Things to Know Before Refinancing Your Home

Learn All About the Process and Benefits Of Refinancing Your Home With Our Tips Below

 

Although refinancing your home may seem like a daunting task, the process can be fairly simple. The benefits of refinancing your home will vary from borrower to borrower, but most often will result in lower monthly payments, better mortgage rates, and shortened terms. If you’re wondering what refinancing your home may entail, continue reading to learn more.

 

Why Would I Consider Refinancing My Home?

You might be asking yourself what refinancing your home actually means. The simple answer is that you are essentially trading in your old mortgage for a new one. When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one; this is where the term “refinancing” comes from. There are many reasons why you might want to refinance. You may have found a company that offers a lower interest rate. You may want to lower your monthly payment or have plans to use your equity for a home renovation. You may simply want to change mortgage companies.

 

Where Should I Start When Looking to Refinance?

When it comes to finding a company to refinance with, preliminary research is often left to the borrower. However, there are many resources available to help with the process. For example, you might look to a mortgage broker or the internet for advice. It’s important to look into the rates offered by your local banks and credit unions, as well as national mortgage lenders. This will give you a good idea of what options may be available to you.

 

Interest rates for refinancing are highly dependent upon your credit score. You will want to complete a thorough review of your finances before reaching out to a lender to decide if now is the best time to be making hard credit checks. It’s also important to remember that refinancing often comes with closing costs that may require you to have that cash on hand. If you don’t have the funds available to put down at closing, some lenders may allow you to roll those costs into your new loan, but doing so will increase your mortgage amount and monthly payment.

 

I Found A Great Mortgage Rate, What Is the Next Step?

Once you’ve found a rate online or through your broker that fits your criteria, your next step will be to contact the lender directly for more detailed information. Interest rates are dependent on a number of things, including your credit score, so you will want to go through  the process of “pre-approval” to make sure you are actually able to get the rate you were hoping for. This will require you to provide documentation such as pay stubs, bank statements and other personal documents, along with a hard credit check.

 

What Are the Cons of Refinancing My Home?

If you are in a situation where you are refinancing to “cash-out your equity” or borrow the difference of what you owe and what the lender determines your home is worth, you may end up restarting on the number of years it will take you to repay your loan. 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. While the pros may outweigh the cons of refinancing with a higher mortgage payment depending on your situation, 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, you’ll first want to determine if you can afford to. You will also want to 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 be time-consuming. You can expect the process to take somewhere between 25-45 days or longer to close on your new mortgage. Like 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. It’s important to know that 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.

 

Should I Update My Home Insurance?

Typically, your new mortgage lender will update your insurance company if you are including the price of the insurance in your new mortgage, although it never hurts to follow up and make sure that changes have been made accordingly. It’s also important to contact your insurance agent and ensure the coverage you have is adequate for your home. For more information or to speak to one of our trusted agents, check out the link below!