With refinance rates still relatively low, now might be a good time to refinance your home. It's possible to save hundreds of dollars a month with a refinance, improving your cash flow and potentially saving you tens of thousands of dollars over the course of the loan's term.
The good news is that it is easier to refinance your home than it is to buy a home. While some of the same processes apply to buying and to refinancing, there are some aspects of refinancing that are easier. Here's what you need to know:
What is a Refinance?
Refinancing consists of getting a new loan to replace your old mortgage. One of the biggest reasons to refinance is to take advantage of a lower interest rate. One rule of thumb is to consider refinancing if you can get a loan with a rate that is at least one percentage point lower than your current rate.
Many homeowners choose to refinance for the balance remaining on the loan. If you originally borrowed $200,000, and now you owe $150,000, you would refinance that remaining $150,000 at the lower interest rate. You can choose how long of a term to refinance to as well. If you have 25 years remaining on your loan, you can refinance your home for the remaining time period, or you can choose to refinance to a 30-year loan. The longer the term, the greater your monthly cash flow will be. However, you will save less in terms of overall cost.
Prepare to Refinance Your Home
Because refinancing involves a new loan, your lender will look at your financial situation and determine whether or not it makes sense to move forward. Some of the factors that are considered during a refinance include:
- Monthly income and its consistency: You might be asked for pay stubs, bank statements and tax returns to establish that you can handle your new loan payments.
- Credit situation: As with your original mortgage loan, credit is a major factor when you refinance. You won't qualify for the best rates if your credit is poor. Check your credit ahead of time so that you can see where you stand, and possibly take steps to improve your score before you apply to refinance.
- Expenses and other debt payments: Your bank statements provide more than a clue about your income. They also indicate your monthly expenses, including how payments on other debts impact your financial picture. Before approving your refinancing application, the lender will determine whether or not your other debts could interfere with repayment. Consider working to reduce your debt levels before applying to refinance.
- Fair market value of your home: In many cases, lenders require appraisals of the interior and exterior of your home before approving a refinance. If your home has dropped significantly in value, it might be difficult to refinance if the home is worth less than you owe. Most low-cost refinances require that you owe 80 percent or less of the home's fair market value. If you owe $150,000 and want to refinance that amount, your home should be worth at least $187,500.
You will also need to provide identifying information, including your Social Security number and a copy of your driver's license or other government-issued identification. Thanks to technology, it's usually possible to share this documentation electronically, so you can use services like LendingTree to find the best terms from lenders all over the country.
Closing Your Refinance Loan
Because you are replacing your old mortgage with a new mortgage, the time frame when you refinance your home is similar to a purchase transaction. The entire process can take between two and eight weeks, depending on how soon you provide documentation, the backlog of applications received by the lender and how long it takes to complete an appraisal. Other items that are taken care of during this period include verification of your insurance, title, surveys and the process of locking in your interest rate. Make sure you continue making regular payments on your original mortgage during this time.
In many cases, depending on state requirements and other regulations, the actual closing requires a notary. If you refinance locally, the closing can be accomplished fairly easily. If you are using a company found via the Internet, be prepared to bring your paperwork to a notary for certification. Send the documents back to the lender via courier or certified mail.
Once everything is received, the new lender will pay off your old loan and you can start saving money on your home payments.