Would refinancing a home loan be a wise financial move for the future? Refinancing a mortgage is obtaining a new loan that pays off the existing loan, giving the borrower a new set of terms and conditions. Refinancing benefits homeowners who may qualify for a lower interest rate than they are paying, those who wish to take out some of the equity in their home, and those who may need to lower their monthly payment, all dependent on the type of loan obtained.

When to Consider Refinancing

Determine what your goals are for refinancing. Consider the following:

• Do you want to lower your monthly payment? Consider refinancing your loan at a lower interest rate or extending the length of the loan.
• Do you want to save money on the overall purchase of your home?
• Consider refinancing your mortgage with a shorter term and lower interest rate.
• Are you considering using the equity in your home to cover some of your other financial needs, like making home improvements or refinancing debt?

When considering the process, always consider the value of your home, your credit score, and the interest rate you would qualify for.

Preparing for Refinancing

Before you start the process of applying for a new mortgage, make sure you have all of your cards in a row:

• Build up your home’s value by making minor improvements that could add value. It may help your appraisal come back at a higher value.
• Work to pay off your debt, make payments on time and otherwise improve your credit score so you qualify for the lowest interest rate possible.
• Work to save for closing costs and other fees so you do not have to roll them into the loan.

Researching and Comparing Refinancing Options

Research your options as you improve your credit and home qualifications. You’ll want to consider various lenders, including banks, credit unions, and brokers who may specialize in loan refinancing. Avoid applying for loans from each lender, but find out what terms and conditions each offers.

You’ll also want to consider the various types of home loans you may qualify for, such as FHA and VA loans. Compare the terms and conditions of any loan offered to you carefully based on your financial objectives.

The Application Process

The refinance application process is much like obtaining a new mortgage loan. Your lender will need to gather information about you, verify the home's value, and then allow underwriters to determine if they will allow for the borrowing of these funds. You can apply online, typically with required identification, W-2 and other income information, proof of employment, and your Social Security number. Some lenders charge an application fee.

Loan Estimate and Closing Disclosures

Once you provide the lender with all the necessary information, they will provide you with a loan estimate. It is just in the pre-qualification stage since all data needs to be verified. However, the lender will provide you with essential information:

• The interest rate on the new loan
• The monthly payment on the new loan
• The cost of closing fees and others
• Closing disclosures about your rights and obligations
• The terms of the loan and payment schedule

Read through all documentation provided to you. Ask questions if you have any. You may still be able to negotiate with the lender to obtain better terms and conditions.

Property Appraisal

The lender must verify that the home is worth your borrowing amount. Remember that if you are financing a mortgage you’ve had in place for some time, you may have significantly lowered the principal you owe.

Your home's value must meet or exceed the amount you intend to borrow up to the lender's limit. Most lenders will loan up to 80 to 90% of the home's value. Typically, appraisers determine this value by examining your home's condition and features and comparing sales of similar homes in your area.

Underwriting and Approval

Once the appraisal moves forward, the loan application goes to the underwriters for approval. They will verify all details of the loan and your application, including verifying your income, credit, and the home’s value. The underwriters ultimately determine if the loan will move forward. You may have to provide more information to verify your qualifications. Once the underwriters approve the loan, you’ll move closer to refinancing.

Closing the Refinance

After the approval process, you will sit down with a title agency or handle the process in a video conference with a title agency. You’ll go through all of the details of the new loan and sign documents. You are agreeing to the conditions and terms of the new loan, and this is a legally binding contract.

Once completed, there is often a few days of a waiting period before the funds from the new lender are sent to the old mortgage lender to pay off what you owe. After that happens, you will begin making payments to your new lender.

Takeaways

The mortgage refinancing process can take several weeks to complete. It allows you to obtain a new loan that may be a better fit for your financial needs. In all cases, it is a big financial decision you will want to make after careful consideration of your needs and financial goals.