Things to Know Before Refinancing Your Home

Learn All About the Process and Benefits Of
Refinancing Your Home With Our Tips Below

Although
refinancing your home may seem like a daunting task, the process
can be fairly simple. The benefits of refinancing your home will vary from
borrower to borrower, but most often will result in lower monthly payments,
better mortgage rates, and shortened terms. If you’re
wondering what refinancing your home may entail, continue reading to
learn more.

Why Would
I Consider Refinancing My Home?

You
might be asking yourself what refinancing your home actually means. The simple answer is that
you are essentially trading in your old mortgage for a new one. When you
refinance your mortgage, your bank or lender pays off your old mortgage with
the new one; this is where the term “refinancing” comes from. There are many
reasons why you might want to refinance. You may have found a company that
offers a lower interest rate. You may want to lower your monthly payment or have
plans to use your equity for a home renovation. You may simply want to change
mortgage companies.

Where Should
I Start When Looking to Refinance?

When
it comes to finding a company to refinance with, preliminary research is often
left to the borrower. However, there are many resources available to help with
the process. For example, you might look to a mortgage broker or the internet for advice. It’s
important to look into the rates offered by your local banks and credit unions, as well as
national mortgage lenders. This will give you a good idea of what options may
be available to you.

Interest rates
for refinancing are highly dependent upon your credit score. You will want to
complete a thorough review of your finances before reaching out to a lender to
decide if now is the best time to be making hard credit checks. It’s also important
to remember that refinancing often comes with closing costs that may require
you to have that cash on hand. If you don’t have the funds
available to put down at closing, some lenders may allow
you to roll those costs into your new loan, but doing so will increase your
mortgage amount and monthly payment.

I Found A
Great Mortgage Rate, What Is the Next Step?

Once you’ve
found a rate online or through your broker that fits
your criteria, your next step will be to contact the lender directly for more
detailed information. Interest rates are dependent on a number of things, including
your credit score, so you will want to go through  the process of “pre-approval” to make sure you
are actually able to get the rate you were hoping for. This will require you to
provide documentation such as pay stubs, bank statements and other personal
documents, along with a hard credit check.

What Are the
Cons of Refinancing My Home?

If you
are in a situation where you are refinancing to “cash-out your equity” or borrow
the difference of what you owe and what the lender determines your home is
worth, you may end up restarting on the number of years it will take you to
repay your loan. For example, let’s say your goal of refinancing is to pay for
something like education costs or an upgrade to your home. You determine you
would need to borrow $50,000 cash from equity that you’ve already paid on your
mortgage over the years. You go through the application process and the lender
agrees to refinance your home for what you owed on your previous mortgage;
plus, the $50,000 cash you need to borrow. Now, let’s say you had 15 years left
on your previous 30-year loan term. After crunching numbers, based on the
amount of the new mortgage and size of the monthly payment you are comfortable with, you may
actually need to go back to a 30 year loan to pay off your new mortgage amount,
starting your mortgage over and adding 15 years back onto your original plan. While
the pros may outweigh the cons of refinancing with a higher mortgage payment depending
on your situation, that is one thing to factor into your decision to refinance.

What Are Mortgage
Points?

You may
have the option to purchase points on your new mortgage. To purchase points
means to reduce the interest rate on your loan, ultimately lowering your monthly payment.  Points typically cost a fee of 1 percent of
the mortgage amount, (ex: $2,000 for 1 point if your mortgage is $200,000). By
buying 1 point you may cut the interest rate of your loan by .25 percent or
more, depending on the lenders terms.

When
considering if you should purchase points, you’ll first want to determine if
you can afford to. You will also want to consider when you will reach your
“break-even point,” meaning how long it will take your monthly savings of
purchasing those points to get back the amount it took to buy them. If you plan
to live in your home for more than a few years, you may benefit from buying
points.

Back to The
Closing Table.

Refinancing
your home can be time-consuming. You can expect the process to take somewhere
between 25-45 days or longer to close on your new mortgage. Like when you first
bought your home, at closing you should make sure your escrow account is set up
with proper funding if necessary and that all paperwork is completed correctly.
It’s important to know that if after closing you feel that you’ve made the
wrong decision in refinancing your home, according to the Consumer Financial
Protection Bureau,
you have until midnight on the third day after signing closing documents to
rescind, or cancel, your new mortgage contract.

Should I
Update My Home Insurance?

Typically,
your new mortgage lender will update your insurance company if you are
including the price of the insurance in your new mortgage, although it never
hurts to follow up and make sure that changes have been made accordingly. It’s
also important to contact your insurance agent and ensure the coverage you have
is adequate for your home. For more information or to speak to one of
our trusted agents, check out the link below!