How to Refinance Your Mortgage | Top 4 Reasons to Refinance

Do you have a mortgage but find it difficult to meet your payments? Here is how to refinance your mortgage and get a low-interest rate and longer terms. This means when you refinance a mortgage, you stand a chance of paying a lower rate, and you can either reduce or increase your monthly payment on long-term or short-term payments.

Most people tend to opt for refinancing when there is a slope in interest rates or a major improvement in their credit score. Let’s say you signed up for an adjustable-rate mortgage (ARM) when you closed your loan, and with the current interest rate, your rate has increased. You can switch to a fixed-rate mortgage when you refinance.

Your credit score influences whether you can get low or high rates; the higher your credit score, the lower your rates. If you have a credit score that is below 640 for most lenders, your rate will be higher than when is above 700. Learn how to refinance your mortgage and check how prepared you are.

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How does refinancing a mortgage work?

Just like when you first bought your home, refinancing a mortgage is somewhat similar and a little bit easier because you have gone through the same process in the past. When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one; you get a low-interest rate, shorten or lengthen payment terms, and cash out the equity you have earned on your home.

Tips on How to Refinance Your Mortgage

The process of how to refinance your mortgage starts with financial evaluation and ends when you close on the loan. Here are some tips on what you should expect.

Evaluate

Before you go ahead with the plans on how to refinance your mortgage, first consider evaluating your financial state to see whether doing a refi is worth it at this time. Do you have a job currently? Is your income steady? Has your credit score increased since you took out your first mortgage? If you have a positive answer to this question, you are on the right track to refinancing.

Choose the Best Lender

Getting the best lender to refinance your mortgage is an important aspect to consider before doing a refi. Lenders have different interest rates and loan terms, which you will have to consider. So to shop around and do a soft check that wouldn’t badly affect your score is not a bad idea at all. Some lenders consider refinancing a mortgage with a low credit score; loan terms may differ from 15 to 30 years depending on the lender.

Apply for Refinancing

The next thing to do after you are done evaluating and choosing your lender is to apply. In applying, there are documents you will be required to submit for the process; just make sure you get them ready before you begin. These are the same or similar details you submitted to your first lender, such as:

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

Lock in Rates

Rates can change at any time, so it is important to lock in your rate once you have settled on one. Floating your rates until the day you close up your loan (which is usually 30 to 40 days) can be risky because your rate may be affected when there is a general rise in the rate. Secure your rate once you have one to avoid any disappointment.

Underwriting

While you are working on how to refinance your mortgage, after you have applied to your lender, the underwriting process begins. This process entails the verification of all financial information you have submitted to your lender and its accuracy.

It also involves the verification of your property details and your home appraisal to quantify the value of your home. The home appraisal determines how much money you can borrow from your lender and whether you have enough home equity to get cash out from refinancing your home loan if that’s your reason for doing a refi.

On the other hand, if you intend to reduce your monthly payment on your mortgage, your home equity will equally determine whether you could get that much as to pay off your old lender or go for other loan options.

Closing on Loan

Closing on a loan involves paying some fees; this is called the closing cost. You should be familiar with this fee because it is not different from the one you have paid in the past. When you are done paying the closing cost, your loan will be ready.

Reasons for Refinancing a Mortgage

There are several reasons why people refinance a mortgage and here are five reasons,

Decline in Rates

There are times when the rate may fall or even rise, but whenever there is a decline in the rate, most people tend to refinance their loans to get a lower rate. The difference in rate might be slight or huge when you consider your current mortgage rate.
If it is huge, then refinancing will work better. For instance, if you have a $250,000 loan on a 30-year fixed term with an interest rate of 5%, the rate drops to 4%. The difference of 1% is a big saving and reasonable for refinancing.

Get Cash-out

The cash one could get from their home equity when they refinance is one of the reasons why people refinance their mortgage. For instance, when you refinance your mortgage and your new lender pays off the old lender, you get the remaining balance from your home equity, and that’s extra cash for other needs.

Changing Loan Terms

You may seek how to refinance your mortgage to shorten or lengthen the loan term. For instance, a loan given for a period of 30 years can be shortened to 20 years to clear the debt within a shorter time and save more money on interest. When you refinance your mortgage from a fixed number of years to a shorter term, you may be eligible for a low-interest rate. On the other hand, you may choose to refinance for a longer term, say from 20 to 30 years; however, you will pay less in monthly payments but more in interest over the years than someone who has a shorter term.

Swap to a Fixed Rate

Another reason people opt for refinancing is to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Using an ARM is uncertain because the rate can change at any time, and this will inflate the interest rate you pay, causing an increase in your monthly payments. People tend to refinance their mortgage to a fixed-rate mortgage to avoid rate inflation and rate increases.

Benefits of refinancing a Mortgage

There are many benefits you stand to enjoy when you refinance your mortgage

Refinancing your home loan could help you qualify for a low-interest rate if your credit score has increased over the years.
You will have to pay less on your mortgage from your monthly deduction.
You can qualify for a cash-out with a mortgage refinance if you have good home equity.
If you have more than 20% in home equity, your private mortgage insurance (PMI) can be eliminated by your lender based on your current loan terms.
With a refinance, you can change your rate from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage if you notice there will be a hike in rates.
On rate and term refinance, you can shorten the length of years, say from 30 to 20 years loan term, which will enable you to pay your loan faster at a low rate.

Demerit of Refinancing a Mortgage

In some cases, after working the math on closing costs and what you stand to gain when you refinance your mortgage, the sum will be way higher than you want to pay.
On rate and term refinancing where you want to increase your term from, let’s say, 20 to 30 years, you will spend more on interest in the long run.
Your home equity will decrease when you refinance and get a cash-out from your home.
If you choose a shorter-term loan, your monthly mortgage deduction will increase, resulting in a large monthly payment.

FAQs

When should I refinance my mortgage?

As you plan how to refinance your mortgage, there are factors you should consider before making up your mind. Considering factors like your current financial situation, which includes your credit score, market trends, and current interest rates, you will have to use a mortgage refinance calculator to see how it will go even after paying the closing costs.

How long does it take to refinance after closing the loan?

Usually, it takes about 30 days, depending on your lender, and could equally take a longer period of up to 180 days.

What other option do I have if I don’t qualify for refinancing?

You can do a loan modification. This will change your current loan terms and add missed payments to your loan balance to help you retain your home. One of the major disadvantages of a loan modification is that your credit score will be affected badly. This is only preferable when you don’t qualify for a refinance.

Sum Up on How to Refinance Your Mortgage

I believe you have learned how to refinance your mortgage, knowing the requirements and what qualifies you for a great deal. When you refinance your mortgage on short terms you can pay your debt faster and save more money. You have an equal chance of taking cash out of your home equity to meet other needs.

Even though refinancing can affect your credit score lightly, you will quickly recover it in a few months when you constantly meet up with payments.

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How to Refinance Your Mortgage | Top 4 Reasons to Refinance

How does refinancing a mortgage work?