The 8 steps of the refinance process
1. What is your purpose for refinancing? Make sure you are refinancing your home loan for the right reason. There are two goals for refinancing; 1.) Aim to shorten — or 2.) at least maintain — your current loan term while lowering your interest rate.
2. Know your credit score. Check your credit history and make sure the information is up-to-date and accurate. The better your score, the better the mortgage refinance interest rates you can qualify for or be offered.
3. What is the current value of your home? The goal here is to check your neighborhood for recent sales of homes like yours. Research your home’s value using reputable sources.
4. Find the best mortgage rate. Start by doing your research, then comparing refinance rates online. You can shop rates online as much as you want, but limit the window for submitting loan applications. Also do not allow your credit report to be pulled. If you do so, limit it to a two-week period. Why? Because this helps to lessen the impact on your credit score.
5. Know your all-in costs. Compare closing costs you receive from each lender you consider. A home loan refinance can trigger a bunch of fees: application fees, the cost of an appraisal, origination fees, a document processing fee, an underwriting fee, a credit report charge, title research and insurance, recording fees, tax transfer fees and points, to name several.
6. Maintain all paperwork and documentation. This can be a bit harder now-a-days because so many of us do our financial business online. But you might have to gather, print or download statements, pay stubs, and whatever else the lender will need during the loan process.
7. Lock-in your rate. You’ll have to decide when to lock in your mortgage refinance rate with the lender you choose, so the rate you’re offered for your new loan can’t change during a specified period prior to closing.
8. Cash is King. There are likely to be property taxes and insurance, closing costs and other expenses to pay at closing, so be sure to set aside enough cash to cover them. In some cases, these costs can be added to the mortgage balance, which, on the one hand, limits your upfront costs but, on the other, increases what you owe on your home.
Final tips
Know that some homeowners refinance their mortgages for reasons other than locking in a lower interest rate. Some refinance as a way to get rid of mortgage insurance.
Others are interested in tapping into their home equity as cash, but it’s important to understand the pros and cons of a cash-out refinance.
And with any refinance, be sure to consider how long it will take for you to break even on the fees and expenses.
Refinancing — for the right reason, with a good interest rate and a suitable term — can enhance your overall financial position.
