As one of the biggest investments in your life, you likely will have a lot of money tied up into your primary residence. As equity builds, you get one bit closer to complete ownership. However, life can sometimes throw challenges or even opportunities your way that requires funds.
The good news is, that you can refinance your mortgage in order to borrow from the equity, to lower payments, or to shorten the term of your loan to be better financially prepared for whatever heads your way that calls for cash fast. Let’s discuss how refinancing a mortgage loan works and what you should expect during the process.
Mortgage Refinancing: What It Is and Why Owners Do It
Refinancing a mortgage loan essentially is a process that secures an entirely new loan for your home. When refinancing, the new loan pays off the previous one, leaving you with one solitary loan and one payment monthly. While many refinance to lock in lower rates or cash in equity, some individuals in divorce proceedings do so to remove one party from the mortgage contract.
How Refinancing Works
The process of refinancing a home mortgage loan is easier than the buying process but entails very similar steps. First you will put in an application, and a loan specialist will evaluate your financial health concerning assets, income, credit score and debts to ensure you qualify for refinancing.
Again, you’ll need to provide recent tax forms, bank statements, pay stubs, and W-2s for verification. Be sure to shop around to compare refinancing rates with various institutions, as you aren’t required to refinance with the same company that you currently hold a loan with.
The Underwriting Process
After submission of the application the underwriting process begins where you lender verifies all of your submitted documents. Once underwriting is complete, a home appraisal will be necessary.
Home Appraisals for Mortgage Refinancing
The lender will order a home appraisal before agreeing to refinance a mortgage loan. The appraiser will give an assessment of value, and this figure is used to determine how much equity you can use for cash or other endeavors. Basically, A cash-out refinance replaces your current mortgage with a new mortgage for more than you owe on your house. When this happens, you receive The difference between the previous mortgage and the new home loan typically as a check or wire transfer. Cash-out refinances are possible when you have accumulated equity in your house.
Securing a Good Interest Rate
If you get a great rate offered to you, take it by locking it in after approval. This means that if rates go up between this time and closing on the refinanced loan, you’ll still get the lower rate. Lock-ins last anywhere from two weeks to up to 6-months. The rates could potentially be lower between now and then, so it’s a bit of a risk either way.
Closing on the Refinance Deal
If the home has a greater value than the loan amount you are trying to refinance, then underwriting is complete and closing on the loan begins. A few days prior to closing, lenders will send you a Closing Disclosure that provides all the relevant details of your offer.
Should You Refinance Your Mortgage?
Before refinancing your home, there are several aspects of the situation to ponder beforehand. First, you want to get apprised of current real estate and financial interest trends to determine if you can score a lower rate with a refinance. Also, you will need to make sure you’re in good financial health at the time. Furthermore, if you need cash, be certain that you plan to put it to good use rather than splurge on non-essentials and investments that are risky.
When taken on at the right time, mortgage loan refinancing can be an excellent financial tool that homeowners can turn to. If you are ready to adjust the terms of your loan or change types of loans, you might save some hard-earned cash in the long run. Be sure to talk to a real estate professional and a financial advisor before getting serious about refinancing efforts.
