Things to Know Before Refinancing Your Home

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.