Buying the home was the hard part, but you might want to refinance your mortgage a few years after you’re settled into your new routine. After the stress of buying the actual house, it can’t be that hard to change up the mortgage, right? While it might not be the most challenging process you’ve ever handled, refinancing a mortgage does come with its fair share of paperwork.
Before discussing the step-by-step process of refinancing your mortgage, let’s go through a few critical considerations first.
Ask Yourself: Is This Right for Me?
It sounds like the perfect solution: renegotiating your existing debt into a deal that saves you money in the long run. However, it’s not always the right choice to solve your financial problems, nor is it always on the table. The approval process is a little more stringent these days, compared to decades ago, which makes it a little harder to get a new loan. Before diving headfirst into the process, asking yourself these three questions can help guide you in the right direction:
Does my house have equity? To get a new loan without adding mandatory private mortgage insurance, a homeowner usually needs 20 percent equity on the house. Having to add extra insurance might cancel out whatever benefit you’d get from refinancing. These days, it’s not uncommon for homeowners to owe more than the value of their property, but even that doesn’t necessarily take refinancing off the table.
How good is my credit? There’s no getting around it: Like with any loan, your credit history and score matter in determining the interest rate. Similarly, you are going to need a healthy score just to be eligible for a mortgage. A credit score of 720 and above will yield the lowest rates, while scores under 620 won’t qualify for most loans.
What is my long-term goal? What is your incentive for refinancing your mortgage? Most want to negotiate better terms that result in lower monthly payments, while others opt for higher payments to expedite the process.
Advantages to Refinancing a Mortgage
Regardless of how much equity is in your home or how long you wish to set the new terms, the primary advantage to refinancing is to obtain a lower interest rate. Naturally, most people want to make more money as they climb their career ladders and use this to improve their credit history. With a better credit score, you’ll be able to get better loans than you were able to when you first bought the house, which can have a substantial impact on how much you pay per month.
How to Refinance a Mortgage
- Know your credit score. This gives you tangible information about what kind of loans and rates you can expect.
- Know your home’s value. The market is volatile and changes all the time, and so too does the value of your home. Checking out recent sales in your neighborhood can give you an idea of what you could expect to sell your home for, if you were selling it.
- Learn all the fees. There are plenty of them to go around: You’ll pay to apply, to have your home appraised, for origination, to process documents, for underwriting, to have your credit report accessed, recording, title research, tax transfer, and those are just a handful. Fortunately, you don’t have to remember all of these; a mortgage lender will plainly list these fees in its estimate.
- Find all your paperwork. If you normally bank online, you’ll have to hit up a printing station. Lots of paperwork will be required for this process.
- Lock in that new interest rate. Once you receive the estimate with the offered mortgage rate, be sure to lock it in.
- Keep cash on hand. Other fees include closing costs and property taxes, so having enough cash set aside to pay these off will get you in a good spot without throwing off your refinancing calculations.