How to refinance home loan | 4 Types of Mortgage Refinance

The process of how to refinance home loan is not different from when you first got your mortgage. Ideally, you plan to build a good credit history before you refinance your mortgage. 

A good credit history will improve your credit score and you will qualify for a better rate when you refinance your mortgage. If you are struggling with meeting the target or have missed payments sometimes, which has lowered your credit score. 

Don’t worry, you can still get lenders that will offer to refinance your home loan with bad credit. You will have to shop around to find a lender with a better offer before you refinance. In this article, we will show you how to refinance home loan,

Meaning and How to Refinance Home Loan

What does it mean to refinance a home loan? 

Refinancing your home loan is a process of revising and replacing a loan term. It involves getting a new loan from your current lender or a new lender, who will pay off your old debt. 

It means your old debt will be replaced with the new one, while you are now obligated to your new lender. People do refinance in other to change the current rate or terms to a more favorable one.

On an occasion, when your home equity is greater than the amount you owe, you can get a cash-out from your home equity. Usually, when you refinance a mortgage you get a better rate and you can shorten or lengthen loan terms with rate and term refinance. 

Steps on How to Refinance Home Loan

How to refinance home loan is not much different from the process of acquiring your mortgage. It usually takes 30 – 45 days for the process to go through and for your loan approved, but sometimes it takes more than that.

Check your Cash Flow

The first thing to do as you plan on how to refinance a home loan is to check if you are prepared for the process. You need a good job with consistent monthly earnings to enable you to make payments at the stipulated time every month. 

Having a constant cash flow and a good credit score will make you get quick approval from your lender. If your job is unstable, this will affect your income flow and you may have bankruptcy to your credit history, note that this will not be good for your credit history and your credit score.

Know the Best Lender

If you think you are ready for the process the next thing to do on how to refinance a home loan is to shop around for the lender with the best offer. Getting the lender with the best offer is not an easy task but it is ideal to know what you and go for it. 

Compare rates and terms while selecting a lender, some lenders offer longer terms up to 30 years loan term with good rates. If your credit score is high above 720 you will likely get a low rate for your mortgage. However, there is no universal standard to measure your rate to your credit score.  

Apply for Refinancing

Before applying make sure you gather all necessary documents that will be needed for the application process such as your bank statement, recent pay stubs, recent W-2s, tax returns, and your business income statement. 

These documents should be made available within 14 days of your application this will help make the hard pull on your credit score to be insignificant. The mortgage application process usually last for about 30 – 45 days.

Lock in Rate

If you have found a good rate from a lender, you may want to lock in the rate before closing on the loan. You may not want a general increase in rates to affect your new rate. Certainly, you don’t know what rates will become in the next 30 days it may go up or come down. 

However, most people prefer to lock in a good rate rather than float the rate because there may be a hike in the rate. Although, when rates are floated before closing on a loan it may be to your advantage. So consider floating or locking in your new rate. 

Underwriting 

The underwriting process begins after you have submitted your application to your lender. This process involves your lender verifying all financial information that you have submitted during the application process to confirm its legitimacy. 

Other home property documents will go through the underwriting process as well as the home appraisal. The home appraisal is what determines your home equity, the amount you can borrow from your lender.

 Let’s say if your home equity is above the amount you owe, you are entitled to cash out from your home equity after paying your old debt. 

On the other hand, if it is not up to the amount you intend to borrow, you may not qualify for the loan but rather go for other available options or reduce the amount you want to borrow. 

Close on loan

This is the last process on how to refinance home loan before your old debt is paid. It involves paying the closing cost to your lender. 

This fee is what your lenders charge to process your loan, it covers the home appraisal and home title costs involved in the process of creating your home loan. 

The closing cost differs on the type of loan you are going for and the distance from where you live. Closing cost is usually about 3 – 6% of the total amount you want to borrow.

Types of refinancing

There are four types of mortgage refinance. You can decide on which one to choose according to your need.

Rate and term Refinance: When an individual seeks how to refinance home loan with rate and term refinance, it simply means to replace an existing loan with a new and more favorable loan that requires lower payment on the interest rate and longer term.

Consolidation Refinance: This type of refinance is applicable when one has multiple credits. It involves getting a new loan to pay off several credits, such that you now have only one credit attached with lesser interest on the principal.

Cash-out Refinance: In cash-out refinance, when the value of your home increases, instead of selling it to gain the extra value. You can refinance your mortgage for a higher loan such that you can have access to the extra value immediately. Cash-out refinance goes with a higher interest rate. 

Cash in Refinance: this type of refinance allows the individual to pay down a small loan amount or a certain amount of the loan for a lower loan-to-value ratio.

Reasons to Refinance a Mortgage

 Fall in interest rate

Whenever there is a fall in interest rate, individuals with a fixed-rate mortgage cannot enjoy the fall in rate until they refinance their loan. A 1% drop in rate is a reasonable drop to refinance home loan.  

Cash-out

Most individuals sort out how to refinance home loan because they want to get cash out from their home equity. When there is an increase in home value, refinancing a mortgage can give you access to enjoy your home equity by cashing it out immediately after your loan is approved. This cash out can go in for renovation or other personal needs. 

Change rate type

With a refinancing, you can change your mortgage rate from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Having an ARM, your rate will slope up or down whenever there is a fall or rise in rate. To be certain of what to expect, individuals refinance a mortgage to switch to a fixed rate. 

Change loan term

Refinancing to change loan terms from 15 to 30 years or Vis versa is a reason individuals refinance a home loan. When terms are longer the monthly payments are reduced and the individual pays more on the interest rate in the long run. On the other hand, when terms are shortened the payments are higher on monthly basis but the individual pays less on interest rate over the years.

The Merit of Refinancing a Mortgage 

• When you walk through the process of how to refinance home loan and get approved, you will save up money on interest because your rate will drop.
• Your monthly payment will reduce when you have a lower rate and longer-term refinance.
• You can pay your debt faster when you refinance in short term, although you will pay more monthly but will spend less on total interest.
• When you refinance a mortgage you can cash out from your home equity if you need cash for any purpose.
• You can change from an adjustable-rate mortgage to a fixed-rate mortgage and be certain of the interest rate you pay.

Demerit of Refinancing Mortgage

• You will pay more on interest rate in the long run when you revert to longer-term.
• If you refinance for a shorter term you will pay more on monthly basis.
• Whenever you refinance your home loan, you will have to pay a closing cost fee which is about 3-6% of the total loan amount.
• If there is a drop in interest rate, it won’t apply to you on a fixed rate, except you will refinance again.
• When you do a cash-out refinance, the home equity you hold may reduce.

In Conclusion

Having discovered how to refinance home loan, types of mortgage refinancing, and reasons people refinance their mortgage. You will want to start your process immediately or plan to start your process when you are ready to refinance. 

Be diligent to shop around for the best lenders to get the best offers. Weigh the merits and demerits of the options you chose and see if it is worth the price in the long run.

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