There are many reasons to consider refinancing the mortgage on your home. One of the most common reasons is high-interest debt consolidation. A cash-out mortgage refinance allows you to get cash for the equity in your home. If you have enough home equity, you may want to consider a cash-out refinance. If cash-out is not what you want, you could consider refinancing to lower your mortgage interest rate.
The idea of home loan refinancing may seem daunting at first. But with some careful preparation and some research, you can get started with the process. Follow the five steps below to prepare for your home loan refinance.
1. Know your Mortgage Refinancing Goals
Before you apply to refinance your mortgage, think about your goals. Get a clear picture of your present financial situation and monthly budget. Are you in debt? How much debt do you have? How much cash do you expect from refinancing? Do you want to lower your mortgage payments, and by how much? Also, consider whether you want to refinance your mortgage to lower your interest rate or to get cash-out. Mortgage refinancing can help you reduce your monthly payments, lower your interest rate, or cash-out some home equity. When you have these answers, you’ll be better prepared to talk to a lender about loan amounts and interest rates.
2. Consider Home Loan Options
Before you talk to a lender, it is a good idea to educate yourself about the different home loan options. The two most popular mortgage options are fixed and variable interest rate loans. A fixed-rate loan will keep your interest rate the same for the term of the loan, while the interest can change with a variable rate home loan. Get a basic understanding of each, then reach out to a mortgage lender with your questions and concerns.
You might also want to consider if you’re going to pay discount points for a lower interest rate. Deciding on the term of the loan is also important. Do the math with different options and determine the best fit for your financial situation and goals. Mortgage calculators can help you make comparisons.
3. Streamline Your Finances
You should streamline your budget and take a close look at your finances before applying for refinancing. Your income, savings, credit score, and debt each play an important role in refinancing a mortgage. If your credit score needs improvement, you may not be able to obtain the lowest possible interest loan, and if you have too much debt, it could prevent you from qualifying.
It is important to make sure that your credit score is the best it can be, and that your credit isn’t frozen when you apply for refinancing. Your credit score is an extremely important part of refinancing.
Also, you will need to pay any back taxes on the property and clear any tax liens. Otherwise, you might be unable to refinance.
4. Prepare Your Paperwork
The lender will need quite a bit of documentation from you to process your loan refinance application. To streamline the process, gather all of your documentation in a timely manner. Check with your lender for a complete list of required documents. Among other things, you’ll need your last two years’ tax returns for yourself and your business (if you are a business owner), your last two years’ W2s and 1099s, your last two months of bank statements, and proof of any child support or alimony payments that you receive.
5. Get Your Home Ready for the Appraisal
The amount of money you can get on your cash-out refinance will depend in part on the appraised value of your home. There are ways to prepare your home for the appraisal to make sure that you maximize value. Double-check that your home is in its best condition. Sometimes a new coat of paint or new wallpaper can make a lot of difference in the overall appearance and condition of the home.
You might be able to maximize the appraised value of your home by making sure that all safety measures, such as smoke detectors are in working order. Preparation for an appraisal is similar to staging your home for sale. Make sure everything is in working condition, and there are no broken window sills or door handles.
Talk to one of our expert mortgage professionals to fully prepare for your refinance. If you’re still unsure about refinancing, consider how a mortgage broker was able to help Benjamin from San Diego. Benjamin’s home was appraised at $200,000, and he had $88,964 home equity. His non-mortgage debt was $23,634 at about 18 percent interest, which cost him $495 per month. He was able to get a cash-out mortgage eliminating the $495 monthly payment for an increase in his mortgage payment of only $43, lowering his total monthly payments by $452*.
What are the pros and cons of cash-out refinancing?
Cash-out refinancing is an easy to understand form of borrowing. It is a home financing option for homeowners with substantial home equity. With a cash-out refinance, you take out a new home loan to replace your current mortgage. You refinance for more than the amount you owe, and you keep the difference in cash. One of the most important requirements of cash-out refinancing is sufficient equity in your home. However, it’s important to consider the pros and cons of a cash-out refinance to make sure that you’re getting the optimal mortgage for you.
What are the pros of cash-out refinancing?
Pay Off Expenses
With a cash-out refinance, some people might use the money to make improvements and repairs to their homes. Others might use the cash for other large expenses, such as college tuition, to pay medical bills or to start a business.
Reduce Your Monthly Mortgage Payments
Additionally, a cash-out refinance can possibly improve your debt profile. For example, someone might use their cash out to consolidate their high-interest credit card debt, which might improve their credit score.
Cash-out refinancing might help you reduce your total monthly debt payments. Consider how a mortgage lender helped Amelia from Lakeside. At the time of refinancing her mortgage, Amelia’s home was appraised at $360,000, with $194,426 of equity. Her loan balance was $165,308, and she had $20,151 in non-mortgage debt with an interest rate of about 16%. By refinancing, she was able to consolidate her non-mortgage debt payment of $622 a month. Amelia’s new mortgage payment increased by $106 a month, but she has reduced her total monthly debt payments by $516*.
For more information about cash-out refinancing, contact a mortgage broker today.
Refinance for a Better Interest Rate
Cash-out refinancing might get you lower interest rates on your mortgage because current mortgage rates might be lower than the interest rate on your original mortgage.
Instead of taking out a second loan for a home improvement project, which might have a higher interest rate, refinancing and using that cash might save you money in the long run. Or instead of taking out a high-interest student loan, homeowners might opt to pay their tuition with their cash-out.
Possible Tax Breaks
Depending on how you use the money from your cash-out loan refinance, you might be able to get some tax breaks. For example, someone might use the cash for installing qualified energy generating systems. Consult a tax professional to learn about possible tax breaks and refinancing.
What are the cons of cash-out refinancing?
You Might Have to Accept a Higher Interest Rate Mortgage
Your cash-out refinance rates might be higher than a standard refinance because the lender might be taking on more risk by lending more money to you. Cash-out refinancing rates are sometimes a fraction of a percentage more, but that can add up over the years.
Longer Loan Term
Unless you change your loan terms to be a shorter payment period, you might be paying your mortgage for longer than you would if you hadn’t refinanced. In the long run, you might end up paying more interest because you will be taking more time to pay it off. Of course, a longer-term loan has the possibility of being a pro, too, if you need extra payout time. Either way, it is something to consider.
Signification Closing Costs
Just like with the original home loan, there are closing costs involved. Closing costs can be several thousand dollars, so when you are considering refinancing, it is important to take this into account. Closing costs can include, among other things, discount points, loan origination fee, mortgage application fee, appraisal fee, inspection fee, the survey fee, title search, title insurance, and attorney fee (some states require the presence or the involvement of an attorney during the transaction).
If you fail to make your mortgage payments, you might be at risk of foreclosure. Before committing to a cash-out refinance, consider how much you can afford each month and ensure that your mortgage does not go over that amount.
Additionally, there is the possibility that you might end up owing significantly more than the amount your home is worth if market prices decrease.
Want more cash-out information? Contact a mortgage broker for answers to your cash-out refinancing questions.