What Mortgage Refinancing is and how it Works
One of the ways to invest your money is to own a home. Little wonder the real estate industry is growing in leaps and bounds. Apart from owning a home, another way to reap the investment benefits of your home is to refinance.
There are many reasons why you might choose to refinance which include shortening an existing loan term, reducing your payment, and for most folks, a chance to get some money. Whichever reason yours might be, having a good understanding of the entire process is crucial.
Therefore, in this article, we will discuss what mortgage refinancing is all about and how it works. We are certain that at the end of this read, you will be well informed about this process.
What Mortgage Refinancing is
To refinance your home simply means that you are trading your present mortgage for another one. In most cases, the principal, as well as the interest rate, is different. The lender you have chosen will then pay off the old mortgage using the newer one. In the end, you only have to deal with one house loan and one payment.
As we said earlier, people refinance for various reasons. The most common reason most folks do it is to cash out using the equity of their home. Another reason is to get an interest rate that is better than the original mortgage.
Folks who are planning a divorce can also use refinancing to remove their spouse from the mortgage. In the same way, it can be used to add an individual to the home loan.
How Mortgage Refinancing Works
Interestingly the steps involved in this financial process aren’t as complicated as most folks think. The process of buying a home is more complicated compared to refinancing. Surprised, right? But that’s how simple the whole thing is.
The time it will take to finish the process is just about 30 to 45 days. Hence, you don’t have to wait a long time before the deal is done.
To give you further understanding of the whole process, let’s look at the steps involved:
To apply for a refinance, it is necessary to know the various types that are available to you. You can then select an option that is most suitable for you. We recommend you visit https://www.refinansiere.net/ to learn more about the types of home refinance available options.
For any of the refinance options, when your application is submitted, the lender will request the information that you provided initially when the home was purchased. After that, they will examine your income, credit score, debt, and assets. This will enable them to decide if you are qualified for the loan.
Documents you might be required to provide include:
- 2 most current pay stubs
- 2 most current W-2s
- 2 most current bank statements
If you are married, you will be asked to provide the documents of your spouse. Also, if you are self-employed, you will need to provide more extensive income documentation. We equally advise that you have your most recent tax returns at hand.
One thing you need to know about refinancing is that you don’t have to transact with your current mortgage lender. You are permitted to work with another lender. Many folks use this as a means of getting a better loan deal with another lender.
When you choose to work with another lender, the new lender will pay off the existing mortgage. This will effectively end the relationship you had with the previous lender.
As you prepare to apply, ensure that you contact different mortgagees. This will allow you to find which deal and rates are best for you.
2. Locking the Interest Rate
Once the loan is approved, you might be presented the opportunity to lock the interest rate. This is necessary because the rates might change before you finally close the loan. Hence, it is something you should do.
15 to 60 days serves as the period for rate locks. This period is dependent on certain factors such as the loan type, the mortgagee, and your location. In the event you can’t close the loan before the rate lock expires, you will be asked to extend it. In this case, you will be charged a fee for this service.
Apart from locking the rate, you might be presented with the opportunity of floating the rate. In other words, you don’t lock the rate. The advantage is that you might get a lower rate. The downside is that you are at the risk of incurring a higher rate.
Interestingly, the option to float-down is also available sometimes. This allows you to enjoy both options discussed above.
Your mortgagee will start the process of underwriting after your application has been submitted. During this period, the financial information which you submitted will be verified to ensure its accuracy.
The property details will also be verified. An appraisal of the house will also be conducted to determine its worth. This appraisal is important as it will determine the loan options that you can take.
If you are opting for the cash-out refinance, the amount you will get is determined by the property value. Also, if you are seeking to reduce the payment for your home loan, the property’s value will once again determine if the home equity is sufficient for that.
4. Home Appraisal
An appraisal of your home must be conducted before refinancing the same way it is conducted before you bought the house. The appraisal will be ordered by your lender. Once the order is made, the appraiser will come to your home and carry out the appraisal. You will be told the worth of your property once they are done.
There are certain things you can do to enhance the value of your home before the appraisal. You need to ensure that your home is looking its best. Clean the home and the environment and carry out any necessary minor repairs.
Another thing you can do is to list the upgrades that you made in your home since you came into possession of it. Such information will significantly increase the value.
When the value of your home is higher or equal to the refinance loan amount, then the underwriting process can be said to be complete. At this point, your mortgagee will reach out to you and present you with the loan’s closing details.
5. Closing the Loan
As soon as the above steps are complete, the loan can then be closed. Some days before the closing, a Closing Disclosure document will be sent to you from your lender. In this document, all the details about the loan will be seen.
The duration for refinancing closing is also faster compared to closing a property purchase. The people involved in the closing include the individuals on the title and loan and an individual who represents the mortgagee.
At the closing, you can reexamine the loan details before signing the documents. Once the signing is complete, any cost that is rolled into the mortgage loan will be paid at this point. Also, if you are to receive any payment from the lender, you will get them once the closing is over.
After the closing, the loan will be locked in after some days. Hence, if you feel you want to change some details or want to opt-out completely, you can do so. All you need to do is leverage on what is called the right of recession. This should be done within the grace period of 3 days.
The article above has discussed in detail what mortgage refinancing is and how it works.