Your home is a significant investment. Over the years, you build equity that can be utilized for home improvements, debt consolidation or to refinance your mortgage for a lower monthly payment. If you’re thinking about refinancing, here’s what you should consider.
What Is Refinancing?
Refinancing is the replacement of your existing mortgage with a new home loan, one ideally with a new interest rate, lower monthly payment or without any mortgage insurance.
You will continue to make payments based on the terms of the new mortgage, which your lender uses to pay off the old mortgage. Common reasons homeowners refinance include:
- Utilizing the cash available through your home’s equity
- Getting a lower interest rate or monthly payment
- Eliminating mortgage insurance
- Switching from an adjustable-rate mortgage to a conventional loan
- Adding or removing someone from the mortgage
How Refinancing Works
You will apply to refinance and have a new loan underwritten and closed. The process typically takes 30 to 45 days.
- You will complete an application listing your income, assets and debt. Be ready with current paystubs, your last two W-2s and latest bank statements. Credit score will also be considered. Any co-signer should be prepared to provide similar information.
- You will have the option to lock in your rate, which lasts up to 60 days, or until you close the loan. You can also float your rate, which allows you to wait until you get a lower rate, but understand this doesn’t always happen when the loan closes.
- The lender will order a home appraisal to determine your home’s current value. If the value is equal to or greater than your mortgage, your lender starts the closing process. If it’s lower, you have the option to refinance at the lower value.
- You will close on the new loan and pay any closing costs.
Within this process, consider the following:
- If you’re able to get a lower interest rate up front, you can lock it in, but may need to pay a lock fee.
- Refinancing is not the only option to lower your monthly payment. Other solutions include loan modification, which updates your current terms and payment, and a mortgage re-cast, in which you put a larger payment toward the principal, so your lender can adjust your monthly payment in relation to the outstanding balance.
- The lender obtains your credit report, which may lower your credit score.
Costs of Refinancing
Understand that refinancing comes with a few costs:
- Fees are calculated from three to six percent of the outstanding principal balance.
- Your lender may level a prepayment penalty against you, especially if you’re refinancing within three to five years of taking out your original loan.
If you’re thinking about refinancing your mortgage, get expert assistance from Ion Bank! To discuss your financial goals, contact us today.