For many homeowners, their mortgage is their largest monthly expense. It can be difficult to keep up with the payments, especially when interest rates are high.
Refinancing is a popular option for homebuyers who want to take advantage of better rates, terms, and programs available from mortgage lenders which may make it more affordable to own a home. It can also be used to access cash for home improvements or other expenses. But what is it, exactly? And how does the refinance process timeline work? Here’s a breakdown of what you need to know.
What Is a Mortgage Refinancing?
Mortgage refinance is the process of replacing your existing mortgage with a new one. The loan terms, monthly payments, and interest rates are revised either to meet a person’s current needs or to improve the original loan. The process of refinancing a home typically involves closing costs, so it’s important to do your research and weigh the potential benefits against the costs before deciding whether or not to refinance a loan.
There are several types of refinance loans, including fixed-rate and adjustable-rate mortgages. A fixed-rate mortgage has a consistent interest rate throughout the life of the loan, while adjustable-rate adjust over time.
The Benefits of Refinancing Your Mortgage
Is refinancing the right move for you? There are many different reasons why people refinance their mortgages, but the goal is always the same: to save money each month. Here are some of the benefits of doing it.
#1 Lower Your Monthly Payment
When you refinance a loan, you’ll take out a new one with terms that are more favorable to you. This could mean a lower interest rate, a shorter repayment period, or both. As a result, your monthly payment will be lower, making it easier to stay on top of your mortgage. For example, extending your loan from 15 years to 30 years will likely result in a higher interest rate but lower monthly payments. This can free up some extra money each month, which can be used to pay down debt or save for a rainy day.
#2 Reduce Your Interest Rate
When interest rates fluctuate, it makes sense to shop around to see what refinance process can do for you. For example, refinancing from a 30-year to a 15-year loan will generally result in a lower interest rate, but higher monthly payments.
#3 Lower Your Mortgage Term
One way to reduce your monthly mortgage payment is to lower the term. This will lower the interest rate on your loan, and you will have more time to pay it off.
#4 Save on Interest — and Build Equity Faster
Refinancing is a great way to save money on your mortgage and pay it off faster. It can also allow you to tap into the equity that you’ve built in your home. Equity is the portion of your home that you own outright; as you build equity, your home becomes more valuable.
#5 Consolidate Debt
Consolidation is when you combine multiple debts into one loan or payment. If you have credit card debt, personal loans, or student loans that are higher than your mortgage payment, refinancing could be another way to save money on interest payments because there are fewer accounts for lenders to collect from each month and each account has a higher balance than if it were separate from others.
Refinance Process Timeline And Steps
Step 1: Establish your refinance goals.
The first step in the process of refinancing is to establish your goals. You want to consider what you hope to accomplish with this loan, and you and your lender need to be on the same page. If you’re looking for a lower monthly payment, but have a high-interest rate, chances are you’ll have trouble reaching your goal.
Your goals should be specific and measurable so that both parties can evaluate progress along the way. If you’re looking for a lower monthly payment, for instance, you should come up with an estimate of what amount would be considered “lower.”
If you want to refinance for a more favorable interest rate, then a simple comparison of current rates versus those available through refinancing might suffice. However, if you plan on staying in your home longer than five years or plan on purchasing another home within five years (a common refinance goal), then it’s important to consider not only today’s rates but also how they might change over time.
Step 2: Shop for a refinance mortgage lender
When you’re shopping for a refinance lender, the best way to find the right mortgage company is to shop around. Here are the things you should look for:
Compare rates and fees. Explore online resources that can help you compare rates and fees from multiple mortgage lenders. But be sure to also look at your credit score as well as any fees that may be charged by other companies.
Check out resources that offer free rate quotes from lenders nationwide on both fixed and adjustable-rate mortgages. You can also see how much each lender charges in points and origination fees.
You might also want to look at Bankrate’s Mortgage Calculator, which will help you compute a loan estimate when you enter various details about your current situation and plans for the future (such as closing costs).
Loan options. Make sure the lender offers what you need — whether that’s a 15-year fixed-rate loan or an adjustable-rate mortgage with an introductory period.
Approval process. Look for lenders who have approval processes that suit your needs. You may want fast approval or quick closing times. Or perhaps you’d rather spend some time getting prequalified so that you know how much house you can afford before shopping around.
Fees. Compare fees charged by lenders and factor these into your decision when choosing one over another. Some banks charge application fees while others don’t; some require a credit report while others don’t; some charge points while others don’t.
Step 3: Get pre-qualified
A pre-qualification is a quick way for you to determine how much home you can afford by using an automated formula. But it won’t tell you how much money you can borrow.
That is why it is important to get pre-qualified for refinancing before shopping for your home loan.
What does getting “pre-qualified” mean?
Pre-qualification is the process of gathering your financial documents so that a lender can give you a loan estimate of how much they will lend you based on current interest rates and other factors. The lender will look at factors such as your income, assets, debts, credit score, and down payment amount to decide what they think they can lend you.
How to Get Pre-Qualified for Refinancing
There are two basic ways to get pre-qualified: Online or in person at a lender’s office or branch location. You’ll be asked some personal questions about yourself and your credit history. The information is then entered into an automated system that calculates how much of a mortgage loan you may qualify for based on current interest rates and other factors.
Step 4: Apply for the refinance loan
Once you’ve found the lender that will give you a great interest rate, the next important step is to apply for a refinance loan. This will be done through a mortgage lender and is generally completed by a broker or loan officer.
This involves filling out an application and providing information about your financial situation, including your income, tax returns, and debts. This can be done electronically or in person at the bank or mortgage lender’s office.
You’ll want to make sure that you answer all questions truthfully and accurately because any information that’s inaccurate or incomplete could lead to problems down the line and possibly even getting denied.
Step 5: Submit your documents
Lenders need to ensure that the borrower can afford the loan. To do this, they will check the applicant’s credit score, income and assets, and current debt levels. Knowing what’s expected will help you prepare the right documents and make the mortgage refinance process go more smoothly.
Typically, the following documents will be required by the lender:
- Proof of income such as latest paystubs, income tax returns
- Insurance: homeowners insurance and title insurance
- Bank statements for the last two months
- Asset statements documenting your financial assets
- Property appraisal
These documents need to show that you have enough income to cover your monthly mortgage payments, as well as any other debts. The lender will also want to see a copy of your credit report.
Step 6: Set up an appraisal and underwriting
When you are refinancing your mortgage, the loan amount is based on the current market value of your home. This is determined by an appraisal. Appraisers use several methods to come up with an estimate of a property’s worth, including recent sales of similar homes in the area, construction costs, and recent property tax assessments.
Your lender may also require an underwriting review to ensure that you are still eligible for the loan amount you’re requesting. Underwriters look at factors such as your credit score and debt-to-income ratio to make sure you can afford the new mortgage payment. By understanding the appraisal and underwriting process, you can be better prepared when refinancing a mortgage.
Step 7: Review your documents and disclosures
The refinancing process involves more than just signing some papers, submitting them, and waiting for the money to be deposited in your account. You should take some time to review all the documents and disclosures related to the process.
One of the most important things you should look out for is whether or not there are any prepayment penalties associated with your current mortgage loan before deciding if you want to refinance it or not.
In case there are any missing details or incorrect data, you must make sure that they are corrected before submitting your application.
The discrepancy could lead to delays in processing your application and even rejection of your application if the lender finds serious errors in it.
In addition to this, you need to review the terms and conditions of your loan refinance as well as any other documents related to it. This way, you will be able to get a better understanding of what exactly is being offered by the lender and whether or not it suits your needs.
Step 8: Close the loan
Closing on your refinance is the last step, and it’s important to make sure everything goes smoothly. Your lender will provide all of the information you need to close, but here are some basics to help get you started. Closing costs will likely be due to attorney fees, title and mortgage insurance, and recording fees. Here are a few things to keep in mind as you get ready for closing.
1) Make sure you have all of your documentation ready. This includes copies of your driver’s license, Social Security card, mortgage statement, proof of insurance, and any other relevant paperwork.
2) Be prepared to pay closing costs. Make sure you have all the funds required for closing. This varies depending on the lender, but generally includes application fees, processing fees, underwriting fees, and other charges.
Things to Consider Before Refinancing Your Mortgage
Refinancing can be a great way to save money on your mortgage, but it’s not right for everyone. Make sure to weigh the pros and cons before making a decision. To find out if refinancing is right for you, consider these questions:
How long have you been in your home?
The longer you have been in your home, the more likely it is that refinancing will save you money.
How long do you plan to extend your loan?
You’ll need to consider the length of your refinance loan. A longer loan will often have lower monthly payments, but it will also take you longer to build equity in your home. As such, you’ll need to weigh the pros and cons of each option before making a decision.
Do you have a high-interest rate?
It’s important to remember that a refinance loan also typically comes with a higher interest rate than your original mortgage. As a result, you’ll want to make sure that the savings from your lower monthly payments will outweigh the cost of the higher interest rate.
Pitfalls to Avoid When Refinancing Your Mortgage
You should be aware that extending the term of your loan will also increase the total amount of interest you will pay over the life of the loan. As a result, you should only consider this option if you are confident that you can make the new monthly payments. If you are unsure about your ability to keep up with the payments, it is better to keep your current loan and continue making regular payments. Doing so will help you to avoid accruing additional debt and damaging your credit score.
Refinancing your home is a big decision. If done well, it will reduce the monthly payment, lower the interest rate, and overall decrease the amount of money owed on the mortgage, which can save you a considerable amount of money over the life of your loan. If you’re interested in refinancing your mortgage, speak to your mortgage lender about what options are available to you and compare rates before making a decision.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.