No matter how you look at it, your home is a big investment to make, and you’ll want to find ways to leverage it if you want to make it worth your while.
Refinancing your mortgage is one of the ways to go about it, and there’s a multitude of reasons to do it, from getting some extra cash out of the home you bought to lowering your mortgage payments.
Essentially, refinancing is trading the mortgage you’ve currently got for a new one, which usually comes with different interest rates and a lower principal.
By doing this, you’re passing the responsibility of paying your previous mortgage onto your lender, while all you have to worry about is a single loan with only one payment every month.
On top of this, people tend to use refinancing to remove one person from their previous mortgage, something that people resort to when they divorce their partner, although sometimes, it’s also used to add a person to a mortgage.
The ins and outs of refinancing
Usually, this process tends to be less complicated than actually buying a home, but it does have a great load of similarities too.
While it’s impossible to say exactly how long refinancing your current mortgage will actually take, the process typically lasts around a month to a month and a half.
Naturally, the first step to refinancing is finding the option that best suits your current circumstances, and you’ll have to offer your new lender all the information you gave your previous lender.
With this on hand, they’ll do a thorough examination of your income level, owned assets, credit score, and amount of debt you’ve piled on to see if you meet the refinancing requirements they’ve set.
Most commonly, you will have to provide the two most recent copies of your pay stubs, W-2s, and bank statements.
If you happen to be self-employed, you may need to provide additional info on your income, and to be completely safe, make sure you’ve got your tax returns from the past couple of years close by.
Locking or floating your interest rate
If your loan does get approved by the lender, you may then be asked whether you wish to lock in or float your interest rates, which gives you a choice between preventing your rate from changing or possibly getting a lower rate down the line.
Rate locking can last anywhere from half a month up to two months, and it largely depends on where you live, what type of loan you opted for, and finally, your lender’s terms.
If you choose to lock for a shorter period of time, you may be able to get a better rate, as the lender won’t have to hedge for an extended period of time.
However, if the loan doesn’t close before the lock period ends, you may have to extend it, which will cost you some extra money.
On the other hand, floating your rate does the exact opposite, and while it offers the possibility of getting a better rate, it also puts you at risk of getting a higher one instead.
To protect yourself, you may also choose a float-down rate option.
Similar to when you initially bought your home, refinancing also requires getting an appraisal on it, which is ordered by your lender, who will provide an appraiser to evaluate the property’s value.
In order to get a higher value, you’ll want to make your property in its best shape, and you can do this simply by tidying up and completing any minor repairs that need to be done before then.
On top of this, you may want to create a list of all the upgrades you’ve done on the home ever since you acquired it to show that you’ve been taking proper care of it.
If the appraisal works out in your favor and your home’s value is estimated to be equal to or even greater than the loan you’re trying to refinance, that means the process is practically complete.
After this, your lender will contact you and inform you of any details regarding the closing of the contract.
On the other hand, if the appraisal is lower, the lender may not agree to the loan, as the loan-to-value ratio isn’t in their favor.
If this happens, one of the things you can do is ask for a lower amount of money through the refinancing process, with the only other option being canceling your application.
Closing the new loan
Once the process is complete, it means that the time to close your loan has finally come, and a couple of days prior to it, your lender will send you a Closing Disclosure with all the finalized numbers for the loan.
The number one thing about a refinance is that the closing lasts significantly shorter than that for purchasing a home, and it includes only a short look through all the loan details and a signing of the contract.
This is also when you’ll pay for any closing costs that aren’t included with the loan itself.
However, if the lender owes you money instead, one example being if you’ve done a cash-out refinance, the funds will be returned to you once the process is complete.
A few days down the line, you’ll be locked into your new mortgage, meaning that if something happens and you need to get out, you’ll only get a short period to do so.
You have the right to cancel your application for 3 days after closure, after which there will be no room for excuses.
At times, refinancing your mortgage is one of the best options to make use of the home you’ve bought and gather some additional funds.
It also helps adjust your loan term and possibly even gets you a better interest rate while also saving you money in the long term if things work out in your favor.
In fact, you can even cash in the home’s equity value and use those funds wherever you see fit.