Want to refinance your mortgage? Do These 7 Things Now Smart change: personal finance
A key question a homeowner must answer is whether or not now is the right time to refinance their mortgage, especially in today’s environment with mortgage rates hovering around 3%.
About 11.2 million homeowners could cut their interest rate by at least 0.75 percentage point if they refinance their home loans to current mortgage rates, according to mortgage data company Black Knight. Experts agree that a rate cut of this size usually makes the whole refi process worthwhile in terms of cost versus savings.
The savings that a refi can provide are also significant. These homeowners could save a total of $ 3.1 billion per month, or about $ 279 per month per borrower. About 1.2 million homeowners could save over $ 500 per month by refinancing at today’s rates.
If your current rate is near 4% or more, it’s worth checking out if mortgage refinancing is right for you. But the refi process takes time. It took an average of 43 days to close a refinance loan in September, according to ICE Mortgage Technology. It is best to start as early as possible.
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If you don’t know where to start, these seven tips can point you in the right direction.
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1. Set a refinancing goal
Most homeowners refinance in order to get a lower interest rate and therefore lower their monthly payments. However, this is not the only reason to refinance.
Different types of loans offer different benefits.
You may want to switch from a variable rate mortgage to a fixed rate mortgage to secure a permanently lower rate. You may want to switch from a 30-year loan to a 15-year loan to pay off your mortgage faster. If you have enough equity, you could also save on mortgage loan insurance by going from a mortgage loan FHA loan to a conventional mortgage.
Perhaps you’ve recently been faced with large medical bills, unscheduled home repairs, or other expenses that are weighing you down financially. If you have built up enough equity in your home, a withdrawal refi will not only allow you to refinance your loan, but also withdraw additional cash.
Knowing what you want to accomplish with a refi will help you determine the type of mortgage product you need. Consider all of the options to see which one works best for you.
2. Check the equity in your home
You could qualify for a conventional refi loan with as little as 5% of your home equity, depending on Find out about mortgage loans. However, most lenders prefer that you have at least 20% equity.
If you have more equity in your home, you may be eligible for a lower interest rate and fees, as lenders will view borrowers with higher equity as a lower risk. More equity also means that you are less likely to owe more than the home’s value if home prices go down.
To get an estimate of your home’s equity, subtract your current mortgage balance from your home’s current market value. The result will be the equity in your home. Contact a knowledgeable local real estate agent to get an idea of your home’s value. Zillow’s home price estimate can also be a rough starting point.
You should also prepare your home for a formal appraisal, which will be part of the refinancing application process. Have documentation on hand about the improvements you have made to the home. (For example, did you add a bathroom or replace an old roof?) It won’t hurt to clean and organize your home for refurbishment.
If your income has taken a hit, a home equity loan can offer less expensive help.
Using a home equity line of credit can help you if you need it. Click below to find out more.
3. Check your credit score and credit report
Before making any loan decision, it is important to check your credit rating as well as your credit report.
Your credit score will largely determine the interest rate a lender will offer. The higher your score, the lower the rate you qualify for and the lower your monthly payments will be. If you have a low score, look for ways to improve your credit score well before you apply for a loan.
Your credit report shows the information on which your score is based. This is where you can check for any errors that can negatively affect your credit score. If you find any errors in your report, you can contact the credit bureaus to have these items removed. Be prepared to provide documents proving the error.
As part of the consumer protections put in place by the CARES Act, you can get a free weekly credit report from one of the major reporting bureaus until April 2022. (As a rule, you are entitled to a free report from each credit reporting company per year.)
You should also be aware of the factors that could temporarily adversely affect your credit score. Applying for a credit card, personal loan, or car loan right before, at the same time, or right after the refi application will lower your score, even temporarily.
Your credit reports and your credit scores play an important role in your future financial opportunities.
Identifying and responding to any potentially fraudulent activity can mitigate the damage to your credit. Click Below To Get A Copy Of Your Credit Today!
4. Do the math to see if refinancing will pay off
Before asking for a refi, make sure you understand the costs associated with a new loan. The closing costs for refinancing are usually between 2% and 5% of the total loan amount. For a refi to make sense, you need to be able to recoup those closing costs, as well as save money in the long run.
To determine if it’s worth it, you’ll need to calculate your breakeven point. This is the time it will take for the savings on the new loan to exceed its cost. You can calculate the breakeven point by dividing the loan closing costs by the amount you save each month.
For example, if your closing costs are $ 5,000 and your monthly savings are $ 100, your breakeven point would be 50 months or about four years. In this case, refinancing probably makes sense if you plan to live in your home for more than four years.
An easy way to determine if a refi is right for you is to use a mortgage refinance calculator.
5. Put your mortgage papers in order
You need a lot of documents proving that you are ready to refinance.
The documents you should have on hand include your last pay stubs, the last two years of W-2, information on your current home loan, as well as information on property taxes and home insurance.
If you are self-employed or have a non-traditional job, have two years of bank statements. You may also need an income statement from your bank, past two years 1099 forms, and customer invoices as proof of income.
A lender may have additional documentation requirements depending on their initial assessment of your finances. Once you’ve chosen a lender, find out about all the other requirements so that you can get them together in advance. This will make the application process much smoother.
6. Find a mortgage lender
Don’t settle for the first interest rate offered to you. You need to compare the rates and terms of at least three refinance lenders to see which one offers the best plan for your needs.
You should also consider different types of lenders. Compare rates from major banks as well as online lenders and local credit unions. If you have a long-standing relationship with a financial institution that also offers home refinancing, check with them as well. You may be able to negotiate a better rate if you already have other financial transactions with the lender, but not always. Do not assume your current lender offers you the best deal.
Lock in a lower interest rate by refinancing your mortgage
For borrowers with a solid credit history, refinancing can be a good way to get a lower interest rate. Click below for a free quote.
7. Block your rate
Once you’ve found a lender who offers the best terms and rate for you, set your interest rate. A rate lock-in will ideally ensure that your interest rate does not rise until the close.
However, rate freezes are usually done for periods of 15 to 60 days. With lenders taking a while to close these days, you may want to go for a longer foreclosure. While some lenders may not charge a rate freeze, others will. The rate blocking fee can vary between 0.25% and 0.50% of the total loan amount. If your loan does not end on time, extending the lock-up period may result in additional charges.
The key with a rate foreclosure is timing. Check with your lender to find out how long it typically takes them to close, then lock in the rate for that length of time.
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