You may have heard that home loan interest rates are near record lows. Lower interest rates mean that you can save money on your monthly mortgage payment. You will also save in the total amount of interest you will pay over the life of your loan.
If you have not been through a home loan refinance before, you may not know where to begin. The process of buying your home is very different and has a lot more people involved! Fortunately, refinancing your mortgage is straightforward.
This guide will walk you through the process of a home loan refinance as well as what you can expect along the way.
What Is a Refinance?
First, it is important to understand how refinancing works. When you bought your home, you took out a mortgage loan to pay the seller, at a certain interest rate, over a certain term.
When you do a refinance, your existing loan will be paid off and replaced with a new loan. The loan payoff is part of the refinancing process.
You do not need to refinance with your existing lender. You can refinance with any lender, and your new lender will take care of paying off your current mortgage.
Benefits of Refinancing Your Mortgage
While mortgage refinance rates and reducing your interest are great reasons to refinance your home, they are not the only reasons. Here are some other benefits to refinancing your home.
Reduce Your Loan Term
You may have started with a 30-year loan term, but you can refinance to a 15-year loan to pay off your loan sooner. You can also go in the other direction and extend your term to reduce your payments.
Access Your Equity
As you pay down your mortgage, you build equity in your house. A cash-out refinance allows you to access that equity and receive a check with your loan closing that you can use for home improvements or other expenses.
Similar to accessing your equity, you can use the equity in your home to pay off other higher-interest debts, such as credit cards.
Get Rid of an Adjustable Rate Loan
If you have an adjustable-rate loan, you can refinance into a fixed-rate loan. Your payments will then remain stable over time.
Steps to Refinancing Your Mortgage
If you have decided to refinance your mortgage, what are the steps you can expect?
First, you will need to apply for a mortgage with a lender. You will need to fill out a home loan application, which is a standard form. Some lenders may have you begin the application process through an online portal.
On the application, you’ll need to fill out identifying information about yourself and any co-applicant (such as a spouse), including name, date of birth, and social security number. The application will also require you to list out all of your assets and any debts that you have. Your debts may include car loans, credit cards, student loans, and more.
Lock In Your Interest Rate
Once your loan is approved, you will lock in your interest rate. Whatever the interest rate is that day is the interest rate that you will have on your loan. Even if the interest rate goes up (or down) between that date and your closing date, your interest rate will not change.
Putting Your Loan Together
Your lender will then get to work on your loan. Your loan will involve title insurance, which will show the lender your current mortgage as well as any other mortgage, liens, or encumbrances on the property. The lender will also order an appraisal to determine your home’s value.
Once everything is received, you will schedule a loan closing with the lender. This is where you will sign all of the new loan paperwork and where your existing loan will be paid off. After the loan closing, your monthly mortgage payment will change and reflect the new payment per your new loan terms.
What You Will Need to Provide
While your lender is waiting for your title insurance and appraisal, your loan will also go through underwriting. An underwriter will collect additional information from you to verify what you had submitted on your application. Some of the information requested will depend on whether you are using the same lender or a new lender.
Part of your loan application will including pulling your credit report. This will show the lender your credit score and verify the debts you had reported on your loan application.
You can expect the underwriter to request:
- Pay stubs covering a 30-day period
- Copies of W-2s or 1099s
- Tax returns, if you are self-employed
- Bank statements
- Retirement or stock statements
- Proof of homeowners’ insurance
Your underwriter may also reach out to your employer and complete a verbal verification of employment. They will confirm the information on your paystub and also inquire about the likely future of your position.
In some cases, you may need to provide a written explanation for things the underwriter finds. These could include recent inquiries on your credit report, information regarding late payments, or sources for large deposits into your bank accounts.
It is important to provide information to your underwriter promptly. The more quickly your respond, the faster your loan will go through the underwriting process. In some cases, you may need to provide updated copies of certain documents prior to closing.
Refinance Your Home Loan With Your Local Lender
When you work with a local lender, you will have a more personalized experience. Refinancing your mortgage involves a lot of paperwork, as required by law. It helps to work with a lender with whom you feel comfortable asking questions.
At your community bank, mortgage specialists will keep you informed of your loan’s status every step of the way. They will let you know if you need to provide any additional information to the underwriters and ensure a smooth loan closing.