your Chances of Getting a Mortgage
Closing the Loan
With all your paperwork in hand and your appraisal completed, your lender will be ready to send you and your loan to closing. With no seller involved, you will be going to closing at a time that’s convenient for you. Furthermore, it’ll be a very quick process. Make sure to double-check the terms of the loan to ensure you’re agreeing to the mortgage you were signing up for. If you have any questions, your lender will be more than happy to clarify. Just remember to ask them before you sign the dotted line.
Following your closing day, you have a special period to change your mind and revoke the loan entirely. Thanks to your right of rescission, you can cancel the loan with no penalties and no modification to your previous mortgage within three days of closing. So, if you wake up the next day with cold feet, it’s not too late to turn back time!
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