Now might be time to learn the steps to refinancing if current interest rates are lower than the rate on your home mortgage. While refinancing is very similar to getting a mortgage to buy a home, there are enough differences that knowing the steps ahead of time can save you time and stress.
So here's what you'll need to do, step-by-step, to prepare and go through a complete refinance process.
STEP 1: KNOW YOUR GOAL
When you buy a home, your goal is clear: get a mortgage so you'll have enough money, when combined with your down payment, to purchase it. But people refinance for different reasons, and some of the decisions you'll make about your refinance are easier when you're clear about your refinancing goal.
Like many people, you might be interested in refinancing to take advantage of the lower interest rates available. But there are other reasons - for instance, you may want to access the equity in your home and use it to make home improvements. Or, perhaps you decide to pay your mortgage off more quickly and decide to refinance to a 20 or 15-year mortgage term.
Your purpose in refinancing could be to lower your monthly payment by starting the amortization clock all over again. In that case, it would spread the current balance of your mortgage over the next 30-years, lowering your payment.
Refinancing is one way of removing mortgage insurance requirements. If you have an FHA loan, refinancing to pay off that loan with a conventional mortgage will clear the mortgage insurance requirement if you have enough equity in your home.
If you have PMI (private mortgage insurance for a conventional loan), you can get the requirement dropped without refinancing with a minimum of 22% equity in your home.
Ultimately, your goal for refinancing may be one of these reasons, or it may be for more than one of them. Whatever the reason, keep it in mind as you go through the rest of the steps.
STEP 2: REVIEW YOUR CREDIT
A good credit habit to have, aside from always paying your bills as agreed, is to check it yearly. You can do this by going to www.annualcreditreport.com. This site allows you to get a credit report from all three credit bureaus (Experian, Trans Union, and Equifax.)
It's essential to check all three for the most accurate information. Check the reports for delinquent payments or reported derogatory items you weren't aware of, like collections and judgments. If you find something - take time to do detailed research, gathering as much documentation as possible to discuss with your loan officer.
Also, check the outstanding balances on loans and credit cards - and note the monthly minimum payments due on these accounts. The minimum payments and installment loan payments are used to calculate your debt-to-income ratio.
Don't worry about credit scores in these reports because they're Consumer Credit Scores. Lenders use Mortgage Credit Scores for qualifying, and those are different. Both scores come from the same basic information, but mortgage credit scores can be 10-40 points lower than a consumer score.
STEP 3: TIME TO TALK TO LENDERS
When you're comfortable with your credit history, it's time to check in with some mortgage lenders. It's best to shop 3 or 4 lenders and ask about their refinance process and turnaround times. But the main reason to talk with them is to find out the current interest rates and fees.
Working with a mortgage broker is helpful for this comparison step. Mortgage brokers work with many different lenders and find the best rates and fees to fit your needs (and the goal you started with above.)
That also answers the refinance question because they'll process your loan and shop the best lender.
Don't forget to check in with the loan officer you worked with to purchase your home. Again, find out what the refinance process is, their turnaround times for refinances, and current rates and fees. Some lenders treat refinancing differently than mortgages for a home purchase.
Remember - the absolute lowest interest rate available may not be the best loan for you. Many variables determine the rate you qualify for, so be aware of this factor and set your expectations accordingly.
STEP 4: GATHER YOUR DOCUMENTS
Once you choose your loan officer, it's time to gather all the required documentation. You'll need to document your current income with a month of pay stubs. If you're salaried or hourly, you'll also need the last two years' W-2s.
For self-employed, or if you earn commissions as a regular form of income, you'll need the last two years' tax returns along with your W-2s. Your loan officer will use these to calculate debt-to-income for you.
You'll also need your most recent mortgage statement, homeowner's insurance statement, and the most recent two months of statements for all asset accounts. Some investment accounts only provide quarterly statements, so alert your loan officer if that's the case.
STEP 5: FORMAL LOAN APPLICATION + APPRAISAL
Now that you have identified your loan officer, gathered your documentation, and checked your credit, it's time to move forward with the loan. To do that, you'll need to complete a formal application, supply all your documents, and allow the lender to pull your credit report.
Once you've formally applied, you'll receive a Loan Estimate from your lender. This form will have all the estimated costs associated with your refinance. Take the time to review this and discuss it with your loan officer.
It's also time to consider locking in your interest rate. Refinancing can take longer than purchase mortgages, so consider a 45-day rate lock. Following these steps will help you get organized and expedite the loan process, but remember to discuss the rate lock timing with your loan officer.
The appraisal order occurs at this time. The loan officer will let you know if an appraiser will physically visit your property or if they can do an automated valuation. Talk with your loan officer about any concerns with your property's condition before the appraisal is scheduled.
STEP 6: GETTING TO LOAN APPROVAL
The next stop for your loan file is underwriting. This may happen before the appraisal is complete or after. Once an underwriter has reviewed the file, they may request additional documentation to answer any questions from their review.
Gather additional documents as quickly as possible, being mindful of your rate lock timing. Discuss any questions or concerns over these documents with your loan officer. The sooner these are submitted to the underwriter, the better.
Once the underwriter is satisfied, they'll issue your loan approval, and your file will be ready for loan documents. The next step - a Closing Disclosure is prepared for you to review. This is the final version of the Loan Estimate so make sure you look it over, discuss any concerns with your loan officer, then sign and return the form.
Pay close attention to any funds you need to bring to closing. All fees related to the refinancing were on both the Loan Estimate and the Closing Disclosure. You may have decided to include all or most costs in the new loan amount so that the new loan proceeds pay them.
Still, you may need to provide funds at closing to pay the interest due on the loan you're refinancing. Once you have a mortgage, you owe interest every day, and the monthly payment covers the interest until you refinance (when the pay-off timing may leave you with outstanding interest due).
The outstanding interest isn't a fee for the new loan. It's a regular cost of the old loan. Including this in the new loan means financing one of your mortgage payments for thirty years. Since you would have paid the interest in your next mortgage payment, it's best to bring the funds to closing.
Follow these steps to zip through your refinance. Working with a trusted Point Equity loan officer is all you need to handle any unexpected issues that might come up.