How to Refinance Your Mortgage the Easy Way
If you want to save money on your mortgage or access some of the equity in your home, refinancing your mortgage could be a vital step in your journey. There are a variety of things that make home refinancing a popular financial tool -- and today, we’ll get into how and why you might want to consider refinancing.
Step 1: Figure Out Why You’re Refinancing
The first major step in the home refinance process is simple: figure out why you want to do it. Since there are good reasons to refinance (and not so great reasons to refinance) your home, this is something that merits some consideration before you jump into it.
Some of the most popular reasons to refinance include:
Getting a lower interest rate: Some experts say a 1% reduction in interest rate is enough to make a refinance pay off in the long run.
Shortening the term of your loan: If interest rates fall significantly, it can sometimes make sense to shorten a 30 year fixed-rate mortgage to a 15-year fixed rate mortgage. And if interest rates have fallen enough, it might not even increase the mortgage payment by that much.
Convert a hybrid ARM to a fixed-rate mortgage: Most people who get hybrid ARMs, such as a 7/1 ARM, don’t actually intend to keep paying the adjustable-rate mortgage indefinitely. Instead, they plan to either sell their home or refinance their mortgage before the variable-interest portion of the loan begins. That way, they’ll never have to experience the financial uncertainty of an interest rate that can increase every year, as is the case with most ARMs.
Get rid of high-interest debt: Many people who choose to refinance their mortgage to tap the equity in their home (often using a cash-out refinance) do so to consolidate higher-interest debt, such as credit card debt or payday loans. Often, this can make good financial sense, but only in the case that the borrower stops getting into more credit card debt. Otherwise, they’ll have to deal with both credit card debt and even more years of mortgage payments. In addition, it’s important to remember that due to the new tax laws, interest on mortgages is no longer tax deductible, so you won’t be able to take advantage of that on your tax bill.
Step 2: Gather the Required Documentation
So, now you have a pretty good idea of whether you should refinance or not. What’s the next step? Well, there’s actually quite a few, but it starts with gathering a bunch of paperwork and documentation (much like when you applied for your initial mortgage). You’ll need:
Social Security Card
Previous two years of employer information
Checking and savings account information
W-2 forms, pay stubs, and personal tax returns (for those who are self-employed)
Approximate value of current assets
Step 2: Do Research and Take Stock of Your Financial Situation
Before (and during) your lender shopping, it pays to take stock of your financial situation so you know what you’ll be eligible for. This includes:
Checking your credit score: Lenders often have strict credit score requirements, so if you don’t yet match up, you may want to spend a few months (or even longer) repairing your credit score before applying for a home refinance. Plus, if you can get your score particularly high, you might be able to get a really juicy interest rate -- and who doesn’t want that?
Discovering the current value of your home: Without ordering a full appraisal, you can still get a really good idea of how much your home is worth by searching the value of other homes that are near you. This is easy to check out on popular real estate sites like Zillow or Trulia.
Comparing refinance rates from various lenders: Unless you look around and see what’s on the market, you’ll never really know how to get the best deal on a mortgage refinance. So, always do your research before committing to anything. While you should be shopping around, you should only actually submit mortgage applications (and have your credit report pulled) during a two-week period -- since doing anything more could seriously impact your credit score.
Understanding the total, or “all-in” cost of your mortgage: Refinancing your mortgage isn’t free; in fact, it comes with a lot of fees (mostly closing costs) -- including underwriting fees, tax transfer fees, points, recording fees, credit report charges, and more. So, unless you understand these, you might be missing out on the full costs, and you could be in for a rude awakening.
Before You Leap, Consider All Your Options
If you’re having a bit of trouble paying your mortgage, you might want to try refinancing into an FHA mortgage, which will usually accept applications for individuals very little home equity and low credit scores.
For those with more serious financial issues, HARP, or the Home Affordable Refinance Program, is a great program if you’re underwater on your mortgage or are struggling to pay due to various financial hardships -- but your mortgage must have been originated on or before 2009 for you to qualify.
Finally, if you’re an eligible veteran or an eligible veteran’s spouse, you might want to consider a VA refinance, (available even if you don’t originally have a VA loan) which may be able to offer incredibly attractive rates.
Step 3: Approval and Closing
After getting approved on your home refinance, if you decide to go through with it, closing is the next step. Read all the refinancing documents carefully, and if you decide that there’s some part of the loan agreement that you really can’t live with, you have three days to cancel (as long as you’re refinancing through a different lender, that is. If you choose the same lender, you’re probably stuck). Saturdays count as a day, but Sundays and bank holidays don’t.
In the end, refinancing your home can be a smart financial decision, as long as you know what you’re doing -- and are refinancing for the right reasons (not just to buy a boat or a sweet new ride.) So, buckle up, do your research, and, if you’re serious about refinancing, take a careful look at the process to determine if it’s right for you.