Refinancing your home
may seem daunting. Surprisingly, the process is fairly simple, and your
finances can certainly benefit from the few steps it takes. If you’re wondering
what refinancing your home may entail, continue reading below.
Why would I consider refinancing my home?
Refinancing, in plain terms, is obtaining
a new mortgage for your home. There are many reasons why you might
want to refinance. You may have found a lower interest rate, want to lessen
your monthly payment, have plans to use your equity for a home renovation, or simply want to change
mortgage companies.
Where should I start when looking to refinance?
When it comes to refinancing your home,
the research is largely left up to you to find the best interest rate. There
are many resources to help with the process, like a mortgage broker or the many sources available on the
internet. Be sure to look into rates at your local banks and credit unions, as well as
national mortgage lenders. The best rate might not be just outside of your
front door, but you may like the ease of doing business close to home, so those are factors to take
into consideration.
Assess your current financial and credit status beforehand.
Just like when you bought your home, rates for refinancing are mostly
dependent upon your credit score. Do a deep dive into your finances to help decide if now is the best
time to be making hard credit checks. Also remember, refinancing comes with
closing costs that may require you to have that cash on hand. If you don’t have the cash on
hand to put down at closing, some lenders may allow you to
put those costs into your new loan, but remember, doing so will increase your
mortgage amount and monthly payment.
I found a great mortgage rate, what is the next step?
If you found a rate online that seems to fit what you’re looking
for, your next step should be to contact the lender directly for more detailed
information. Rates are dependent on a number of things, like your credit score,
so you will want to go through the process of making sure the rate you think
you can get is what the lender will actually offer you. This will require you
to provide things like pay stubs and bank statements among other personal
documents, as well as a hard credit check.
Are there any downsides to refinancing my home?
For the most part, refinancing your home comes with many benefits. However, if you decide you need to
refinance to cash-out your equity, meaning to borrow the difference of what you
owe and what the lender determines your home is worth, you might end up
restarting your loan in terms of years left to pay.
For example, let’s say your goal of
refinancing is to pay for something like education costs or an upgrade to your home. You determine you would
need to borrow $50,000 cash from equity that you’ve already paid on your
mortgage over the years. You go through the application process and the lender
agrees to refinance your home for what you owed on your previous mortgage, plus
the $50,000 cash you need to borrow. Now, let’s say you had 15 years left on
your previous 30 year loan term. After crunching numbers, based on the amount
of the new mortgage and size of the monthly payment you are comfortable with, you
may actually need to go back to a 30 year loan to pay off your new mortgage
amount, starting your mortgage over and adding 15 years back onto your original
plan.
The pros may outweigh the cons of
refinancing with a higher mortgage payment depending on your situation, but
that is one thing to factor into your decision to refinance.
What are mortgage points?
You may have the option to purchase points on
your new mortgage. To purchase points means to reduce the interest rate on your
loan, ultimately lowering your monthly payment. Points typically cost a fee
of 1 percent of the mortgage amount, (ex: $2,000 for 1 point if your mortgage
is $200,000). By buying 1 point you may cut the interest rate of your loan by
.25 percent or more, depending on the lenders terms.
When considering if you should purchase
points, first determine if you can afford to, but also consider when you will
reach your “break-even point,” meaning how long it will take your monthly
savings of purchasing those points to get back the amount it took to buy them.
If you plan to live in your home for more than a few years, you may benefit
from buying points.
Back to the closing table.
Refinancing your home can take some time, as
did the original purchase of your home. You should expect the process to take
somewhere between 25-45 days or longer to close on your new mortgage. Similar
to when you first bought your home, at closing you should make sure your escrow
account is set up with proper funding if necessary and that all paperwork is
completed correctly. If after closing you feel that you’ve made the wrong
decision in refinancing your home, according to the Consumer Financial Protection Bureau, you
have until midnight on the third day after signing closing documents to
rescind, or cancel, your new mortgage contract.
Double check the protection on your home, too.
Refinancing your home can help your finances, both long and short term,
depending on your overall goals. When going through the refinancing process, it
may be beneficial to also check in on your home insurance coverage. Contact your local
agent by clicking the button below to make sure your coverage is adequate for
your home.
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