In America, the mortgage loan is the number one debt for most people. US financial institutions hold a staggering $10 trillion of mortgage debts which is the highest ever in the world. Mortgage loans are larger than student loans and credit card loans put together. For many people in this US, the burden of mortgage loans is something that weighs very heavily on their backs. So it’s only natural for people to search for options in mortgage refinance.
Refinancing mortgage loans happens due to many reasons. But usually, refinancing refers to a transaction where you pay off the existing mortgage loan and purchase a new one instead. But how do you go about all this?
If you’re looking to refinance your mortgage but not sure where to start, this post is for you.
How To Refinance Your Mortgage.
Step 1: Get your financial goals in sight and on paper.
There are many reasons why people decide to refinance their mortgages. Some of the most common ones are:
- For shortening the mortgage term
- Reducing the number of monthly payments on a mortgage
- Getting a loan with a lower interest than the current one
- Converting from one type of mortgage into another – usually from ARM, an adjustable-rate mortgage to FRM, fixed-rate mortgage
- There is a financial emergency, and your family needs to raise funds from the home equity
- You want to eliminate the insurance of FHA mortgage
So, before you start looking for lenders, identify the reason behind your financial decision to refinance a mortgage.
Step 2: Examine your financial history.
After you decide why you require mortgage refinance, now it is time to take a good hard look at your finances. Start with going over your credit card score. Similar to securing your original mortgage, you will also need approval for refinancing. And a high credit card score is detrimental to whether you secure the loan or not.
In addition, you should also check how much equity you have. A homeowner with high equity in their home inspires confidence, which leaves a great impression on the lenders. In other words, if your home has high equity, a lender will gladly give you a loan. To find out how much equity you have in your home, a real estate agent can help you find the answer.
Step 3: Start shopping for lenders.
As you begin your search for loan lenders, don’t just work with one. Get quotes from multiple loan lenders so you can get the best deal. Working with multiple mortgage lenders will allow you to compare interest rates, transactions, and service fees. In addition, you will also get the option to roll the existing loan into the new one, among other options.
While comparing lenders and their fees, watch out for potential pitfalls such as no-closing-cost refinances. This type of offer can be very attractive, but it usually comes with a catch in the form of higher interest rates.
So ideally, you should consider at least five moneylenders before deciding on one. In addition, apply simultaneously to all the lenders within one to two weeks. This will help reduce the heavy impact on your credit score.
Step 4: Settle on a lender of choice and ready your documents.
After you are happy with a lender and what they are offering, it’s time to make things final. It can be easy to assume that you will do all the deciding at this point. However, your lender also needs to make decisions. And these decisions will be influenced by your documentation and finances as well.
So it is a good time to gather your bank statements, pay stubs, and federal tax returns. In addition, some lenders also require clients to provide mortgage refinance appraisals to seal the deal. This is typically required so that your lender can determine the current market value of your home. You need to have whatever documents your lender asks for.
If your home has had any type of renovation, repairs, or improvements, it is also a good time to bring it to the attention of the lender. These can result in a higher appraisal for your home, which is always positive for your loan.
A good tip to expedite your appraisal and loan processing is to get all your documents ready even before your lender asks you to bring them. In addition, maintain transparency and provide accurate information about your finances, including your net worth, credit score, and assets and liabilities, if any.
Step 5: Closing the deal and locking the interest rate.
Before the transaction closes, you also need to lock your interest rate for the mortgage. Be very smart during this step because you can’t change it until the specified period expires. Ideally, your lender will try to work out with and close the loan as quickly as possible.
At this stage, you will have a clear understanding of how much you need to pay to close the mortgage as well. In this regard, some lenders might require you to make the closing with cash, so be prepared.
These days most lenders also offer a lower rate of interest when clients opt for auto-payment of loans. So check if your mortgage lender has this provision. Apart from the lower interest rate, signing up for auto-payments also ensures that you do not miss a single payment and end up paying late fines.
After you come home with the deal, do not consider it the end of your mortgage journey. You still need to cover some important steps. And securing the loan papers in a safe location is one of the first steps you can take.
For any type of financial transaction, it is best not to take chances. So a written document is always great insurance. This will also allow you to monitor your loan and your financial activity.
As the economy stumbles back to normal after the ravages of the Covid pandemic, many experts agree that the window to mortgage refinance is getting smaller. This is even though the mortgage rate is not expected to rise significantly. So if you have plans but is undecided to refinance your mortgage loans, today might be the best time to go ahead and close the deal.