Guide to Refinancing a Home

Guide to Refinancing a Home

Your home is likely your most valuable asset, and your highest monthly expense. You may be facing large mortgage payments, high interest rates, or a type of loan that you can no longer afford. You may be able to save hundreds of dollars a month, and thousands of dollars over the life of the loan, by refinancing to obtain more favorable loan terms. Keep in mind that while you can save money by refinancing, there are also some costs involved.

Reasons to Refinance

There a number of reasons why you may want to refinance your home, including:

  • Reduce monthly payments
  • Change loan companies
  • Get a better interest rate
  • Change the length of the loan
  • Change the loan type
  • Stop possible foreclosure
  • Take money out of equity

Determine your goal for refinancing your home so you can find the option that best fits your needs. If you are having trouble meeting your monthly mortgage payments or are falling behind, lower payments could help you save your home from foreclosure. Before you take steps toward refinancing your mortgage, read your mortgage terms to see if there is a prepayment penalty. If so, there will be an added expense if you choose to refinance, and you will need to figure out that cost and determine if it is worth refinancing. Many mortgages do not have a prepayment penalty.

Obtain a Lower Interest Rate

If the interest rate has dropped since your original loan, or if your credit score has improved, you may be eligible for a lower rate. A lower interest rate will make an immediate impact on your payments and will reduce the total cost of the loan. When you get a lower interest rate you will build equity more quickly in your home. You can look online to see what the current mortgage rates are by searching “current mortgage rates”.

Change the Length of the Mortgage

You may want to lengthen or shorten the length of your original loan. For example, if the current mortgage payments are too high you may be able to get a longer term, thus decreasing the monthly costs. If you are able to make higher monthly payments, you could reduce the length of the loan and pay it off sooner, eliminating a lot of interest.

It is important to note that you can pay off your current loan in a shorter length of time without refinancing. To do so, you must make an additional payment each month that goes directly towards the principal. This will effectively reduce your mortgage length and could save you thousands of dollars in interest.

Change the Type of Loan

Many people choose an adjustable rate mortgage (ARM) for their first home purchase. Once the initial rates begin to change, you may realize that the terms of the loan are no longer favorable to you. ARMs are usually more advantageous to those who do not intend to stay in their home for a long time and want the lowest interest rate and mortgage payment in the first years of the loan. If the rates change or if you decide to stay in your home longer, you may be better off refinancing with a fixed rate loan. Fixed rate loans usually allow you to rely on specific monthly payments over the entire length of the loan.

Switch Lenders

There are hundreds of available mortgage providers, and some are better than others. If you are unhappy with your lender, you may be able to switch to a different company by refinancing. Some things to consider include customer service, online billing review, automatic payments, and the reputation of the lender. You can search online to learn more about a specific lender, including their customer satisfaction ratings and comments from other customers. Search for “(name of lender) mortgage customer reviews”.

Get Money Out of Equity

As you are paying your mortgage balance down each month, you are building equity in your home, as long as the value of your home doesn’t decrease. Equity is the difference between the current value of your home and the current amount you owe on it.  If you have built up a lot of equity, you may be able to refinance, get better rates, and get some money back in the process. If you are looking for money to make a purchase or to make improvements to your home, you can do so with money that you take out of your home’s equity. Keep in mind that if you take money out of the equity of your home when refinancing, your loan balance will be higher and your payment will likely go up.

Prepare to Refinance

As you think about refinancing your home, you should begin to prepare for the process. Familiarize yourself with your current home mortgage. This will make it easier to evaluate and compare refinancing options. Verify whether your loan has a prepayment penalty that will apply if you pay off the loan during refinancing. You can also look at an online mortgage calculator at http://www.mortgagecalculator.org/mortgage-rates/30-year.php, and choose your state and the “refinancing” option. This calculator will allow you to plug in different variables, such as the length of loan, type of loan, amount of the loan and your credit score, to get an estimate of the current interest rates and mortgage payments.

Review Your Credit

One of the most important steps you can take when preparing to refinance your home is to review your credit score. This should be done well in advance so you have time to resolve any problems or errors on the report. Even some minor issues could drag your score down and make it more difficult to refinance your home. If you find and correct mistakes, you could raise your credit score making you eligible for better interest rates. Federal law requires the three major reporting agencies to furnish you with a free credit report once a year. If you search online for “free credit report”, you’ll find several websites that offer to supply you with your credit report at no charge.

Eligibility to Obtain a Loan

While you currently have a loan in place, you may not be able to meet the eligibility requirements for a new mortgage. Just as with your original loan, the lender will need to review your mortgage application, including your income, assets, credit score, current value of the property, and the amount of the loan you are requesting. These factors will be evaluated before you are approved or declined. In situations where the credit score is low, the lender may offer a loan at a higher interest rate. You will need to decide whether the offer is worthwhile.

Have Your Home Appraised

Many lenders offer refinancing of mortgages without an appraisal of your home, especially if you refinance with your current lender. However, you may want to have your home appraised because this will give you the most accurate current evaluation of its worth. It is often worth the cost of a professional appraiser because it is possible that the value of your home has changed. If the value has gone up substantially, you may have more equity, which would support a request to take money out of your equity when you refinance. It may be in your best interest to wait until your lender tells you whether an appraisal is necessary, and whether they want to use an appraiser of their choosing. In the meantime, you can also do some basic investigation online, or talk to a realtor, to find out what similar homes have recently sold for in your neighborhood.

Gather Documentation

As part of the refinancing process you will need to have some documentation in order. It is best to gather the necessary information in advance since some items could take longer to find than others. You may be required to provide the same data as was necessary when you obtained the original loan. Lenders will ask for some of these documents:

  • Proof of employment and/or pay stubs
  • Proof of assets
  • Recent tax returns
  • Bank statements

It is helpful to scan this data and keep it in a folder on your computer so it can be sent electronically if necessary. This information may be required for every person who is listed on the loan.

Evaluate Mortgage Providers

There are many mortgage providers available. The most common lenders may include banks, credit unions, and mortgage companies. Your current mortgage lender may be able to offer you a different loan, a new rate, or other refinance option, often without needing to provide as much documentation. Your payment history with your current lender will be a factor. Contact your lender to find out what options are available. Gather information from several lenders before making a final decision. Compare loans based on factors such as:

  • Reputation of the lender
  • Principal amount
  • Interest rate
  • Terms and type of loan
  • Closing costs or upfront costs
  • Payments
  • Inclusion of taxes and insurance

Comparison can sometimes seem difficult because different lenders may use different terms and there can be variations between loans. Focus on the total amount of the loan and the interest rate and make sure that the monthly payments are well within your ability to pay. Make sure that your monthly payment will include property taxes and insurance if you want those expenses as part of your mortgage payment.

Costs of Refinancing

Refinancing your home can certainly save you plenty of money over the life of your mortgage, but it does have some associated costs such as:

  • Loan application fee
  • Loan origination fee
  • Points
  • Title search and insurance
  • Survey and appraisal fees (if applicable)
  • Filing/recording fees

There are some loans advertised as having no costs out of pocket. This is generally accomplished by adding the costs of refinancing to the total amount of the loan.

Get It in Writing

Refinancing gives you an opportunity to shop around for a loan without the time constraints you may have had when making the original purchase. Obtain loan details from several or more lenders so you can review them. Make sure that you get the loan details in writing and do not rely on what you are being told verbally.. If you have any questions or concerns, you can check with the lender or seek help from a qualified attorney.

Final Paperwork

Just as with your original loan, refinancing culminates with “the closing”. Because you are refinancing and not making a purchase from a seller, the closing is just you and your lender’s representative. You will be required to read and sign the loan paperwork. The new lender will pay off your original mortgage. Fees for closing costs are due at the closing, unless they are rolled into your new mortgage.

DISCLAIMER: This guide is provided only for informational purposes and is not intended to be a substitute for legal or other professional advice. This guide does not contain nor is it intended to provide legal or other professional advice for any specific situation and readers should not take action or refrain from taking action, based only on the information provided in this guide. Goldberg & Osborne has attempted to provide accurate and current information in this guide, but cannot and does not guarantee that the information is accurate, complete, or up to date. This guide may contain links and/or search terms that will lead to external websites as a convenience to the reader, but Goldberg & Osborne is not responsible for the content or operation of any website other than its own website. The presence of a link or a search term does not imply and is not an endorsement by Goldberg & Osborne of the website provider or the information contained on any linked website or on any website contained in search results from a search term provided in the guide.