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After taking out a loan, it’s easy to fall into a routine of repaying the monthly loan amount without questioning the interest rate or considering other options. Yet, over time, interest rates rise and fall, your credit score change, and in some circumstances, more affordable conditions can emerge. For borrowers with outstanding debt, these changing circumstances are great opportunities to refinance a loan. Loan refinancing, for those unfamiliar with the term, basically describes the process of retiring an outstanding loan by taking on a new loan that features more attractive terms, generally in the form of a lower interest rates. The process of refinancing a loan begins by identifying a more beneficial interest rate than the one you’re paying. For instance, if you currently have an outstanding loan amount of $5000 at an annual rate of 5.50%, you can refinance that $5000 loan at a rate of 4.50% represents immediate savings on monthly payments.
The best way to refinance a mortgage begins by doing a bit of homework on your existing mortgage. Sure, digging into the loan paperwork is no easy task, but you don’t have to be a contract lawyer to uncover the important nuggets. Without knowing the specifics of your loan and its accompanying restrictions or potential penalties, evaluating other options is not advisable. Refinancing can be accomplished by following a few straightforward steps:
Once the applicable costs of refinancing have been assessed, and the new estimated monthly payments established, it is easier to narrow the field of potential lenders even further. After determining the best option, a borrower and lender agree to a rate lock. This locks in the interest rate on a mortgage refinancing loan offer for a specified period between when a lender makes the offer and the loan agreement is signed. Sometimes, there are fees associated with a mortgage rate lock and borrowers can withdraw from the agreement if interest rates go down during the period, but this is not guaranteed. It is important to understand the accompanying provisions of a rate lock before moving forward with it. The duration of mortgage loan refinancing locks commonly last between 10 and 60 days but can be extended in certain circumstances for a fee or a higher interest rate. The goal is for the borrower and lender to close the loan before the expiration of the mortgage lock period. Once the loan agreement is closed, borrowers will be responsible for paying the fees covered in the Loan Estimate and also closing fees. Finally, the original mortgage loan is closed with the newly issued refinancing loan and the accompanying benefits negotiated by the borrower, whether a shorter loan term, better interest rates, or other advantages
Although refinancing a mortgage loan is undoubtedly beneficial for a wide range of borrowers, not all borrowers qualify for refinancing. This specific type of refinancing arrangement is generally only applicable for qualified borrowers with healthy credit scores, strong payment histories, a minimum of 20% equity in their home, and strong income. To understand if you’re qualified for a mortgage refinancing loan, it is important to gather some relevant information before applying.
Obtain a credit report: Thanks to consumer protection laws, consumers are entitled to receive a free copy of their credit report from the three major bureaus (Equifax, TransUnion, and Experian) once annually. Although important for the refinancing application process, it is also valuable to review credit reports for any erroneous entries or errors that might negatively impact the score and ultimately, a lender’s view of a borrower’s creditworthiness.
Compile proof of income: This may include copies of 2-3 months-worth of paystubs from your employer, tax returns from the prior few years, W2 forms and even 1099 forms from the last few years. All these documents will be scrutinized by the lender to assure your employment and income remain stable.
Assemble Statement of Assets: The statement of assets covers all your financial accounts like checking and savings accounts, retirement accounts, investment portfolios, and any other financial or non-financial assets that the borrower currently owns. To produce the necessary information, simply provide account statements or any other documents that support proof of ownership.
Prepare Statement of Outstanding Debts: The statement of outstanding debts is similar to the statement of assets, but instead covers all debts the borrower has on the books. These figures can be compiled directly from a credit report, but it is important to provide all the relevant documentation for these borrowings which detail each of the outstanding financial obligations.
There are still some other, more specific requirements which may vary depending on the type of loan being refinanced. For instance, FHA mortgage loan borrowers may need to meet certain minimum financial requirements, like monthly housing costs not exceeding 31% of the borrower’s total monthly income. Additionally, borrowers must be able to ensure that they can afford all the closing costs.
Generally, adding the closing costs to the desired mortgage refinancing loan amount is detrimental because borrowers will have to pay interest on this amount, raising the costs of a refinancing. It is wise to use all the gathered information from income to creditworthiness to build a comprehensive financial picture and understand if a mortgage refinancing loan is the best choice.
Once all the required paperwork has been compiled for the application process, evaluating and applying for mortgage refinancing loans is much more straightforward and streamlined. The only thing left is to begin the loan application process with your desired lenders.
Refinancing an outstanding mortgage might sound like a universally great idea. Who can argue with more affordability or a more applicable repayment period? However, there are significant costs that accompany any mortgage loan refinancing. It is vital to understand the costs of refinancing a mortgage to ensure it is not only worthwhile, but in the borrower’s best interest.
While difficult to quantify, it goes without saying that the refinancing loan application process in many ways resembles the application for a mortgage itself. It is a time-consuming process that requires a lot of information, research, and thorough analysis. Although the savings can be immense, quantifying them is valuable for understanding if the time and effort involved with filing the application is sensible.
First, just applying for a refinancing loan requires a loan application fee. Though these generally range from $100-300, they should not be ignored because small costs can add up quickly. Arranging all the necessary documentation can also cost money and there are several forms that a lender will need to you to complete to ensure your eligibility, which can also add a few hundred dollars to the process.
There might be a home appraisal fee so that the lender can determine the current value of the property. Importantly, a lender will also probably assess a title search fee that is used to determine whether the borrower actually holds title to the property being refinanced. This is also several hundred dollars. Moreover, there might be home inspection fees, the lender may charge attorney fees for reviewing all the borrower documentation, a fee for surveying the property to establish and confirm its boundaries, and other certifications like flood certification.
Apart from all these fees which can quickly reach thousands of dollars, the mortgage refinancing lender will also charge origination fees at the end of the process that can amount to between 1-3% of the total loan amount. All told, the summation of all these costs may total between 1-5% of the mortgage refinancing loan. While these fees can be rolled into the loan itself and paid down over time, it will ultimately add to interest payments, making it more advisable to pay them separately to save more money.
The prospect of refinancing a mortgage loan is enticing for many reasons, but above all, the possibility of saving money over the life of a loan stands out as an especially attractive feature. However, how much you will save along with the possibility of either shortening or lengthening the duration of your mortgage requires more than simply stepping into your local bank branch. Although your friendly neighborhood banker may be familiar with your financial circumstances, there are now more options than ever when seeking the best company to refinance your mortgage loan.
Before beginning to study the available options, the first step is identifying the goals of any refinancing, whether more affordable monthly payments, reducing interest rates, and lengthening or shortening the loan repayment period, the research phase can commence. For instance, if your goal is to refinance an existing mortgage with a government-backed program, its important to only search for lenders that offer option. A little work and patience will go a long way towards achieving the best refinancing results.
Before and during the application process, it is also important to ensure that you continue making timely payments on your outstanding mortgage while also working to maintain or even improve your credit score, as these will be seriously considered by any refinancing lender. Keeping an eye on your credit report for any erroneous or incorrect entries is vital to ensuring that your credit score reflects your financial stability and repayment abilities. Furthermore, many refinancing options require a minimum credit score of 620, with the best rates and terms reserved for those who maintain scores above 700.
While simple to stroll into the local bank branch might give you some immediate answers as far as what is available, mortgage brokers and non-bank lenders may also offer competitive terms. Having lenders compete for your business is a surefire way to ensure that you can access the very best terms to match your personal financial circumstances. Apart from pitting lenders against one another, its relevant to judge their reputations amongst users. Reading mortgage loan refinancing reviews can help add clarity to the entire process, highlighting the pros and cons of certain lenders, user experiences, and more. Furthermore, there are certain websites that aggregate multiple lenders and their terms to help borrowers research their options more efficiently.
It is important to shop around for the best rates, because despite all mortgage lenders gaining access to the same information about the borrower, the rates and terms can vary widely. Some lenders may offer lower rates but higher fees for refinancing while others may supply options with lower fees and higher interest rates. After applying to 3-5 lenders, comparing all the different offers is valuable for understanding the true costs of refinancing, and which lender offers the most advantageous terms for reaching your already established refinancing goals.
After picking the best company to refinance your mortgage, it is important to lock in the rates accordingly while the lender processes the loan. Because loan processing can take a month or more, it is important to lock the rate to avoid fluctuations before closing. Although these rate locks can be extended, it is an expensive proposition in some cases, so it is worth picking a relevant time frame according to the lender’s processing times for the initial lock. All that’s left is closing. After signing, your mortgage refinancing loan is disbursed and delivers all the necessary benefits needed to reach your chosen refinancing goals.
Even though mortgages are long-term commitments, you may sometimes sign up for terms that are great when you apply, but not so great once you’re in a better financial situation. For instance, you may significantly improve your credit over the first five to ten years of your mortgage, meaning that what was once the best available interest rate for you may now be too high. Similarly, you may be able to cut down on your repayment term with a higher income, so you may want to change both. You may not be able to change your original mortgage agreement, but you can still find better and more favorable terms by refinancing your loan. When you refinance a mortgage, what you’re doing is taking out a loan that will cover your remaining mortgage, but that comes with better interest rates, different repayment terms, or other conditions. This allows you to improve your mortgage repayments and reduce the total sum you pay over the lifetime of your loan (due to lower interest while freeing up your finances somewhat at the same time. Some of the biggest benefits of refinancing your mortgage include:
It’s worth keeping in mind that while refinancing your mortgage comes with several benefits, there are a few aspects you should consider. For instance, you may have to pay your new lender origination, processing, and other fees to change your loan. Additionally, you may have to cover legal costs for documents, forms, filings, as well as submit to credit checks and appraisals that could lower your score or slightly reduce the value of your home if it wasn’t properly or recently valued. There are three main types of refinancing: