refinancing

Refinance

Refinancing your house is a way to utilize your home as an investment. By refinancing, you can leverage the value of your home for various purposes. There are several reasons to consider refinancing, such as accessing cash from your home, reducing your monthly payment, or shortening the duration of your loan.

What exactly does it mean to refinance a house?

It involves replacing your existing mortgage with a new one, typically with a different principal amount and interest rate. The new mortgage is used to settle the old one, resulting in a single loan and a single monthly payment.

There are several motivations behind refinancing a house. You may opt for a cash-out refinance, which allows you to tap into your home's equity. Alternatively, a rate and term refinance can help you secure a more favorable interest rate and a lower monthly payment. In some cases, refinancing is used to remove a person from the mortgage, often arising from divorce situations. It's also possible to add someone to the mortgage.

Reasons to Consider Mortgage Refinancing

  • Altering Your Loan Duration - Many individuals choose to refinance in order to decrease their loan term and ultimately reduce interest charges. For instance, if you initially took out a 30-year loan but can now comfortably manage higher monthly payments, refinancing to a 15-year term could enable you to secure a more favorable interest rate and consequently pay less interest overall.
  • Decreasing Your Interest Rate - Given the ever-fluctuating nature of interest rates, refinancing becomes an attractive option if prevailing rates are more favorable than those at the time of obtaining your loan. By reducing your interest rate, you can potentially achieve a lower monthly payment. Moreover, over the duration of the loan, you will likely pay a diminished sum in total interest.
  • Modifying Your Loan Type - In certain scenarios, switching to a different type of loan or loan program can prove beneficial. Perhaps your original choice was an adjustable-rate mortgage (ARM) in order to capitalize on reduced interest rates, but you now desire the stability of a fixed-rate mortgage while rates are currently low. Furthermore, accumulating sufficient home equity might prompt you to refinance your Federal Housing Administration (FHA) loan into a conventional loan, thus ceasing payments of a mortgage insurance premium (MIP).
  • Accessing Your Home Equity - Through a cash-out refinance, you can borrow an amount exceeding your outstanding mortgage balance, allowing you to receive the surplus as cash. If the value of your home has appreciated, you may possess enough equity to acquire cash for purposes such as home improvements, consolidating debts, or covering other expenses.

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The Refinance Mortgage Application Process, Step by Step

Although it shares similarities with the home buying process, refinancing tends to be less complex. While the exact duration may vary, the typical timeline for a refinance is 30 to 45 days.

Step 1: Application

The initial stage involves exploring the different types of refinancing options to determine the most suitable one for your needs.

During the application process, your lender will request similar information to what you provided when originally purchasing the home. They will evaluate your income, assets, debt, and credit score to assess your eligibility for a refinance and your ability to repay the loan.

    The necessary documents may include:

  • Your two most recent pay stubs
  • Your two most recent W-2 forms
  • Your two most recent bank statements

If you are married and reside in a community property state, your lender may also require your spouse's documents, regardless of whether they are included on the loan. If you are self-employed, additional income documentation might be necessary. It is wise to have your tax returns for the past few years readily available.

You are not obligated to refinance with your current lender. Opting for a different lender means the new lender will settle your existing loan, thereby severing ties with your previous lender. Take the opportunity to shop around and compare various lenders' current mortgage interest rates, availability, and client satisfaction ratings.

Upon receiving approval, you will have the choice to either lock in your interest rate, ensuring its stability until the loan closes, or to let it float.

The duration of rate locks can range from 15 to 60 days, varying depending on factors such as your location, loan type, and lender.

Opting for a shorter rate lock period may result in a better interest rate since the lender does not need to protect against market fluctuations for an extended period. However, please note that if your loan does not close before the lock period expires, you may need to extend the rate lock, incurring additional costs.

Alternatively, you may have the option to let your rate float, meaning you do not secure it before proceeding with the loan. This choice may lead to a lower mortgage rate, but it also exposes you to the risk of obtaining a higher rate.

In certain situations, you might be able to enjoy the advantages of both options with a float-down provision. Nonetheless, if you are satisfied with the current rates when applying, it is generally advisable to promptly lock in your rate.

Once you have submitted your application for a refinance loan, your lender will initiate the underwriting process. During this stage, your financial information will be verified, ensuring the accuracy of the documentation you have provided.

Your lender will also assess pertinent details concerning the property, such as the date of its purchase. This step includes a crucial appraisal to determine the property's value. The refinance appraisal significantly impacts the available options for you.

For instance, if you intend to extract cash through refinancing, the value of your home determines the amount of funds you can obtain. Similarly, if your goal is to reduce your mortgage payment, the value of your home has implications regarding your eligibility to eliminate private mortgage insurance (PMI) or qualify for specific loan programs.