What is refinancing and how does it work?
When you refinance your mortgage, you’re going to get a new loan to substitute your old one. The new loan may have various terminology, such as shifting from a 15-year to a 30-year term or by an extendable to a fixed interest rate, but perhaps the most common difference is a lower rate of interest. Refinancing your mortgage can help you lower your monthly bill, save interest income over the term of your loan, pay off your mortgage faster, and access the equity in the home if you required money for any reason.
How does refinancing work?
Even though it contains most of the same steps as buying a home, the refinancing procedure is often less complex. Although it’s difficult to anticipate how much time your refinance will take, the average timeframe is 30 to 45 days.
Let’s look at the process of refinancing in more detail.
The first step in this process is to go through the different options available of refinances to see the best fit for you. When you apply to refinance, your lender will ask for the same data you gave them or the other lending institution when you purchased the house. They’ll look at your assets, income, debts, and credit score to see if you meet the requirements for refinancing and can pay back the loan.
Lender might require the following documents:
- Pay stubs from the last two months
- W-2s from the last two years
- Bank statements from the last two months
Borrowers with bad credit or other issues can get a hard money loan till they are qualified for traditional financing. For homeowners facing foreclosure, hard money loans may be a viable option. It enables them to pay the foreclosing creditor with a hard money refinance, giving them more time to sell the property or improve their credit enough to qualify for long-term financing with better terms.
If you’re married and live in a joint property state, your creditor may also require your spouse’s documents. If you’re self-employed, you may be asked to submit additional documentation of income. It also is a smart option to have your tax returns from the previous two years on hand.
You don’t have to keep your current lender if you are looking to refinance. If you switch creditors or lenders, the new one will ends up paying off your current loan, effectively ending your association with the old one. Don’t be nervous to shop around it and compare current availability, rates, and client satisfaction scores from different lenders.
Getting your interest rate locked in
You may be offered the choice to lock your rate of interest after you’ve been approved, so it doesn’t start changing before the loan closes.
The duration of a rate lock can range from 15 to 60 days. The length of the rate lock period is determined by a number of factors, including your loan type, lender, and location. Because the creditor doesn’t have to manage risk against the industry for as long, you might get a better rate if you lock for a shorter time. However, if the loan does not close before the rate lock time ends, you may be recommended to expand the rate lock, which can be costly.
You may also be provided the choice to “float” your rate, it means that you won’t have to lock it in before moving forward with the loan. This feature may help you get a lower interest rate, but it also increases your chances of getting a higher one. Sometimes in cases, a float-down option may allow you to get the best of all worlds, and if you’re pleased with rates at the time of application, it’s usually a good idea to lock your rate.
Your lender will start the underwriting process after you process your request. Your mortgage provider verifies your financial data and ensures that everything you’ve submitted is correct during underwriting.
Your lender will check the property’s details, such as when you purchased it. An appraisal is used to determine the home’s value in this step. Because it decides what choices are available to you, the refinance appraisal is an important part of the process.
If you’re refinancing to accept money out, the value of the home, for example, will decide the amount you can get. If you’re looking to save money on your mortgage, the value of the home could affect if you have enough equity to just get rid of mortgage insurance or qualify for a particular loan.
Appraisal of your house
You must get an appraisal before refinancing, just as you did when you bought your home. Your lender requests an appraisal, the appraiser visits your home, and you receive an estimate of your home’s value. In order to prepare for the appraisal, you’ll want to make your home look its best. Clean up and make any minor repairs to make a good first impression. Making a list of home improvements you’ve made since you’ve owned it is also a good idea.
If the home’s value is equal to or greater than the loan amount you want to refinance, the underwriting is complete. Your lender will inform you of the specifics of your closing.
What if your estimate turns out to be too low? You have the option of lowering the sum of money you would like to get from the refinance or cancelling your application. You can also do a cash-in refinance, which involves bringing cash to the table in exchange for the terms of your current loan.
Your new loan is about to be closed
Upon completion of the underwriting and home assessment, your loan is ready to close. A few days before the closing, your creditor will send you a Closing Disclosure form. Those are the numbers you’ll find in this section. It takes less time to close on a refinance than to close on a new home.
The closing is attended by the parties involved in the loan and title, and a representative from the lender or title company. At closing, you’ll go over the details of your loan and sign your loan documents. If your loan doesn’t include any closing costs, you will be responsible for those out of pocket when you close the deal.
A cash-out refinance, for example, will result in you receiving the funds after the closing has occurred if your lender is owing you money. After your loan closes, you have a few days to get your finances in order. Your right of rescission allows you to cancel your refinancing before the three-day grace period expires if something unexpected happens.
Refinancing a Mortgage for a Variety of Reasons
Homeowners refinance their mortgage loans for a variety of reasons. Here are a few of the most important ones to consider:
Lower interest rate and payment: If the credit has enhanced or market rates have fallen since you took out your first loan, you could be able to save some money on interest by refinancing your rental loan with another long term loan at better rates. Even hard money lenders offer longer term loans and have interest only options which can be an option when refinancing the loan.
Cash-out: If your home has a lot of equity, you might be able to cash out a portion of it with a refinance to buy out an ex-spouse in a divorce, or pay the bills.
Change your rate type: If you have an adjustable-rate mortgage, switching to a fixed rate loan can help you avoid market fluctuations.
Change your loan term: If you reduce your loan term from 30 years to 20 or 15 years, you may be able to qualify for a lower interest rate. You can also save money on interest over the life of the loan by doing so. You may be able to reduce your monthly payment by extending your loan term.
It’s important to consider the risks of refinancing your mortgage loan as you consider your reasons for doing so:
- If you extend the term of your loan, you may end up paying more interest.
- Cashing out a portion of your equity will result in a larger loan amount on your new mortgage, potentially raising your monthly payment.
- There’s no guarantee that the new loan will have better terms.
- If interest rates have risen significantly since you took out your first loan, a higher credit score may not be enough to get you a better deal.
The benefits and drawbacks of refinancing a mortgage
If you’re considering refinancing, make a list of the procs and cons to see if it’s right for you.
- You could be able to reduce your interest rate.
- You could shorten your loan’s term and pay it off sooner.
- You could reduce your mortgage payment to make more room in your monthly budget.
- You might take out cash of your home’s equity at closing.
- You might take out cash of your home’s equity at closing. To avoid having to pay unnecessary fees, you may be able to terminate private mortgage insurance premiums.
- You could consolidate debt — for example, some property owners use refinancing to combine student loans as well as other debts into a single transaction.
- You could convert your fixed-rate mortgage to an adjustable-rate mortgage or vice versa.
- Closing costs must be paid.
- You may have a longer loan term, which will raise your prices and delay your payoff date.
- If interest rates fall significantly after you close, you may experience buyer’s remorse.
- When you take out cash, you have much less equity in the property.
- Your credit history will temporarily suffer as a result.
- It is not a fast process: refinancing could take from around 15 to 45 days or more.
When you refinance, you might be able to save thousands of dollars in interest and even shorten the length of your mortgage, but you have to be careful. Make sure you’re making a smart decision about your home by looking at the costs and what your plans are. A highly experienced lender, 14th Street Capital, can assist you in obtaining a hard money land loan. Quick, no-hassle hard money loans with flexible terms and minimal paperwork are available.