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Refinancing Your Mortgage: What You Need To Know

Refinancing a home mortgage can be a confusing and overwhelming process, but it doesn’t have to be. Understanding the basics of how refinancing works can help you make an informed decision about whether it’s the right choice for you. In this article, we’ll break down the process step by step, from start to finish, to help you better understand what refinancing is, how it works, and potential benefits for you and your finances.

What is Refinancing?

Refinancing is the process of obtaining a new mortgage to pay off an existing mortgage. It allows homeowners to replace their current mortgage with a new one that better suits their financial needs and goals. This could be due to a number of reasons, including a change in interest rates, a desire to lower monthly payments, or the need to access equity built up in the home to fund home improvements, pay for college, or consolidate debt.

Why Refinance Your Mortgage?

There are many reasons why homeowners might choose to refinance their mortgage. Here are the top 5:

  • Lower monthly payments: Refinancing can result in lower monthly payments, freeing up cash flow for other expenses
  • Shorten the loan term: Refinancing to a shorter loan term can save homeowners money in interest over the life of the loan.
  • Change in interest rate: Refinancing allows homeowners to take advantage of lower interest rates, potentially saving them thousands of dollars in interest over the life of the loan.
  • Access equity: Refinancing can also provide homeowners with access to the equity they’ve built up in their home, which can be used for home improvements, debt consolidation, or other expenses.
  • Get rid of mortgage insurance: If your current loan has Mortgage Insurance, either FHA or Conventional, you may have enough equity in your home to refinance into a new loan, without PMI.

Pro Tip:

Oftentimes, you can pull cash out of your equity with a Cash out Refinance, pay off high interest debt, save on monthly payments, and STILL pay your loan off sooner. If you would like to see if a Debt Consolidation Cash Out Refinance is an option for you, click here for our online, Refinance Pre-Approval.

Factors to Consider When Refinancing Your Home Mortgage

When considering refinancing your home mortgage, there are several factors to consider. These include:

  • Current interest rate: The current interest rate on your mortgage will play a significant role in determining whether refinancing is a good option. If interest rates have dropped since you obtained your original mortgage, refinancing to a lower interest rate could result in a lower monthly payment.
  • Loan-to-value ratio (LTV): Your LTV is the ratio of the loan amount to the value of your property. In general, a lower LTV can result in a better interest rate when refinancing.
  • Credit score: Your credit score will play a role in determining the interest rate you qualify for when refinancing. A higher credit score can result in a lower interest rate.
  • Home value: The value of your home will also play a role in determining whether refinancing is a good option. If your home’s value has increased since you obtained your original mortgage, you may have a lower LTV and may be able to refinance to a lower interest rate.
  • Remaining mortgage term: The length of time you have remaining on your current mortgage will also impact the benefits of refinancing. If you have a significant amount of time remaining on your mortgage, refinancing to a longer term may not result in a significant monthly payment reduction.

Steps in the Refinancing Process

The refinancing process can be broken down into several steps, including:

  1. Determine your eligibility
  2. Submit an application
  3. Underwriting
  4. Approval:
  5. Closing:

Determine your Eligibility

When considering refinancing your home mortgage, it’s important to understand the eligibility requirements that lenders typically look for. To be eligible for refinancing, you’ll generally need to have a good credit score, stable income, and sufficient equity in your home.

First and foremost, having a good credit score is crucial when applying for a refinance. Your credit score is a measure of your creditworthiness, and lenders will use it to determine the interest rate you qualify for. The higher your credit score, the more likely you are to qualify for a lower interest rate. If your credit score is low, you may still be able to qualify for a refinance, but you may be required to pay a higher interest rate or provide additional documentation to support your application. Our Mortgage Advisors can work with you to optimize your credit, to ensure you are eligible for the lowest rate possible.

In addition to a good credit score, lenders will also look at your income and employment history when considering your eligibility for a refinance. Having a stable income and a consistent employment history can help demonstrate to lenders that you have the financial stability to make your monthly payments.

Finally, having sufficient equity in your home is also an important factor when determining your eligibility for a refinance. Equity is the difference between the current value of your home and the outstanding balance on your mortgage. Generally, lenders will require that you have at least 20% equity in your home to qualify for a refinance. If you have less than 20% equity in your home, you may still be able to qualify for a refinance, but you may be required to pay for private mortgage insurance (PMI), which can increase your monthly payment.

Overall, understanding the eligibility requirements for refinancing can help you determine whether it’s the right choice for you. By working with a knowledgeable lender and carefully considering your financial situation, you can make an informed decision about whether refinancing is the right choice for you.

Submitting and Application

Once you have decided on your Lender, the next step in the refinancing process is to submit a loan application. In your application, you can expect to provide the following information:

  1. Personal information: You’ll need to provide your name, address, Social Security number, and other personal information.
  2. Employment information: You’ll need to provide information about your employment history, including your current employer and your salary.
  3. Financial information: You’ll need to provide information about your assets and liabilities, including bank account statements, investment statements, and other financial documents.
  4. Property information: You’ll need to provide information about the property you’re refinancing, including the address and the current value.
  5. Loan information: You’ll need to provide information about the loan product you’re applying for, including the loan amount, interest rate, and loan term.

Overall, the loan application process can be time-consuming and complex, but working with a knowledgeable lender can help make the process smoother and ensure that you understand all of your options. By providing accurate and complete information and responding promptly to any requests from the lender, you can help ensure that your application is processed as quickly and efficiently as possible.

Luckily for you, we offer one of the best online applications available. Not only can you apply for your refinance within 15 minutes, but you can track your loan progress, upload documents, and e-sign disclosures, straight form the app on your phone. Click Here to get started!

Underwriting

Once you’ve submitted your loan application, the lender will begin the underwriting process. This involves evaluating your creditworthiness and your ability to repay the loan. The lender will review your credit score, income, employment history, and other financial information to determine whether you meet their eligibility requirements.

During the underwriting process, your lender may request additional documentation such as pay stubs, tax returns, or bank statements, to support your application. It’s important to respond to these requests promptly to avoid delays in the refinancing process.

Approval

Once your Lender’s Underwriter issues a Conditional Approval, you may be asked to supply a few additional documents to button up your final approval. This is completely normal, and getting the requested documents to your Mortgage Advisor quickly can get you to the closing process faster, and easier.

Once your loan has been given Final Approval by Underwriting, you can move on to the Closing process below.

Closing

The closing is the final step in the refinancing process, where you’ll sign the loan documents and pay any closing costs associated with the new loan. This step can be both exciting and overwhelming, but with proper preparation, you can ensure that the process goes as smoothly as possible.

Before the closing, the lender will provide you with a Closing Disclosure, which outlines the terms of the loan, including the interest rate, loan amount, and any other fees associated with the loan. It’s important to carefully review the Closing Disclosure and compare it to the Loan Estimate you received earlier in the process to ensure that the terms of the loan are what you were expecting.

On the day of the closing, you’ll meet with an Escrow Closer, attorney, or Notary to sign the loan documents. This typically takes place at the title company or the lender’s office.

The loan documents you’ll be required to sign can vary depending on the lender and the type of loan, but they typically include a promissory note, which outlines the terms of the loan and your obligation to repay it, and a deed of trust or mortgage, which gives the lender a security interest in the property.

Once you’ve signed the loan documents and paid the closing costs, either with a cashier’s check, or taken out of your equity, the lender will fund the loan, and the new mortgage will be recorded with the county. Once it’s complete, you’ll officially have a new mortgage with new terms and a new interest rate.

Conclusion

Refinancing your home mortgage can be a valuable option for homeowners, offering the potential for lower monthly payments, access to equity, and a more stable interest rate. However, it’s important to carefully consider the costs and potential drawbacks before making the decision to refinance. Working with a knowledgeable and experienced lender can help make the process smoother and ensure that you understand all of your options.

If you’re considering refinancing your home mortgage, take the time to educate yourself on the process and the benefits and drawbacks of refinancing. With a better understanding of how refinancing works and the potential benefits and drawbacks, you can make an informed decision about whether it’s the right choice for you.

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Brad Patshkowski

Preparing future home owners is paramount to our customer's success and the success of our industry. The dream of homeownership is closer than you think!