Homeowners refinance their mortgage for a variety of reasons. With a lower interest rate, they may lower their monthly payment. The term of the mortgage could be shortened to payoff the loan faster. Some choose refinancing to cash out equity in their home for debt consolidation or home improvement projects. With interest rates remaining near historic lows, refinancing remains a popular activity to achieve one of these financial goals. Some may find the refinancing process intimidating, especially if they’ve never done it before. To help take the mystery out of the process, let’s take a look at the steps one would go through to refinance their mortgage.
The first step is to discuss with a mortgage consultant your goals for refinancing. If the consultant is with the financial institution that holds your current mortgage, they will be able to access your loan information. If your current mortgage is with a different financial institution, you may want to bring along with you the current balance and monthly payment breakdown (principal, interest, escrow). The consultant will help you determine if it is feasible to achieve your goals, and give you some suggestions as to what course of action to take.
Gather Information For Mortgage Application
Once you have weighed your options and have decided to go forward with refinancing your mortgage, you will be asked to provide some documentation to prove your income and financial assets. Documentation may include the following:
- Most recent W-2s
- Current bank account balances and most recent statement
- Pay stubs from the last 30 days
- Previous year’s tax returns
- Retirement account balances
Pull Credit Report
While you are gathering information needed for the mortgage application, the financial institution will pull your credit report. You may be asked to pay for this upfront, and usually costs around $35. Your credit score will help the mortgage consultant determine what interest rates you are eligible for. The better your credit score, the better your potential interest rate. Your credit history will help the mortgage consultant determine if there are any obvious issues that would signal you would not be approved, such as too much consumer debt.
Banks have rules regarding how much they will borrow to homeowners. This is commonly based on the loan to value ratio. Typically, banks will only refinance a mortgage for 80% of the value of the home. If the loan to value ration exceeds 80%, you may also be required to pay private mortgage insurance (PMI). A home appraiser approved by the bank will schedule a time to come to your home to estimate its value. This appraisal will be used to determine the maximum amount the lender will borrow to you. You may be asked to pay for the appraisal upfront, at a cost of between $450 and $600.
Submit Mortgage Application
Once your credit has been evaluated and your home appraised, you will work with your mortgage consultant to make sure your original course of action is feasible. If you decide to move forward, the consultant will submit a mortgage application using your credit history/score, appraisal, and information you provided to the bank.
If your mortgage refinance application is approved, your mortgage consultant will work with you to schedule a day for loan closing. This usually takes place at a title company. At closing you will sign many documents. The old mortgage will be paid in full, and your new mortgage will be funded.
If you refinanced to “cash out” equity in your home, it may take a few days before your funds are available. There may be a right of refusal period, usually a few days in length in which the borrower can back out of the refinancing. To avoid complications, any cash out funds are held until that period has expired.
Expected Time Frame
Mortgage refinancing is a complex process with many steps. The time from my initial meeting with my mortgage consultant to closing day was about 4 weeks. However, each experience is unique, and the timeline can vary greatly depending upon availability of the mortgage consultant and appraiser.
Mortgage refinancing can be a useful financial tool to save money, consolidate debt, or to use equity in your home to fund home improvement projects. It is a complex and lengthy process that might discourage some homeowners. Having a blueprint removes some of the mystery of the process, allowing homeowners to confidently investigate if refinancing could help them.
How about you, Clever Friends, have you refinanced your mortgage? Did you encounter any additional steps in your experience?
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