There comes a time in many a homeowner's life that they get interested in the idea of refinancing their mortgage.
There are a lot of different reasons to do this, but regardless of why you are doing it, if you do it without doing your homework first, it can turn into a sticky, awful mess. Before we consider the steps to refinance a mortgage, we should first consider why you would want one to begin with.
Why should I refinance my mortgage?
There are several reasons why you may want to refinance a mortgage. The following are just a few of the major reasons people seek a mortgage refinance:
- They want a better interest rate than what they currently have: Interest rates change all the time for all kinds of loans, and mortgages are no different. It is possible that, when you bought your home, interest rates were particularly high. It is also possible that you are in a better credit or financial situation where a potential lender would be able to offer you a better rate.
- They want to be able to stop paying mortgage insurance (a requirement on some loan types): Mortgage insurance (or MPI), is a rate that is tacked onto your mortgage payment every month and can be a big chunk of what you are paying. If you want to get out from under it, a mortgage refinance can do the trick. If you have a Federal Housing Administration Loan (or an FHA), you almost certainly were required to have mortgage insurance when you started your loan.
- They want to change the length of their mortgage to alter their monthly payments: It may be possible that your financial situation has changed for the worse, and you need help with adjusting the financial burden of your monthly mortgage. Though this is a rather drastic step, it is possible that a mortgage refinance could help get your monthly payments in line with your current budget. Remember, though, this will likely come at the cost of extending the life of your mortgage, which means you will end up paying a bucket load in interest.
- They want to have access to the equity in their home by cashing it out (seniors frequently do this through a process called a reverse mortgage). This is frequently a step taken by retired seniors who never plan on selling their home and want access to the equity in the form of cash. The lender evaluates the current value of your home and compares it to what you owe on the loan, and then they give you the difference in cash. This method is also sometimes used for making home improvements. Even though you raise the amount of your mortgage, you may be increasing the value of your home, which turns out to be a wash in your favor.
Regardless of the reason why you want to refinance your mortgage, you are going to want to keep one goal in mind: is the cost of the refinancing service I'm looking at outweigh the actual cost of the mortgage refinance. If at any point it does not, it is possible that a mortgage refinance is not for you.
If you fit into any one of the aforementioned categories as to why one may seek a refinance, then a mortgage refinance might be the best option for you. However, as we have said, you want to be sure to follow the process properly to give yourself the best deal and not cost yourself money in the long run. Here are some of the basic steps of refinancing your home:
- Check your credit score
- Begin shopping!
- Financially prepare for mortgage closing costs
- Secure the mortgage rate and complete final details
Your credit score is one of the most important components when lenders consider whether or not they will refinance for you, and if they do, what kind of interest rate they will offer you. If your score is low, you may want to take some time to improve it, as well as dispute any negative claims against your score that you believe to be in error.
If you believe your credit score is in check, the next step is to start shopping around for mortgage rates. There are plenty of places that may consider refinancing your mortgage for you. You could consider your local bank or credit union, or you could consider one of the dozens of online lenders that specialize in mortgage refinances.
Remember when you first bought your home and how you had closing costs in addition to the myriad of other costs that were present during the process? Though you are not buying a new home this time around, you are still getting a new mortgage, and with that comes closing costs.
There are also fees that you will need to prepare for as well. If you find a lender that says that the offer a refinance with no cost, approach them with caution. It is not that they do not charge fees that other lenders do, it is that they are rolling those fees into your newly refinanced mortgage. The more you mortgage is, the more interest you will pay on the principle, so be wary of deals that sound too good to be true.
Mortgage interest rates can vary from day to day, and these changes are outside of the control of your lender. It may be worth postponing a mortgage refinance if interest rates are particularly high, especially if your current rate is quite low. However, if a rate is offered that you are interested in, you can "lock it in" at your leisure.
That means that specific rate is guaranteed, regardless of how market rates change from there on out. From this point, you will review some final costs and paperwork, but this is the last major step in refinancing your home.
It cannot be emphasized enough that you should not do a mortgage refinance haphazardly. Do your due diligence in shopping for a rate, being aware of fees that are being charged, and making sure you are putting yourself in the best financial position possible. You will be doing both your present and future self a huge favor.
