Refinancing A Mortgage Step By Step
Ready to tackle the refinance process? Go!
Set your goal. Reduce monthly payments? Shorten the loan term? Get rid of FHA mortgage insurance?
Shop for the best mortgage refinance rate. Keep an eye on fees, too.
Apply for a mortgage with three to five lenders. Submit all applications within a two-week period to minimize the impact on your credit score.
Choose a refinance lender. To pick the best offer, compare the Loan Estimate document each lender provides after you apply. The Loan Estimate will tell you how much cash youll need for closing costs.
Lock your interest rate. When you lock the interest rate, it cant be changed during a specified period. You and the lender will try to close the loan before the rate lock expires.
Close on the loan. This is when youll pay those closing costs that were listed in the Loan Estimate and again in the Closing Disclosure. Closing on a refinance is like closing on a purchase loan, with one main difference: No one hands you the keys to the home at the end.
You Want A Lower Interest Rate
Refinancing for a lower interest rate could not only save you money – it could also help you pay off your home loan sooner. It means your repayments might be lower every month, which means more money in your pocket. Or, if you use some of that saved money to continue making larger repayments, you might pay your mortgage off faster and save on total interest paid.
You hear a lot about interest rates and the RBA in the news, but every lender uses many different measures to set their rates. Thats why its important to speak to a Mobile Lending Manager or Broker to understand what rates you can access.
Why And When You Should Refinance A Home
Before you begin, consider why you want to refinance your home loan. Your goal will guide the mortgage refinancing process from the beginning.
Reduce the monthly payment. When your goal is to pay less every month, you can refinance into a loan with a lower interest rate. Another way to reduce the monthly payment is to extend the loan term say, from 15 years to 30. The drawback to extending the term is that you pay more interest in the long run.
Tap into equity. When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called a cash-out refinance. People often get a cash-out refinance and a lower interest rate at the same time.
Pay off the loan faster. When you refinance from a 30-year mortgage into a 15-year loan, you pay off the loan in half the time. As a result, you pay less interest over the life of the loan. There are pros and cons to a 15-year mortgage. One downside is that the monthly payments usually go up.
Get rid of FHA mortgage insurance. Private mortgage insurance on conventional home loans can be canceled, but the Federal Housing Administration mortgage insurance premium you pay on FHA loans cannot in many cases. The only way to get rid of FHA mortgage insurance premiums is to sell the home or refinance the loan when you have accumulated enough equity. Estimate your home value, then subtract your mortgage balance to calculate your home equity.
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Compare Home Loan Options
Just like when you first apply for a loan, youll need to shop around. Comparing home loan options might seem difficult how can you decipher the jargon? How do you know that the home loan options youre looking at are suitable for expats? Thats why its a good idea to speak to an expert about which home loans they would recommend and whether you meet the eligibility criteria.
Before making your mind up to leave your current lender, its sensible to get in touch with them and see if they can offer you a better deal internally.
How To Apply For A New Home Loan
Your research has hopefully revealed the loan and terms that suit your needs and goals. Now its time to put in your application. There are 3 ways you can apply for a home loan. You can start an application online, go to a mortgage broker, or complete your application by visiting branch lenders.
When you apply, you will need to provide all your information and supporting documents for the lender to decide whether to approve your application.
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Reasons To Refinance Your Mortgage
Though it isn’t right for everyone, there are many great reasons you might consider refinancing an existing mortgage loan. Here are a few:
1. You may be able to reduce your interest rate. The interest rate on your mortgage loan dictates how much your loan will cost you in the end. Even the difference of a single APR point can mean tens of thousands of dollars in savings over the years.
If market interest rates have dropped and/or your credit score has improved enough that you qualify for a notably lower interest rate, consider refinancing. It’s important to do the math here to ensure that your savings will make up for any closing costs on your new loan if you can save 1% or more, it’s typically worthwhile.
There are several online tools that can help you determine what interest rates you could possibly qualify for based on your current situation.
2. You can adjust a monthly payment. Refinancing allows you to change any and all of your home mortgage terms. If you are struggling and need a lower monthly payment, for instance, a refi can extend your loan term and give you a lower monthly payment requirement, even if your interest rate doesn’t improve.
3. You can use it to pull equity out of your home. If your property is worth considerably more than you owe on it, a cash-out refinance allows you to withdraw some of that equity in cash. You can then use that cash to pay off debt, purchase a new property, cover big expenses or just have a cash safety net.
To Consolidate Multiple Mortgages
Heres a classic reason to refinance. Youve got multiple mortgages and want to consolidate them into a single loan.
A refinance is often a great way to accomplish this, especially if you wind up with a lower interest rate to boot.
Many second mortgages have sky-high interest rates or are adjustable , so this can be both a conservative strategy and a money-saving move.
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Will Refinancing My Home Affect My Credit
When a homeowner refinances their mortgage, the lender pulls a hard inquiry and runs a credit report on the borrowers history. This process will lower your credit score but only for a short period of time. As long as you dont open any other credit cards and continue repaying any debts you have, your credit score can recover after a few months.
Should You Refinance Your Mortgage
Understanding the basics will help you make the best decision on whether a refinance makes sense for you, and then move quickly if you decide to refinance. Youll want to not only look at the current interest rates and closing costs, but also think about your personal situation and your financial goals.
For instance, if youre planning to move in a few years, its likely that a refinance wont make sense, since you wont have enough time with the better terms of the new mortgage to offset the closing costs. But if youre staying put in your house for the long haul and can get an interest rate thats significantly lower than your current mortgage , then theres a good chance refinancing will ultimately save you money.
If after using a refinance calculator you find that a refinance makes sense for you, make sure you compare lenders and brokers to find the best mortgage refinance rates, as well as the lowest closing costs. Use an online comparison tool to quickly compare refinance terms across multiple lenders.
Once you decide that refinancing is the best move for you, knowing how to refinance your mortgage can make the process seem more straightforward, and youll be on your way to saving money and hitting your personal financial goals.
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Break Your Existing Mortgage Contract Early
You would consider breaking your mortgage early if you wanted to obtain a lower interest rate or access equity from your home. In this case, you eliminate your existing mortgage and take on a brand new one with any lender. Breaking your mortgage will incur a pre-payment penalty from your bank, which is normally equal to around three months worth of interest charges. If you can justify the cost of the pre-payment penalty with your new mortgage rate, then breaking your mortgage can still be worth it.
What Is Mortgage Refinancing
Refinancing a mortgage means you get a new home loan to replace your existing one. If you can refinance into a loan that has a lower interest rate than youre currently paying, you could save money on your monthly payment and interest you pay over the term of the loan. You might also be able to take advantage of a cash-out refinance, which allows you to tap into your home equity essentially as a lower-interest loan.
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Add A Home Equity Line Of Credit
A home equity line of credit gives you access to the equity in your home, at your own discretion. A HELOC works a lot like a credit card account, but because itâs a secured loan the interest rates are much lower. If you do take money from it, youâll be responsible for monthly interest-only payments on the outstanding balance. You can access a home equity line of credit through your existing lender and a small subset of other lenders.
How To Refinance A Mortgage
Refinancing is fairly simple at least in theory. It means taking out a new loan to pay off your current mortgage, either with your current lender or a new one. Most homeowners refinance to take advantage of low mortgage rates, but sometimes its about changing the loan terms, getting rid of mortgage insurance, or freeing up the equity in a home to use for other purposes such as debt payoff or paying educational costs.
Average mortgage refinance rates have risen sharply from the historic lows of 2020 and 2021, but you may still be able to get an advantageous rate by shopping around with multiple lenders. Some homeowners may also qualify for better interest rates than when they first took out their mortgage if their credit score has improved due to consistent payment history. However, qualification happens on a borrower-by-borrower basis and every lender has different requirements.
Heres an overview of the mortgage refinancing process and the steps you should follow for a successful refi:
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Shop Multiple Mortgage Lenders
Getting quotes from at least three mortgage lenders can save you thousands. Once youve chosen a lender, discuss when its best to lock in your rate so you wont have to worry about rates climbing before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether theyll be due upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
Pay Off Your Home Faster If You Havent Met Other Financial Goals
Refinancing into a shorter-term loan solely to pay off your loan faster can short-change you on other financial goals. More of your money will be tied up in your house that could be put toward increasing your retirement account contributions, college fund savings, paying down debt or making investments with higher returns.
After youve checked off those boxes and if the spread between your current interest rate and a shorter-term refinance rate isnt that large, consider knocking down your mortgage debt another way, recommends Johnson, the Mr. Cooper lending executive.
You can always pay more principal on your existing mortgage to pay it off in 15 years while giving yourself the option of making smaller payments if you are faced with financial hardship , Johnson says.
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What It Means To Refinance Your Mortgage
Refinancing your mortgage basically means that you are trading in your old mortgage for a new one, and possibly a new balance .
When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one this is the reason for the term refinancing.
Most borrowers choose to refinance so they can lower their interest and shorten their payment term, or to take advantage of turning some of the equity they have earned on their home into cash.
There are two main types of refinancing: rate and term refinance and cash-out refinance.
Rate and Term RefinanceIn a rate and term refinance, you would typically be getting a new mortgage with a smaller interest rate, as well as possibly a shorter payment term .
With the recent record-low interest rates, refinancing your 30 year mortgage into a 15 year mortgage may end up getting you similar monthly payments as your original loan. This is because of the lower amount of interest you would be paying on your new mortgage, even though 15 year mortgage payments are usually higher than the 30 year loans.
The Truth about Mortgage states that it’s important to be sure you find your break-even point before deciding to refinance your current mortgage rate. This is essentially when the refinancing costs are recouped via the lower monthly mortgage payment .
What Should I Watch Out For
- High closing costs. You could end up paying between 2% and 6% of your total mortgage to cover your closing costs, which has the potential to eat into your savings.
- Other fees. Many lenders charge additional fees such as application, appraisal and legal fees which can make your overall bill more expensive.
- Increased monthly payments. You could end up with higher monthly payments if you go with a shorter term even though youll pay your loan off faster.
- Not suitable for short-term mortgages. Refinancing may not make financial sense for you if your mortgage is small or youre planning to sell your property soon.
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Homeowners: Leverage Your Home Equity Today
Our rate table lists current home equity offers in your area, which you can use to find a local lender or compare against other loan options. From the select box you can choose between HELOCs and home equity loans of a 5, 10, 15, 20 or 30 year duration.
Consumers who need a small sum of cash for a short period of time may want to consider either credit cards or taking out an unsecured personal loan, though these typically charge significantly higher interest rates than loans secured by appreciating assets like second mortgages.
Keep Tabs On Your Loan
Store copies of your closing paperwork in a safe location and set up automatic payments to make sure you stay current on your mortgage. Some banks will also give you a lower rate if you sign up for autopay.
What to consider: Your lender or servicer might resell your loan on the secondary market either immediately after closing or years later. That means youll owe mortgage payments to a different company, so keep an eye out for mail notifying you of any such changes.
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Locking In Your Interest Rate
After you get approved, you may be given the option to lock your interest rate, so it doesnt change before the loan closes.
Rate locks last anywhere from 15 to 60 days. The rate lock period depends on a few factors like your location, loan type and lender. You may also get a better rate by opting to lock for a shorter period of time because the lender doesnt have to hedge against the market for as long. Be warned, though: If your loan doesnt close before the lock period ends, you may be required to extend the rate lock, which may cost money.
You might also be given the option to float your rate, which means not locking it before proceeding with the loan. This feature may allow you to get a lower rate, but it also puts you at risk of getting a higher one. In some cases, you might be able to get the best of both worlds with a float-down option, but if youre happy with rates at the time youre applying, then its generally a good idea to go ahead and lock your rate.
Is This The Right Time To Refinance My Mortgage
There are many benefits to refinancing your mortgage. However, its important to weigh the pros and cons to ensure its the right time for you to do so. With inflation and mortgage rates rising, be sure to look at your existing contract and assess whether or not refinancing will cost you or save you money in the long run.
As a mortgage broker and financial advisor, I can offer expert advice to help you make this major decision and help you to find the best solution for your unique situation. Below is an outline of my ultimate guide to deciding if the timing is right to refinance your mortgage.
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