Buy your house was probably one of the most (if not the most expensive purchases you have ever made. One of the ways to lower the overall cost of your home is through lower monthly payments. Refinancing helps with this.
Your mortgage refinancing occurs when you take out a new home loan to replace your previous one. You will receive a new interest rate and a new monthly payment. It also means that you will receive new terms. So if you’ve been on a 30 year mortgage for a couple of years, the refinance will restart the clock.
When you consider historically low interest rates during the coronavirus outbreakwhich is causing many lenders to work off a backlog. (This also means that your application may take longer than normal to process.), you’re not alone. Millions of Americans are applying for mortgage refinancing
You can still refinance yourself, even during. How to start.
1. Find out your “why”
Before you rummage through lenders, ask yourself first what the purpose of refinancing is. Such as:
Do I want a lower interest rate? If you are watch interest rates fluctuate and floating at some of the lowest rates ever, refinancing seems tempting. If you bought your home at higher interest rates, refinancing to secure a lower interest rate also means a lower monthly payment. You can also refinance to switch from a variable rate mortgage to a fixed rate mortgage.
Do I want a lower monthly payment? You usually get this through lower interest rates, but also when you extend your loan terms. For example, if you had a 15 year home loan and you are refinancing for a 30 year term, your monthly payments will be lower in the new terms.
Do I want to pay off my loan earlier? The sooner you pay off your loan, the less interest you will pay. But that also means higher monthly mortgage payments. You can refinance from a 30 year to a 20 or 15 year mortgage. They have higher monthly payments but are also debt free sooner.
Do i need some cash? If you take out new credit for more than you owe, you can pocket the difference in cash Cash-out refinancing. This is a great way to capitalize on the equity in your home.
2. Increase your balance
Refinancing a mortgage means taking out a new loan, so you need yours credit-worthiness in tip top shape to get the lowest interest rate available.
If you have outstanding debts in addition to your mortgage – such as student loans or an auto payment – try paying them off and reducing your debt-to-income ratio. Lenders want you to have enough cash to pay off your mortgage in case something happens, if you lose your job or a medical emergency prevents you from making money.
Make sure to check your credit report. You can do this for free at AnnualCreditReport.com. See if there are any bugs or bad grades that you can remove to improve your credit score. The higher your credit rating, the lower your interest rate.
Continue reading: How to get a free weekly credit report for the next 12 months
3. Calculate your potential payments
Once you’ve decided why you want to refinance your home, see if the change fits your budget. For example, if you wanted to pay off your mortgage sooner, what would your new payments be on a 15 year mortgage? You can also calculate what a new 30 year reduced interest loan would look like. Discover different refinancing calculators at:
Remember, refinancing a mortgage involves another round of closing costs – between 2% and 6% of the loan. Unless you can find a loan that includes your closing costs in your loan (which still means you pay those costs), or you get a loan “without closing costs”, you will need this cash if your application is approved.
4. Browse lenders
After you have a good idea of what to pay for, find the lenders who offer the best deal. Watch out for interest and fees, but also consider the entire process, including:
- Simple application: Does the lender offer online application or do you need to apply to a local branch?
- Process time: Do you know how long it will take to finalize your new loan?
- Requirements: If your credit rating is not optimal, do you still qualify for a refinance, and if so, is this the best interest rate you can get?
There are many places where you can search for lenders and installments online, but keep in mind that the installments generated through online tools may not always reflect your specific situation and may change if the loan is actually drawn.
You can also try your bank or credit union. Your local institution likely offers home loans and refinancing, and has the tools to calculate what you would pay if you refinanced your mortgage. Another option is to try a private mortgage broker.
5. Apply and close
Once you have found some of the best lenders, submit your applications. Try to complete your applications within a few weeks. Since every application triggers a tough credit check, multiple applications tell the credit bureaus that you do Rate shopping, or shop at the best price. Instead of several tough credit inquiries, only one will show up in your credit score. This means that you won’t face a lot of harsh credit checks that would cause your score to drop.
Once you have selected the best lender, set your interest rate. Since interest rates fluctuate frequently, your interest rates can go up anytime before they close. Once you set your course, it won’t change even if the market lets it go up. Interest freeze periods typically last 30 to 60 days (sometimes longer depending on your lender), which is usually the same time as the time to complete a new loan. Some lenders even guarantee that if interest rates go down before closing, you will get the lowest possible interest rate. Then it’s time to close.
There are many different reasons to refinance your home, so make sure you choose the best lender, interest rate, and repayment terms that best suit your finances. If the interest rate is too high, there are too many fees, or you can’t find a lender to work with, you should put your refinancing on hold for now.