Does dealing with your finances make your hands sweat like you are in the seventh grade going to your first school dance? Maybe you are thinking about refinancing your mortgage, but you aren’t sure of the best way to go about it. It may make you feel better to do a little bit of homework before you contact a mortgage professional. Read on to understand some of the basics of how to refinance your mortgage?
Before you contact a lender:
Know the reasons why you want to refinance your mortgage.
What are good reasons to refinance your mortgage?
Refinance to lower your interest rate.
Take a look at the current mortgage interest rates and compare them with the rate you received when you first took out your original home loan. Is the rate now higher or lower? If it is lower now, you may want to take advantage of this and go through with a “rate-and-term” refinance. This is the most common reason homeowners refinance their mortgage. If you want an even lower interest rate, look for shorter-term home loans.
Eliminate mortgage insurance.
If your monthly mortgage payment currently includes private mortgage insurance (PMI), a refinance could help lower your monthly payments. If you have a mortgage insured by the FHA (Federal Housing Administration), you are probably paying mortgage insurance.
FHA loans are a great option for people with less than perfect credit and little savings. The big downside of FHA home loans is that mandatory mortgage insurance, which can be a big chunk of money every month. After paying an upfront premium of 1.75 percent of the mortgage amount, FHA borrowers are required to pay an annual mortgage insurance premium of 0.85 percent of the loan amount for the entire term that cannot be canceled. Paying for mortgage insurance adds up over time.
To eliminate PMI, you can refinance your FHA mortgage into a conventional home loan once you have 20 percent equity in your home.
A better credit score could make refinancing worthwhile.
Was there a little blip on your credit report when you first took out a mortgage? Those blips matter, and having them gone could help you get a better interest rate.
The good news is that you can improve your credit score in several ways. You can pay down credit card debt and outstanding delinquent balances. You can also improve your credit if you are paying your bills on time, remove errors from your credit report, or avoid opening a lot of new credit lines in a short span of time.
Your mortgage payment is one of your largest bills, if you want to improve your credit score, make sure you never miss any payments. Your payment history makes up about 35 percent of your credit score. You should pay all of your bills on time, but if you must miss a payment, make sure it isn’t your mortgage payment.
A simple way to raise your credit score is by lowering your credit utilization rate. Credit utilization tells creditors how much of your available credit you are using. It is best to keep your credit card utilization rate under 30 percent of the credit available to you. Your credit utilization rate makes up 30 percent of your credit score.
It takes time to improve your credit score. Credit score changes can take several months. Check your credit score before considering refinancing your home loan.
Consolidate credit card debt.
Another reason to refinance is to consolidate all of your non-mortgage debt. Do you have considerable equity in your home? Do you need cash to consolidate debt or to finance a much-needed home remodel project? You might consider refinancing with a cash-out. Here’s how it works:
Consider how one lender helped Mary in Denver with her debt-consolidation strategy. At the time of the refinance, Mary’s home was valued at $250,000, and she had $96,268 equity in her home. She also had $35,932 in non-mortgage debt. She was borrowing at about 21%. Mary has qualified for cash-back refinance. Her mortgage payment went up by $320 a month, but her non-mortgage debt payment decreased by $882 a month. Mary saved $562* a month by going through with a cash-out mortgage refinance.
The biggest drawback of high-interest debt consolidation through refinancing your home is that you are jeopardizing your home. When you refinance your home, you are taking on secured debt, but your credit card debt was not secured against your home. So, even though you might be reducing your monthly payments, you are also risking your home. Carefully consider the effects of refinancing before you commit to it.
Use a mortgage refinance calculator.
An online mortgage refinance calculator is a handy tool to see how much you can save by refinancing your home. For additional savings, you might look into how much you could save by using discount points when you refinance. Buying points is a popular strategy to reduce the interest rate of your mortgage.
There are many free mortgage refinance calculators are available for you online. Just follow the on-screen instructions. Fill in the information on your current loan, then fill in the refinance loan details along with information on your home. Compare your current mortgage with the mortgage after the refinance. You will see how much you could save each month by refinancing. If any of the calculations are confusing, you can reach out to a mortgage professional for help.
Shop around for the best refinance rates.
Check out multiple lenders in your search for mortgage refinancing options. Look online to see where you can receive the best rates. Talk with lenders to get a feel for working with the company. Look at customer satisfaction reports as well to make sure you are dealing with a reputable firm.
Contact several mortgage lenders.
Home loans are available from several types of lenders such as credit unions, banks, mortgage brokers and online lenders. When you contact multiple lenders you will receive offers with different interest rates and terms. It’s critical to know that lenders are not obligated to offer you the best interest rate or terms. The only way to find the best deal for you is by contacting many lenders and negotiating.
To evaluate your mortgage refinance options, get the following information from each lender:
- Interest rates – Find out about the current interest rates they offer. With variable loans, find out how your interest rate and loan payment can change.
- Down payments and private mortgage insurance – Many lenders require 20 percent of the home’s price down payment. If you can’t afford a 20 percent down payment, many lenders have loan products available. But, if you can’t make a 20 percent down payment, you might have to pay mortgage insurance to protect the lender in case you default on the loan.
- Fees – Refinancing involves many fees and costs, such as underwriting, loan origination or broker fees or closing costs. Get a written estimate from every lender about all fees and expenses.
- Points – You can pay points to lock in a lower interest rate when you refinance. Make sure that you are quoted an actual dollar amount not just the number of points.
Once you have done your research, you should negotiate and consider all of the details of the loan.
Determine your goal.
Do you want to retire in a few years and want to own your home free and clear? Do you want to consolidate non-mortgage debt by refinancing with a cash-out mortgage? Do you want to change loan term from 30 to 15-years to shorten the life of your mortgage? Regardless of your reason, it’s good to have an idea before you contact a mortgage professional.
Check your credit.
There are many reasons to check your credit. One of the best reasons is to make sure that there are no surprises before you start with the mortgage refinance. Check your credit before you contact a mortgage company to avoid any surprises. In case you found anything out of the ordinary, contact the credit bureaus and get it cleaned up before you start with the refinance.
Check the value of your home.
Get an idea of the current value of your home. You don’t need to hire a professional appraiser yet. Once you start the refinance process, the lender might ask you to use a specific appraisal firm to use for the appraisal.
Get your paperwork together.
Ask your lender what documents they need from you. Each lender may require their own set of documents, but some of the most common documents are pay stubs, banking details, savings accounts, tax returns, outstanding loans and debts, W-2s, and or 1099. If you have gone through a pre-approval, you might have most of the necessary documents handy already.
Have cash on hand.
Even though refinancing makes sense for many homeowners, it is not free. You normally have to pay for an appraisal. There are closing costs with a refinance. The exact cost depends on a wide range of factors. Check with your lender to understand all expenses with the refinance.
After reading the information in this article, hopefully, you are more comfortable with the home refinance process. Talk with a mortgage professional to understand the details of refinancing your home.