Homeowners that bought during a time when rates were high have the option to get a better interest rate and lower their monthly payment.
While refinancing your mortgage can be beneficial, there are a number of things to consider before you make the decision.
It’s important to understand all of the implications of refinancing before you sign on the dotted line.
Read on to learn more about the steps to take if and when you want to refinance your mortgage.
What is mortgage refinancing?
Mortgage refinancing is the process of replacing an existing mortgage with a new one.
The new mortgage will have different terms than the old one—usually, a lower interest rate and/or monthly payment.
When you refinance your mortgage, you’ll need to go through the same process as when you originally applied for a mortgage. You’ll need to submit a new mortgage application, provide documentation of your income and assets, and go through a credit check.
Once you’re approved for the new mortgage, you’ll close on the loan and use the funds to pay off your existing mortgage. From there, you’ll make monthly payments on the new loan according to its terms.
Why should you refinance your mortgage?
There are a few reasons why people choose to refinance their mortgage. The most common reason is to get a lower interest rate, which can save you money over the life of the loan.
Other reasons people refinance their mortgage include:
- Lower the monthly payment
- Switch from an adjustable-rate mortgage to a fixed-rate mortgage
- Pay off their mortgage faster by refinancing to a shorter loan term
- Tap into home equity by refinancing for a larger loan amount than they currently owe
What are the steps to refinancing a mortgage?
If you’ve decided that refinancing your mortgage is the right move for you, there are a few steps you’ll need to take to get the process started.
1. Check your mortgage terms
The first step to refinancing your mortgage is to check the terms of your current loan agreement.
Some mortgages have pre-payment penalties that could make refinancing a costly endeavor. You’ll also want to know how much time is left on your mortgage so you can decide if it’s worth it to refinance now or wait until closer to the end of your loan term.
2. Check your credit score
Your credit score is one of the most important factors lenders will consider when you apply for a new mortgage. The higher your score, the better your chances of getting approved for a loan with a competitive interest rate.
If your credit score has improved since you originally got your mortgage, you may be able to get a better deal by refinancing.
If you’re not sure what your credit score is, you can check for free on websites like Credit Karma or AnnualCreditReport.com. You can also request one free copy of your credit report from each of the three credit bureaus, per year.
3. Research mortgage refinancing options
Once you know what kind of loan you’re looking for, it’s time to start shopping around for the best deal. You can compare mortgage rates and terms from a variety of lenders online. It’s not required to work with the same lender that you closed your original loan with either.
When you’re comparing offers, be sure to look at more than just the interest rate. Also pay attention to the fees each lender charges, as well as the length of the loan term and any prepayment penalties.
4. Ask about closing costs and fees
When you refinance your mortgage, you may have to pay certain fees and closing costs. These can include things like appraisal fees, origination fees, and title insurance. Be sure to ask each lender you’re considering about their specific fees so you can compare the total cost of each loan.
You should also do the math to ensure that refinancing will still save you money when you factor in fees and closing costs.
These fees can include:
- Property taxes
- Home insurance
- Escrow and title fees
- Appraisal fees
- Lending fees
- Credit fees
- Origination fees
- Interest rate discount fees
5. Get an appraisal
Most lenders will require an appraisal of your home before approving you for a refinance. The appraiser will assess the value of your home to make sure it’s worth at least as much as the amount you’re borrowing.
6. Apply for the loan
You’ll need to fill out a mortgage application and provide documentation of your income and assets. The lender will also do a credit check as part of the approval process. Working with the same lender may speed up the process since they’ll have much of your information already on file.
7. Close on the loan
After your loan is approved, you’ll sign the loan documents and pay any closing costs. These loan documents will include things like the promissory note, mortgage agreement, and Truth in Lending Statement.
- Promissory note: This is a legally binding document that outlines the terms of your loan, including the interest rate, monthly payments, and repayment schedule.
- Mortgage agreement: This document spells out your rights and obligations as a borrower.
- Truth in Lending Statement: This document provides information about the cost of your loan, including the interest rate and other fees.
Once you’ve signed all the paperwork and paid any closing costs, the loan is officially closed and the money is disbursed to your lender.
8. Start making your new mortgage payments
After your loan closes, you’ll start making regular monthly payments to your new lender. Be sure to stay on top of your payments to avoid any late fees or penalties.
Should you refinance your mortgage?
If you’re ready to start the refinancing process, list out your goals for refinancing and then compare rates and terms from a variety of lenders to find the best deal.
Once you’ve found the right loan, be sure to ask about fees and closing costs, and get an appraisal of your home before you apply. After your loan is approved, sign the paperwork and pay any closing costs, and then start making your new monthly payments.
Refinancing your mortgage can be a great way to save money or tap into your home equity. By following these steps, you can make sure you get the best deal possible on your new loan.
Photo by Alena Darmel