Have you ever considered refinancing your mortgage? For many homeowners, a refinance is a great way to access home equity, consolidate debt, or lower monthly mortgage payments.
If your home has substantial equity and you have good credit with a stable income, refinancing might make sense for you. Here are five reasons why refinancing could be the right choice for you:
Convert Adjustable Rate Mortgage to Fixed Rate
Home loans with an adjustable-rate mortgage (ARM) are at risk of interest rate fluctuations. If you have an ARM, then your interest rate could increase.
Homeowners with an ARM often refinance their home loan to switch to a fixed interest rate mortgage. If you are planning to live in your current home for several years, refinancing to a fixed-rate mortgage might be a good option for you.
Lower Monthly Mortgage Payments
You may be able to do a mortgage refinance for lower monthly payments. Lower mortgage payments will give you more room in your budget for other monthly expenses.
The rates you qualify for will depend on current interest rates and your financial situation such as income, credit score, savings, and employment. Make sure to shop around for the best interest rates.
Eliminate PMI (Private Mortgage Insurance)
Many homeowners pay a significant amount to private mortgage insurance (PMI) each month. These payments are in addition to your monthly mortgage payment (principal and interest).
PMI is generally required on home loans with less than 20% down, such as popular FHA loans. These extra payments protect your lender against a potential default on your home loan. PMI is in addition to your monthly mortgage payment. Speak with your lender to find out more about PMI.
If your home has over 20% home equity, you may be able to refinance and eliminate your PMI payments. This could potentially save you a lot of money over the life of your mortgage, which you can invest in your future.
Cash Out Your Home Equity
If your home has over 20% equity, you may be able to do a cash-out refinance. You can then use the cash to consolidate high-interest non-mortgage debts or pay for large expenses like home remodels or college tuition.
Current cash-out refinance rates are generally much lower than high-interest credit cards. You can use the money from your cash-out refinance to consolidate credit card debt, lowering your total debt payments.
Consolidate High-Interest Debt
The average U.S. household has thousands of dollars in credit card debt. The interest rates on these debts are usually significantly higher than home loan refinance rates. If you have enough home equity, you can use the money from a cash-out refinance to consolidate credit card debt. Your high-interest debt payments will be consolidated into your monthly mortgage payment.
For example, a mortgage broker helped Anna in Castaic consolidate high-interest non-mortgage debt. When she chose to refinance, Anna’s home was appraised at $360,000, and her home equity was $194,462. Her credit card debt was $20,151 at an interest rate of about 16%. While Anna’s monthly mortgage payment increased by $106, she eliminated her monthly non-mortgage payments of $622. After the cash-out refinancing, Anna had lowered her payments by $516* a month.
These are just a few of the reasons why you might want to think about refinancing your mortgage. With a home loan refinance, you could reduce your total monthly payments by consolidating high-interest debt. Every situation is different. Your mortgage broker can help answer any questions you have about mortgage refinancing or interest rates.
What Are The Stages of a Mortgage Refinance
Mortgage refinancing can offer you several benefits, including lower interest rates, better loan terms, and cash in exchange for home equity. To refinance a mortgage is a complex process. You should carefully consider and plan your mortgage refinance. Refinancing your mortgage happens in stages. Below is a look at the four stages of mortgage refinancing, which can help you prepare for the process.
Stage One: Determine if Refinancing Makes Sense
Refinancing a mortgage can offer you significant savings. It is critical to do your homework and evaluate all of your options before you make a decision to refinance your mortgage. So, how do you decide if you should refinance or not? The best option is to consider if you will benefit from refinancing.
You can decide if refinancing is beneficial for you by answering questions such as:
- Will I save money when I refinance?
- Will I get better loan terms?
- Am I refinancing for the right reasons?
- Am I refinancing my mortgage to consolidate high-interest credit card debt?
- How will the terms of the new loan be different from my current loan?
Once you have the answers to all of your questions, you can decide if refinancing makes sense for you. Part of your research should include speaking with lenders about your questions and concerns.
Stage Two: Consider the Cost of Refinance
There are costs involved with a mortgage refinance. It is best to speak with your lender about the various costs of refinancing.
Some possible closing costs are:
- Mortgage application fee
- Credit reporting fee
- Appraisal report
- Discount points
- Loan origination fee
- Inspection fee
- Survey fee
- Title search fee
- Title insurance
- Recording fee
- Closing/Settlement/Attorney fee
- Flood certification
- Escrow deposit
- Homeowner’s insurance
- Property taxes
- PMI (Private Mortgage Insurance)
Keep in mind that you are required to pay the closing costs. Homebuyers pay fees to the lender and other service providers. For example, you would pay discount points to your lender, but you would pay a third party to perform the home appraisal.
Stage Three: Prepare for the Refinance
If you have decided to refinance your mortgage, the next step is to prepare for the process. Adequate preparation can increase the chances of timely loan approval. Below are some of the steps you can take to prepare for the refinance.
Check Your Credit Score: Credit score has a huge impact on whether you will qualify for a mortgage refinance, as well as the interest rates available to you. Therefore, when planning to refinance, it is a good idea to check your credit score in advance. If you see any errors on your credit report, contact the credit bureaus to get it resolved. Improving your credit can go a long way toward improving your refinancing chances. One of the easiest ways to improve your credit is to always pay your bills on time.
Understand Home Equity: It is critical to have an idea about what home equity is. Home equity is an asset. You can calculate home equity by subtracting any outstanding loan balances from your home’s market value. If you are doing a cash-out refinancing, you can get cash for some of your home equity.
Compare Lenders: Comparing deals is something you do daily – from shopping for groceries to shopping for clothes, mobile plans, and others. So why not do it when looking to refinance a home loan? By comparing lenders, you will have more options. Reach out to lenders with your questions about refinancing.
Track Down Required Documents: Mortgage refinancing usually involves a fair amount of paperwork. The paperwork allows the mortgage broker to verify your debts, income, and assets. Some of the required loan documents have to do with your original mortgage, your bank accounts, savings, retirement accounts, your income, etc. To help you get started, ask your lender for a complete list of required paperwork and documents. Having the documents ready could help your loan application go as smoothly as possible.
Stage Four: Avoid Refinance Mistakes
When refinancing your mortgage, it is possible to make some mistakes if you are not careful about how you proceed.
Some of these mistakes include:
- Refinancing without doing your homework. Do you research and ask your lender to answers all of your questions.
- Check your credit before refinancing, to avoid any surprises.
- Avoid opening new lines of credit shortly before or during refinancing.
- Running up debt could hurt your chances of loan approval.
- Not asking your lender for a rate lock. With a rate lock, if interest rates rise during your lock-in period, you will not be impacted.
- Understand the costs involved with refinancing.
- Consider the pros and cons of refinancing your home loan.
With that in mind, it is a good idea to carefully consider your decision to refinance your home loan to avoid mistakes. Are you interested in refinancing? Talk to a mortgage lender and learn about your options.
What Documents Do You Need for Refinancing Your Mortgage?
Home loan refinancing works much like your initial loan application when it comes to the documents you need to provide. Your lender needs certain documents to process your loan application and to determine if you qualify for refinancing.
Lenders use the documents listed below to assess your financial situation and determine the risk of offering you the loan. After reviewing all loan documents and paperwork, it’s up to the underwriter to assess the risk.
I want to help you get your loan documents organized so that your refinance application goes as quickly and smoothly as possible. The required documents below will support the information you’ve submitted in your loan application. Let’s take a look at the types of documents your mortgage broker will be asking you to provide.
Lenders look for two main factors when assessing your loan application: your ability to repay the loan – typically determined by your credit score – and your ability to pay it back. Your pay stubs show proof of income. Mortgage brokers usually ask for pay stubs from the last two or three months, but the exact range depends on the lender. Be sure to find out your broker’s requirements.
If you own your own business, you might not have pay stubs. In that case, you’ll most likely need to provide profit-and-loss statements alongside federal tax returns to prove your income.
W-2s or 1099s
Your lender will most likely ask for tax documents. Employees will need to submit W-2 forms. Since W-2s are used for employees, they show taxes. For an independent contractor, this will likely take the form of a 1099. Lenders will usually ask for two years’ worth of information, but again, this may vary, so check with your lender.
Whether you get W-2s or 1099s, you will be asked to submit your tax returns. Lender use tax information to get a clear picture of your financial situation.
Your income will hugely impact your refinancing options. Increasing income would positively impact your application. Declining income could negatively impact your home loan application.
Statement of Assets
In addition to income, lenders typically want to see what other assets you have. The purpose of this is to determine whether you have enough on hand to cover a couple of months of house payments as well as the closing costs of the loan.
Your assets may include the following items:
- Bank account statements
- 401k or other retirement accounts
- Mutual funds
- Life insurance policies
Having sufficient assets at your disposal can make loan approval more likely since they show the lender that you have enough resources to cover your new home loan.
Statement of Debts
An important part of determining your debt to income ratio (DTI) is your current level of debt. As such, a statement of outstanding debts is necessary.
Your lender will likely ask for documents showing your debt obligations, such as:
- Current mortgage payments
- Auto loans
- Student debt
- Lines of credit
Your mortgage broker will evaluate your debts, your income, and assets in order to determine if you qualify for mortgage refinancing. In some cases, it may be necessary to take care of some of your debt before you’ll be approved.
In addition to all your financial information, your lender will want to make sure that you have the required insurance coverage. Having proof of valid homeowner’s insurance is required when you apply for a refinance.
When you refinance your home, your old home loan is paid off, and the lender’s title policy expires. During loan processing, your lender will require a new loan policy on your new mortgage to protect their investment.
Depending on your situation, you may need to provide additional documents to your lender when applying for mortgage refinancing. For complete information on what documents and paperwork you need to apply for home loan refinancing, talk to a bank or a mortgage broker.