Refinancing your home has a lot in common with buying a home for the first time. At Addition Financial, we get a lot of questions about how to refinance mortgages.
Because this is a common issue for our members, we thought we’d put together a post that explains the nine steps to refinance your home loan.
#1: Determine Your Refinancing Goal
The first step is to decide what your goal in refinancing is. Some examples might include:
- Lowering your monthly payments
- Reducing your total interest payment
- Use the equity in your home to make home repairs or pay debt
- Reducing the term of the mortgage so you pay off your loan more quickly
It’s important to know what you need before you start shopping for refinancing options. A refinancing option that’s ideal if you want to lower your monthly payments may not work if you need cash to do home improvements.
#2: Check Your Credit Score
The next step is to check your credit score and report any errors. You’re entitled to get free credit reports from the three major credit bureaus (Experian, Equifax and TransUnion) once per year.
Checking your score will give you an opportunity to correct errors and pay outstanding debts before you approach lenders – and in turn, it will increase the chances that you’ll be able to get approved for your refinancing.
#3: Check Your Home’s Current Market Value
What is your home worth in the current housing market? Here are several things you can do to find out:
- Check your neighborhood and review recent sales of homes like yours on Realtor.com.
- Use Zillow’s Zestimate tool or seek out other online home valuation resources.
- If you used an agent to buy your home, you might ask them to do a market valuation for you.
Knowing your home’s value will give you an idea of how large a mortgage or home equity line of credit you can get.
#4: Shop for Your Best Mortgage Rate
Approach lenders, including banks and credit unions like Addition Financial, to get their rates and compare them. Ideally, you should do all your shopping within the same two-week period to minimize the impact on your credit score.
Using an online mortgage calculator can help you get a clear picture of your interest rates, monthly payments and other associated expenses.
#5: Calculate Your Total Costs
You might be focused on your interest rates, but refinancing your home can trigger other fees, including:
- Application fees
- Appraisal fee
- Origination fees
- Document processing fee
- Underwriting fee
- Credit report charge
- Title search & insurance
- Recording fees
- Tax transfer fees
In other words, you’ll have to deal with most of the fees that you paid on your first mortgage for the second mortgage.
You should also consider how long it will take you to recoup the expenses associated with refinancing. Balance that against the length of time of your current mortgage to decide whether the expenses are worthwhile.
A word of caution here. Be careful with any lender who promises a no-cost refinance. There’s no such thing – and it means they’ll pass the costs on to you in hidden ways, most likely as a higher interest rate.
#6: Gather the Necessary Paperwork
Gather all paperwork required for the loan process. This includes:
- Pay stubs
- Bank statements
- Tax returns
- Your original mortgage
- Any other outstanding loans or debts
Any records you have online should be printed so you can present them to your loan officer for review.
#7: Lock Your Interest Rate
Before your closing, you may want to lock your mortgage refinance rate. The key here, as we mentioned earlier, is avoiding surprises at the closing. Some lenders charge a fee to lock in your interest rate when you apply, but over time it will probably pay off in lower interest costs.
Of course, there’s a chance that you may lock in at a higher rate than would be available on your closing date. But, seeing that mortgage interest rates are low in 2019, it’s unlikely there’ll be a big difference.
#8: Communicate with Your Loan Officer
Once you’ve submitted your paperwork, you’ll need to wait for your loan to be approved. During this time, make sure you’re available to answer questions.
It’s also a good idea to check in with your loan officer periodically. That way, if they need additional information from you, you’ll be able to provide it quickly and expedite the approval process.
#9: Have Cash on Hand for Closing Costs
At the closing, you’ll need to pay property taxes, insurance and other expenses related to the loan. You need to make sure you have cash on hand to cover them.
The fees should all be listed on your loan agreement. In some cases, you may be able to roll them into your loan – but that will increase your principal and you’ll be paying them off for years. In general, it’s best to pay them at the time of the closing.
One of the benefits of preparing to refinance your mortgage is that you’ve been down this road before. Just follow the nine simple steps outlined here and you’re sure to have a smooth experience.
To learn more about Addition Financial’s flexible mortgage and refinancing options, please click here.