How to refinance your home
Buy your house was probably one of the most (if not the the most expensive purchases you have ever made. One of the ways to lower the overall cost of your home is to lower the monthly payments. Refinancing helps with this.
Refinancing your mortgage involves taking out a new mortgage to replace your current credit. You will benefit from a new interest rate and a new monthly payment. It also means that you will get new terms. So if you’re a few years away from a 30-year mortgage, refinancing will restart the clock.
If historically low interest rates make you consider during the coronavirus epidemic, which causes many lenders to face a backlog. (It also means that your request may take longer to process than normal.), you’re not alone. Millions of Americans Apply for Mortgage Refinance
You can still refinance, even for. Here’s how to get started.
1. Find your “why”
Before browsing through lenders, first ask yourself what the purpose of refinancing is. Such as:
Do I want a lower interest rate? If you are watch interest rates fluctuate and hovering at some of the lowest rates ever, refinancing looks tantalizing. If you bought your home when interest rates were higher, refinancing for a lower interest rate also means a lower monthly payment. You can also refinance to go from a variable rate mortgage to a fixed rate mortgage.
Do I want a lower monthly payment? You usually get this through lower interest rates, but it also happens when you extend the term of your loan. For example, if you had a 15-year home loan and you refinance over a 30-year term, your monthly payments will be lower under the new terms.
Do I want to pay off my loan sooner? The sooner you pay off your loan, the less interest you will pay. But it also means higher monthly mortgage payments. You can refinance a 30 to 20 or 15 year mortgage. You will have higher monthly payments, but you will also be released from your debts sooner.
Do i need cash? If you take out a new loan that’s more than what you owe, you can pocket the difference in cash with a refinancing of collection. It’s a good way to leverage the equity in your home.
2. Boost your credit
Refinancing a mortgage is taking out a new loan, so you will need to get your mortgage credit rating in great shape to take advantage of the lowest interest rate available.
If you have debt outside of your mortgage, like student loans or a payment for a car, try paying it off and lowering your debt-to-income ratio. Lenders like to see that you have enough cash on hand to pay off your mortgage in case something happens, like you lose your job or if a medical emergency prevents you from making money.
Make sure to check your credit report. You can do it for free on AnnualCreditReport.com. See if there are any mistakes or bad grades you can remove to give your credit score a boost. The higher your credit score, the lower your interest rate will be.
3. Calculate your potential payments
Once you’ve figured out why you want to refinance your home, see if the change will fit into your budget. For example, if you want to pay off your mortgage sooner, what would your new 15-year mortgage payments look like? You can also calculate what a new 30-year loan would look like with a reduced interest rate. Discover different refinancing calculators on:
Keep in mind that refinancing a mortgage means another round of closing costs, ranging from 2% to 6% of the loan. Unless you find a loan that incorporates your closing costs into your loan (which always means you pay those costs) or you get a “no closing costs” loan, you will need this money if your application is approved.
4. Browse lenders
Once you have a good idea of what you would like to pay, start researching which lenders have the best deal. Pay attention to interest rates and fees, but also consider the whole process, including:
- Ease of application: Does the lender offer online or do you need to apply at a local branch?
- Processing time: Do you know how long it will take to close your new loan?
- Conditions: If your credit score is not at its best, will you still be eligible for refinancing, and if so, is that the best rate you can get?
There are many places to search for lenders and rates online, but keep in mind that the rates generated by online tools do not always reflect your specific situation and may change when the loan is actually requested.
You can also try your bank or credit union. Your local institution likely offers home loans and refinances, and has the tools to calculate what you would pay if you refinanced your mortgage. Another option is to try a private mortgage broker.
5. Apply and close
Once you’ve found some of the best lenders, send in your inquiries. Try to complete your requests a few weeks apart. Since each request triggers a rigorous credit check, multiple requests will tell the credit bureaus that you are note purchases, or shop around for the best rate. Instead of multiple credit applications, only one will appear on your credit score. This means that you won’t be faced with a lot of serious credit checks that will bring your score down.
Once you’ve chosen the best lender, lock in your interest rate. Since interest rates fluctuate often, yours could increase at any time before closing. Once you lock in your rate, it won’t change, even if the market pushes it up. Rate freezes typically last 30 to 60 days (sometimes longer, depending on your lender), which is usually the time it takes to close a new loan. Some lenders even guarantee that if interest rates drop before closing, you will get the lowest rate possible. Then it’s time to close.
There are many reasons to refinance your home, so make sure you choose the best lender, the best interest rate, and the repayment terms that best suit your finances. If the interest rates are too high, the fees are too high, or if you can’t find a lender to work with, you may want to postpone refinancing for now.