Couple holding up house keys

Mortgage Refinancing: What Is It and How Does It Work?

Introduction

Refinancing is a good option for homeowners interested in using their homes. It is possible to refinance to fund renovations or home improvement, but another vital refinance is to lower the amount of interest your home pays every month. Before delving into refinancing your home, check what it means to refinance a house.

What Does It Mean To Refinance A House?

Refinancing your home mortgage is generally an easy and efficient way to lower monthly payments, shorten the length of your mortgage loan, or reduce interest rates. Your lender will combine your old mortgage with a new one to cover the remaining balance, so you’re left with just one loan for a potentially more extended period at a potentially lower cost.

Refinancing your home can be a smart move, even if you never plan on moving. A cash-out refinance tops off your equity, lowering the risk of losing your home to foreclosure. A rate-and-term can lower your interest rate, which means less money out of pocket on the monthly mortgage payment.

The Refinancing Process

Refinancing your home is getting a new mortgage for your home, most likely to get a lower interest rate or remove a lien. The process is slightly different than buying your home since you are trading in an existing property for one with a mortgage. In most cases, you will work with the same lender and real estate agent. The refinancing process typically takes 30 – 45 days but can be longer if there are any complications. The process is as follows:

Applying

The first step of this process is to consider the various types of refinancing carefully. First, you have to understand what refinancing a mortgage involves. Then you can choose from the multiple options to find the one that best meets your needs, whether it is a conventional loan or a cash-out to refinance loan, or any other option available. After this, you need to complete an application and provide details regarding your financial situation and proposed loan amount.

Your lender will need to see a breakdown of two years’ worth of income. This includes your two most recent pay stubs, W-2 forms, and tax returns. Additional documentation might be required if you are self-employed or live on community property.

When refinancing, you don’t have to work with the same lender. When comparing lenders, choose a company that can help you save money on your mortgage payments and offers a wide range of available mortgage products.

Locking In Your Interest Rate

Getting approved for a mortgage is not the end of the process. Before a loan closes, there are many decisions and steps, including locking your interest rate.

Rate locks can take up to 15-60 days. However, these durations are dependent on a few factors like your loan type and location, along with the lender you choose. You have the option to float your loan rate. This means that you don’t lock it in before taking out a mortgage. By doing this, you may get lower refinance rates during the life of the loan, but you are also at risk of getting a higher one.

Underwriting

Getting approved for a mortgage is not the end of the process. Before a loan closes, there are many decisions and steps, including locking your interest rate.

Rate locks can take up to 15-60 days. However, these durations are dependent on a few factors like your loan type and location, along with the lender you choose. You have the option to float your loan rate. This means that you don’t lock it in before taking out a mortgage. By doing this, you may get lower refinance rates during the life of the loan, but you are also at risk of getting a higher one.

Home Appraisal

The appraisal process will vary from lender to lender. Still, the home appraiser will generally inspect your home, check property records and look at comparisons in your area and the rest of the country.

A solid argument for your home’s value is crucial before beginning the appraisal process. Ensure your home is clean and well maintained to prepare for the appraisal. It’s essential to leave the appraiser with a good impression. If minor repairs are needed, this is the time to do them. Keep track of any upgrades or renovations completed since you’ve owned the property.

After your application is approved and you’ve gone through the underwriting process for your mortgage refinance, you can expect a letter from your lender with details. The letter will likely instruct you to contact the lender for further information about the closing date.

Closing On Your New Loan

After completing the requirements needed to close the loan, it’s time to get your mortgage funded. As you get closer to closing, your lender will send you a Closing Disclosure document. You have the final opportunity to review all of your loan details before submitting them for approval.

When looking to refinance your mortgage, the closing process is more straightforward than purchasing a home because your mortgage company will likely complete most preliminary steps.

To close, you’ll need to provide your loan officer with documentation. This includes personal information such as your Social Security number and driver’s license number. You’ll also need to provide income and employment documentation, including pay stubs and W-2 forms. Once you’ve closed on your loan, you have a few days to evaluate the transaction and ensure it’s right by choosing the type of mortgage you desire, if it’s a 30-year mortgage. If you realize that it’s not, you can exercise your right of rescission to cancel within a 3-day grace period.

Reasons Why You Should Refinance Your Mortgage

There are various reasons homeowners might want to refinance their mortgage during its term. Here are some of the most common causes.

  • Change Your Loan Term
  • Lower Your Interest Rate
  • Change Your Loan Type
  • Cash Out Your Equity

Conclusion

There are various reasons why you may want to refinance your original mortgage. If you wish to lower your rates, add cash to your home equity or take advantage of new programs, refinancing can give you the freedom to make changes so that the property is more beneficial. Before beginning the process, determine the costs and benefits and shop around for rates and other details.

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