Mortgage Refinancing: The BasicsPerhaps the best news any homeowner can get when it comes to a refi is that it’s not likely to be nearly as difficult as getting the original loan was. Breathe a big sigh of relief if you need to; this is the time for it.
For many homeowners, refinancing happens for a few specific reasons: reducing mortgage interest, dropping mortgage insurance, or cashing out for a remodeling expense. When rates are low and values are high, a refinance can provide a double whammy financially. Dropping any mortgage insurance you’re currently on the hook for can make a big dent in your house payment, especially if waiting for it to fall off naturally would take several more years. And, of course, a lower interest rate also means you’re paying less money towards interest over time. Combine the two and it can mean big savings on a home you plan to hold over the longer term. Remodeling is a valid and effective way of adding value, as well, which has a whole lot of other benefits that come with it. In short, there are tons of ways a refi can be helpful to your financial welfare.
The Refinance ProcessMuch like when you got your initial loan, your mortgage banker or broker will examine your financial history and your longer term prospects, which includes your work history, to ensure you’re financially stable. Your debt to income ratio will be reexamined as well. Although these are closely scrutinized, many banks will grant a bit more wiggle room than they did for initial mortgages, especially for homeowners who have a lot of equity already established.
Once approved for your loan, you’ll choose when to lock in your rate. Because interest rates can vary from day to day, it’s important to pay close attention to both the current rate being offered and your lender’s advice in the matter. If they have noticed rates are going up, locking right away makes a lot of sense, but if you’re the gambling sort and rates are trending down, you may want to float your rate a few days to see if you can do any better. Remember, though, this is a bet that you’re taking that the rate will drop, and it won’t always pay off.
Documents You’ll NeedJust like with the initial mortgage, you’ll need to prove you are who you say you are and that you have the income you claim, among other things. Your banker will almost certainly ask for the following types of paperwork:
Once your lender has reviewed your paperwork and determined they’re willing to refinance your loan, they’ll order an appraisal of your home. Typically, an inspection won’t be needed, unlike with a purchase. In many cases, a drive-by appraisal will be adequate, especially if it’s very clear at a glance that you’ve maintained the property.
Closing the LoanWith all your paperwork in hand and your appraisal completed, your lender will be ready to send you and your loan to closing. Since there’s not a seller involved, you will be going to closing at a time that’s convenient for you, and it’ll be a very quick process. Make sure to double-check the terms of the loan to ensure you’re agreeing to the mortgage you believed you were signing up for. If you have any questions, your lender will be more than happy to clarify, but ask them before you sign the dotted line.
Following your closing day, you have a special period to change your mind and revoke the loan entirely. Thanks to your right of rescission, you can cancel the loan with no penalties and no modification to your previous mortgage within three days of closing. So, if you wake up the next day with cold feet, it’s not too late to turn back time!