If you’re like most people, you can’t get too far on the internet or social media without seeing ads or messages touting record-low mortgage rates. The rates are historically low for both new mortgages and refinancing. If you currently have a mortgage, you may want to consider refinancing to get a lower rate, change the terms or type of your loan, or even cash out your home equity. Want to learn more about a mortgage refinance and whether it’s right for you? Read on.
What Is A Mortgage Refinance?
In simple terms, a mortgage refinance is when you take out a new mortgage to replace the current one. Usually, most people want to refinance so they can take advantage of a lower interest rate.
If overall mortgage rates have gone down or your credit has improved, you may wish to refinance so you can get a lower interest rate. Lowering your interest rate could save you a great deal of money, both on your monthly mortgage payment and the long-term cost of your loan.
There are other reasons why you may want to refinance as well. If you have a great deal of equity in your home, you could refinance and take out that equity as cash to pay off other debt, pay for medical or other unexpected expenses, or pay for home improvement projects.
You could also refinance to change to a different loan type. If you have an adjustable-rate mortgage (ARM), for example, you may want to refinance to a conventional mortgage before your rate adjusts. If you have a 30-year mortgage, you could also refinance and take out a 15-year mortgage which will usually increase your monthly payment but will save you a lot of money in interest over the life of the loan.
How Does it Work?
If you are thinking of refinancing your mortgage, the first thing you should do is speak with a lender or mortgage broker. They can advise you if you should explore the refinancing process, what options there are, and what you should consider.
To get the best interest rates and loan terms, you will need to have good credit as well as an acceptable debt-to-income (DTI) ratio. If your DTI is too high, you may not be able to qualify for the mortgage as you won’t have enough income to cover the new payment.
When you take out a new mortgage, your mortgage lender (assuming it is different than your previous lender) will pay off your old mortgage and you will then make your payments to the new lender. If you are refinancing with the same lender, the process is similar, except that they are basically just paying off your old mortgage, closing the account, and opening a new mortgage account for you.
The Refinancing Process
Like the process of getting your initial mortgage, the refinance process will require you to gather financial documents to provide to your lender, including:
- Bank statements
- Pay stubs
- Tax returns
- Mortgage statement from your current mortgage lender
- Your homeowner’s insurance information
- Retirement account statements
Once you apply for the new mortgage, the lender will pull your credit report and credit scores. They may ask for additional financial information, such as documentation of a closed account, statements from lenders, or proof of payment amounts.
While the underwriter is working on your new mortgage, your broker will also be in contact with you about locking in your interest rates. Interest rates change daily, and sometimes they even change multiple times a day.
You will need to determine when to lock in your rate, which remains in effect for a certain period of time (usually 30-60 days). If the mortgage doesn’t close within that period, you may have to pay a fee to extend your rate lock.
Once you lock in your rate and your loan is cleared to close, you’ll have a closing where you sign new loan documents. Once these are signed and the loan is closed, your old mortgage will be paid off. If you did a cash-out refinance, you will receive your funds within a certain amount of time (this depends on your lender) and then your new payment will usually be due on the first of the next month.
Should You Refinance?
The question of whether you should refinance your mortgage depends on many factors. If you are simply looking for a lower interest rate so you can lower your monthly payments, you’ll need to see how much lower your rate will be to determine if it is worth it.
It’s not enough to just look at the current payment vs. the new payment though. Because you are taking out a new loan, you’ll be paying for your house for longer.
For example, say you’ve been paying on your 30-year mortgage for 6 years. You have 24 years left. However, if you take out a new 30-year mortgage, you just added those 6 years back on.
Even if your payment is lower each month, you’ll have to see how much you will save over the life of the loan. If you aren’t going to be in the house for 30 years and you really need a lower payment, then refinancing may be a good decision, especially if you can roll any closing costs into the cost of the loan.
Refinancing is also a great option to fund home improvement projects. By cashing out the equity in your home, you are getting funds for large-scale projects at a much lower cost than taking out a personal loan or other financing option.
Ready to Refinance?
While the mortgage process may seem confusing to you, refinancing is a bit of a simpler transaction and usually takes less time. It’s a smart way to save money, get preferable loan terms, or fund large expenses, such as home improvement projects.
If you’re ready to learn more about a mortgage refinance and how it might benefit you, contact us at the Lindley Group to learn about what refinancing options there are available to you.