Mortgage Refinance
Your home is more than the place where you raise your family, work, play, and rest. It’s an investment, and sometimes change is needed to leverage it best. After all, life isn’t the same since you first took out a mortgage on your home. The economy changes, along with your personal finances. If your mortgage no longer suits your needs, refinancing allows you to secure a new one that works better for your current situation.
What does it mean to refinance a home?
When you refinance your mortgage on your home, it means that you trade in your existing mortgage for a more current one. This may include a new principal or a lower interest rate. The lender will then use the newer mortgage to repay the old one. This leaves you with only one loan and one monthly repayment.
Refinancing can be done for many reasons, including to get cash from your home equity, lower your monthly payment, and shorten loan terms. Refinances can also be used to add another person to or remove another person from the mortgage, as in cases of marriage or divorce. Your mortgage advisor can provide guidance in these circumstances.
How does refinancing a home work?
1.
Starting the Application Process
The first step is to contact a lender. They will ask for the same information that you provided when you purchased the home. To determine if you can repay the loan, your lender will look at your income, assets, and credit score.
They may request the following documents:
- Two most recent pay stubs
- Two of the most recent W-2s
- Two of the most recent bank statements
If you are married, your lender may also require documents from your spouse. If you are self-employed, you might be asked for additional income documentation. It is a good idea to keep your tax returns from the past couple of years.
You do not need to remain with your current lender to refinance. You can choose another lender to pay off your existing loan, such as a USDA loan or VA loan. Shop around, and compare the rates and fees of each lender, as well as their availability and client satisfaction scores.
2.
Locking in Your Interest Rate
Once you have been approved, your lender will ask if you want to lock your rate so that it doesn’t change prior to the loan closing. Be aware of the options in your loan program.
Rate locks can last between 15 and 60 days. Rate lock periods are dependent on several factors, including your location, loan type, and lender. You may need to extend the mortgage interest rates lock if your loan does not close within the lock period. This could cost you money.
If rates are acceptable at the time that you apply, then you should lock your rate. If rates have been dropping, you have the option to float the loan. This means you would proceed without locking in your rate and let the rate fluctuate with the market until closing. Of course, there is a risk that rates could increase during this time instead of decrease. If you lock in your rate and the market rate drops, you may be able to take the lower rate with a floating-down option.
3.
Underwriting
After you submit your application, your lender will begin the underwriting process. Your mortgage banker will verify your financial information during underwriting to ensure that it is correct. They’ll also review your property details as provided by a home appraiser.
4.
Appraising Your Home
You must obtain an appraisal like you did when you purchased your home. The appraisal is ordered by your lender, and it is required to estimate the value of your home. This is an important part of the process as it will decide what options you have. For example, if you are refinancing to get cash out, the home’s value will determine how much cash you can get. The value of your home could have an impact on whether or not you are eligible for certain mortgage loan options or private mortgage insurance.
An appraiser will visit your property to give you an estimate of the home’s worth. To make a great impression, prepare your home by tidying up and doing any necessary repairs. You might also want to keep a record of any upgrades that you have made to your home in the time you have owned it.
If the home’s worth is greater than or equal to the amount of the refinance loan, then the underwriting process is complete. The details of your closing, such as your refinance rate, will be provided by your lender.
What happens if your estimate is low? You have two options: you can decrease the amount you wish to refinance, or you can withdraw your application. You can also do a cash-in refinance to bring cash to the table to obtain the terms of your current deal.
5.
Closing on Your New Loan
After the underwriting is complete and your home appraisal has been completed, it’s time for you to pay closing costs and close your loan. Your lender will send you a document known as a Closing Disclosure a few days prior to closing. This is where you will see the final numbers of your loan.
Mortgage refinance closings are faster than those for home purchases. The title and loan holders, as well as a representative of the lender or title company, attend the closing.
You’ll review the details of your loan and sign the documents at closing. You’ll be responsible for any costs associated with closing that weren’t included in your loan. Any money due to you will be provided after closing, such as funds from a cash-out refinance.
After you close on your loan, and if it is a primary residence, there are a few days left before you lock yourself in. You can cancel your refinance any time before the three-day grace period expires if something happens.
Mortgage Rates and Terms
Rates are effective as of 12/06/2024
TYPE
RATE
APR
6.250%
6.370%
6.750%
6.826%
The top reasons why people choose to refinance:
Modify the term of your home loan
Refinances are a great way to reduce the loan term and save interest. Let’s say that you have a 30-year mortgage but are able to afford a higher monthly mortgage payment. To get a lower interest rate and lower overall interest, you might refinance to a 15-year term. To lower your monthly payments, you can talk with your loan officer to extend your loan term.
Reduce your interest rate
Interest rates change all the time. Refinancing may be a good option if mortgage rates are lower than they were when you took out your loan. A lower interest rate will reduce your monthly payment, and you’ll also pay less interest over your loan’s life. All of which are a great reason to check on your refinance rates and possibly save money, a key step in possible debt consolidation or paying off credit cards.
Modify your loan type
A different type of loan product could be beneficial for you for many reasons. You may have an adjustable rate mortgage (ARM) that you borrowed to lower your interest, but you’d like to refinance the ARM to a fixed rate mortgage at low rates. Or perhaps you have finally gained enough equity to refinance an FHA loan into a conventional loan, without having to pay for private mortgage insurance.
Cash out your equity
A cash-out refinance allows you to borrow more money than you owe on the home, and then you can keep the difference as cash. You may be able to borrow more than you owe on your home, consolidate debt, or use it for other purposes if the value of your home has increased. You can borrow money from your home at a lower interest rate than with other types of home loans. However, a cash-out refinance may have tax consequences.
FAQs
Our FAQs cover key topics such as eligibility requirements, costs involved, and the overall process. If you have further questions or need personalized assistance, our mortgage specialists are here to help.
How much does it cost to acquire mortgage refinancing?
Refinance costs vary depending on many factors, including the value of your home and the lender you use. You can expect to pay between 2% and 6% of the loan’s total value. This includes fees such as application fees, appraisal fees, title insurance, loan origination fees, and other closing costs.
When is the best time to refinance?
The best time to refinance is when interest rates are lower than your current mortgage rate, if you need equity from your home, or when you want to switch from an adjustable-rate to a fixed-rate mortgage. It’s also ideal if you plan to stay in your home long enough to recoup refinancing costs. It’s important to calculate your break-even point and understand the differences between refinancing, loan modifications, and second mortgages. If you’re unsure about the best option for your situation, our home loan experts can guide you through the process and help you make an informed decision.
Are there any tax implications with refinancing?
Refinancing can have tax implications. For instance, you may no longer deduct mortgage insurance premiums, and points paid to lower your interest rate might be deductible. It’s best to consult a tax advisor to understand how refinancing could impact your specific tax situation.
Will refinancing affect my credit score?
Refinancing can temporarily impact your credit score due to a hard inquiry and changes in your credit utilization, but it can improve your score over time if you manage your new loan responsibly.
Refinance your home today.
Refinancing can be a smart move to lower your interest rate, reduce monthly payments, or access home equity, potentially saving you money in the long run. To explore your options and find the best solution for your financial goals, contact a Midwest BankCentre refinancing specialist today.