Refinancing a mortgage is a good way to lower your monthly payments as well as giving you some extra cash. Refinancing is beneficial because you can catch up on some additional bills, put the money into a savings, or take a vacation. Some people get a second loan at a lower rate and use that loan to pay off their first mortgage.
There are many reasons to refinance your mortgage. It is often less stressful than obtaining your first mortgage but it has its own separate risks and details. There are several different types of loans available, various lenders, and different rates. If you have a high interest rate and want to know how to refinance your mortgage, here are some steps to keep in mind.
Do You Need To Refinance
This is an important question to ask yourself: do you need to refinance your home? You should consider all of your financial options before going through the hassle of refinancing.
One reason to refinance your mortgage is to lower your interest rate. If the current interest rates are lower than the rate on your first mortgage, it would be wise to try to refinance. Doing so will save you a ton of money in the long run.
Another reason to refinance is to lower your monthly payments. Finance companies will take your existing mortgage and extend the number of years that you will be paying on it. By extending your mortgage, you can save on a monthly basis because the payments are lower. However, it may cost you more in the long run. The longer you pay on a mortgage, the more interest incurs. Even with a lower rate, you may end up paying more.
Mounting or unexpected bills, such as a health crisis, is a common reason to refinance your home. If you have built up equity, then you can draw that cash out of your home and use it to pay off bills.
Get Your Affairs In Order
Before you apply for refinancing, you need to make sure that your financial affairs are in the best shape. First thing to check out is your credit score. You are going to get the best refinancing rates if you have a good score. If you have bad credit, you need to repair it.
Repairing bad credit involves getting a copy of your credit score and going over it. If you have anything negative on the report that is more than seven years old, you need to contact the credit bureau and get them to remove it. Pay off existing accounts will also improve your score.
Adequate income is necessary for getting approved for refinancing. Lenders want to see proof that you are capable of making payments on a home. If you don’t have a job or your income is sporadic, you will probably be turned down. A good rule of thumb is to save some money, make sure your bank account looks good, and (if possible) put some money into a savings account.
Once you have everything looking good, get copies of all of your finances, such as bank accounts, financial reports, and paycheck stubs and take them to a lender.
Find The Right Lender
The mortgage industry is full of banks and financial institutes that deal in refinancing. When refinancing, the first organization you should approach is your original lender. Since you already have a loan with them, they are the easiest, if not the best, option.
Your original lender may not be your best choice. To find the best lender for your home, do an online search. Most of these mortgage lenders have an online quote that you can fill out and apply for. While the approval process is more involved than this, it is an easy and convenient way to find out if the lender might be able to help you. You can also check out local banks and see if they handle refinancing.
Some lenders advertise low interest rates. Be careful because this advertising does not apply to everyone. Only a small percentage of clients with the very best credit history qualify for those rates. The majority of borrowers will have rates much higher.
Get quotes from several lenders and then do some comparison. Some lenders will offer different rates and shorter or longer mortgages. This means that the total you will be paying for your second mortgage will vary. Get the calculator and do the math to see which lender will be the cheapest in the long run.
Knowing The Costs Of Refinancing a Mortgage
The costs for refinancing a second mortgage is much the same as a first mortgage. You are looking at closing costs and different fees. Be sure that you know ahead of time what type of fees will be charged and that there are no hidden fees. Everything should be upfront.
Basically, you will be looking at a fee for an appraisal, a loan origination fee, title search fee, title insurance fee (if you do not already have it), documentation fees, and prepaid interest.
Generally it is best to refinance when
are low and nearing the bottom of a cycle.
Application Process
Getting approval for a loan is pretty quick. However, the actual application process takes longer. Applying for a second mortgage takes just as long as a first mortgage. It is a long, drawn-out process that can take several weeks and even up to a month.
You will have a whole new application form and paperwork to fill out, just like before. Fill out the forms and turn them in along with any financial reports and statements that you may have. W-2 forms, paycheck stubs, and previous income tax reports are mandatory.
Get An Appraisal
After the paperwork for refinancing has been sent in, your house will need to be appraised. Usually, the mortgage company will send their own appraiser to look over your home and see if it has appreciated or depreciated since the first mortgage. The appraiser will write up a report and send it in to the mortgage company for review.
A standard industry rule has always been that mortgage companies will only lend around 80% of a home’s total worth. What this means is that if your home has depreciated to a level below that 80% mark, then the mortgage lender will turn down the loan.
Avoid ‘No Cost’ Refinancing
Several mortgage lenders advertise ‘no cost’ refinancing. While this claim is technically true, there are no closing costs, it is misleading.
These companies charge a much higher interest rate in order to recoup what was spent in paperwork and research on the home. It is never a good idea to apply with lenders with this kind of advertising. Pay the closing costs and you will save thousands of dollars over the course of time.
Closing On A New Mortgage
Once you have been approved and the refinanced loan has been finalized, the lender takes the new loan and pays off the old one. Anything that is left over is converted to cash and given to the home owner.
At closing, you may be required to present an ID, such as a driver’s license, for legal documentation. If your home has depreciated and there is a balance owed after closing, you will need to pay that before the contract is finalized.