How to refinance a home loan

How to refinance a home loan is quite credible when you have a better chance of a reduced rate. You must be aware that there are advantages to refinancing your mortgage as well as disadvantages. Think about balancing the pros and cons with your present credit score and other factors to determine if refinancing is the best course of action for you right now.

Assume you are having trouble making your mortgage payments on time, that your credit score has significantly increased, or that interest rates have decreased since you last closed your deal.

At this time, refinancing to a fixed rate, a shorter or longer term, or even a cheaper rate will be beneficial for you. In this post, we’ll focus on the procedures for refinancing a mortgage.

Nevertheless, before diving into the focal point of this article, there is a need to state a clear definition and the various types of refinances.

Table of Contents

What does refinancing a home loan mean?

How to refinance a home loan entails taking out a new loan to settle an existing debt. It needs you to go through the identical method you did to obtain your present loan to sign up for a new debt. Your new lender pays off the old debt once your new mortgage has been approved and given access, leaving you with just one new lender. If your present home’s worth allows you to borrow that much, you might combine any mortgage loans you may have into one.

Types of refinancing

There are 4 types of refinancing we will be discussing here they are:

Consolidation Refinance: This is a type of refinance that allows you to combine several credits into one. Suppose you have more than two credits and meeting up monthly targets is challenging, using the consolidation refinance helps you sum them up into one credit with a reduced rate on the principal.

Rate and Term Refinance: with rate and term refinance, you can refinance to get lower rates when you have a higher credit score. It also, allows you to adjust, lengthen or shorten your loan term based on your current financial status. With rate and term refinance, you can’t get cash out from your mortgage, but you can pay your old debt from the new loan with a more favorable interest rate and terms.

Cash-in Refinance: By doing a cash-in refinance, you can pay some amount of money toward your home equity to reduce the loan amount you are owed. When an individual does cash-in refinance he can reduce the amount of money he will borrow from the new loan by paying in some thousands of dollars to subsidize an old loan.

Cash-out Refinance: This type of refinancing allows you to convert your home equity into cash. With cash-out refinance, you can borrow more than your current mortgage loan amount with a new loan, to pay off your old loan and the remaining cash value will be paid to you in cash, to be used for any personal needs.

Procedure on how to refinance a home loan

The process of refinancing a home loan differs slightly from your first loan. Usually, the time frame of how to refinance a home loan takes up to 30 to 45 days or more, from the time of application to closing of the loan and getting approval for the new loan.

Secure a job with a steady cash flow

Having a steady cash flow is quite imperative in taking out a new mortgage. If your cash inflow is unstable, you may lose chances of getting approval. You have to stabilize your job for a constant inflow of cash. this is because you must maintain consistency in making your monthly deposit for the new mortgage as one of the criteria your new lender will consider before granting you access. For delay and miss of monthly mortgage payment, you have a deficiency resulting from your lender’s report that may grossly affect your credit score.

Find your favorite lender

It’s not quite easy to get a lender with the best offer, but taking time to shop around will help you discover several offers from different lenders and which one offers the best. Finding the best lender in seeking how to refinance a home loan will yield you a better rate and term for your mortgage. Suppose your credit score has well improved you will be eligible for a lower interest rate for your mortgage.

Start your application

once you tender your application, you have to present the following documents within the first 14 days of submitting your application.

Recent pay stubs
Bank statement
Recent W-2s
Tax returns
Business income statement

Certainly, there will be a hard pull on your credit score when refinancing a mortgage. However, submission of these documents in good time makes the hard pull on your credit score almost insignificant.

Lock in rate

This very step on how to refinance a home loan is quite optional. You may choose to either lock in rate or float rates. To lock in a rate entails you secure a current favorable rate amount that your lender offers at the time of your application rather than float it till the closing date. This is because of the unstable nature of rates, sometimes rate hikes or falls depend on the current reports.

Most people prefer to secure a particular favorable rate during the application process for fear of a hike in rates. However, sometimes it may fall below the current state but it is better to lock in your rates to avoid an increase in rates.

Underwriting

This process is carried out by your new lender after you have submitted your application. It involves the verification of all financial documents you submit while applying for a new home loan.

It also involves the verification of your home property documents to ascertain their authenticity and a home appraisal that quantifies your home equity and how much you are capable of borrowing for your mortgage.

Your home equity determines how much you can receive from your home value if you are doing a cash-out refinance. It also will ascertain whether you qualify for the amount you are applying to borrow considering your current mortgage amount.

Close on loan

Closing on a loan comes with a closing cost. This is usually the last stage of the application process. You will have to pay the fees attached to the closing cost which is usually 3 to 6% of the total amount accessible to you.

This cost covers your lender’s charge for the loan and the process of underwriting which involves your home appraisal and home title cost. The closing cost amount is determined by the loan type you are going for and the distance from where your home is located.

Why you should refinance a home loan

Having discussed types of refinancing, there are also reasons why people seek how to refinance a home loan.

Drop in rate

When there is a forecast for a fall in rates, it is quite favorable for individuals who still have longer terms to refinance their mortgage for a lower interest rate. An individual who has a fixed rate cannot access the down pull on rate except if they refinance their mortgage. Although individuals with variable rates will automatically enjoy the fall in rates but are at greater risk when the rate is hiked.

Get cash out from home equity

One can refinance a mortgage when there is an appreciation in the home value to get cash from the home equity. If the home is appraised and has more monetary value than the remaining balance of the current loan amount one can refinance to pay off the current debt and the remaining balance from the home equity will be paid in cash for other personal needs.

Switch rate type

Refinancing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage is a good reason to refinance a mortgage. Having an ARM, one is not certain of what rates will be, sometimes there is a hike while sometimes a slope downward. however, because of uncertainty in the ARM rate type, Individuals who have ARM type tend to refinance to a fixed rate when rates are unfavorable with ARM.

Adjust loan term

To change loan terms to either lengthen or shorten the number of years in favor of one’s financial state to be able to meet up with payments is a good reason to seek how to refinance a home loan.

Sum up

We have outlined the process of how to refinance a home loan, the types of loans, and the reasons why people do refinance. However, your credit score is a good determinant of how much rate you will receive from your new lender. Therefore it is ideal to build a good credit history by staying consistent with paying your current loan to have a better credit score.

Why there are many advantages to refinancing your mortgage, it is also ideal to weigh the balance whether you can do a refi now, considering the closing cost and other criteria that qualify for a better refinancing.