How Does a Mortgage Refinance Work?
Although a mortgage is designed to last until the loan is completely paid off, homeowners often choose to refinance it. They have many reasons they might decide to refinance, from cutting the interest rate to shortening the loan term. Selecting the right time to apply helps homeowners to ensure that they get the best options. Knowing what to expect from the mortgage process can make it easier to determine if refinancing is appropriate, and how they can go about it.
Consider Refinancing Goals
When people get a mortgage to buy a home, being able to qualify for a loan that meets their buying needs is typically their primary goal. With a refinance, homeowners may get to be a little more selective about their options. They still have to qualify for the loan like a new mortgage, but their ability to secure the house is not on the line. This allows them to think about how refinancing might improve their lives. Homeowners often refinance a mortgage to:
- lower the monthly payment
- eliminate the need for private mortgage insurance (PMI)
- take out cash to pay for home improvements or other expenses
- pay off the loan more quickly
- switch from an adjustable-rate mortgage to a fixed-rate loan
People may receive a variety of offers with different terms. Knowing their goals will help them select the most appropriate one.
Evaluate Current Refinancing Options
Before they start applying for a loan, homeowners should take time to investigate their current finances and the state of the local market. Usually, people want to refinance when loan terms are favorable enough to help them achieve their goals. The right time depends on what homeowners want from the loan. For example, a person who got their original mortgage when interest rates were higher may want to time their application when average interest rates have dropped enough to justify the effort. A homeowner who is close to the 20 percent threshold needed to eliminate PMI may want to gauge home values in the neighborhood to be fairly certain the numbers will suit.
At the same time that people are evaluating the state of the current market, they should confirm that everything related to their credit and finances are in order. Applying for a refinance is considerably similar to a new mortgage application, requiring the same income and employment verifications, as well as credit checks. If homeowners' credit has improved since they bought their homes, they may get better options.
Research Lenders and Apply for Loans
Many homeowners may choose to refinance the loan through their current lender, but they are not required to do so. In fact, researching a few different options and applying for multiple loans may paint a clearer picture of a borrower's options. As with the existing mortgage, the lender will respond to qualified applicants with a Loan Estimate. This identifies the relevant details of each loan the lender is willing to offer. Homeowners should consider it carefully, particularly the costs they are required to pay at closing. Lenders may give applicants the option to roll most closing costs into the refinance, but this often increases the loan amount.
Arrange for a Home Appraisal
In order to approve the loan, the lender typically arranges for a home appraisal. The appraisal amount verifies that the home's value meets the requirements of the new mortgage. Harbor Town homeowners usually do not need to fully stage the home for the appraisal, although it should be clean and in good repair. Appraisers tend to focus on the condition of the permanent structures of the home, as well as recent upgrades that may improve its value. Homeowners can help by answering the appraiser's questions and providing evidence of improvements they made since they moved in. If the appraisal meets lender specifications, homeowners may be clear to proceed to closing.
Finalize the Loan
Assuming that all paperwork is accurate, the lender will provide a Closing Disclosure to the applicants. Homeowners should double-check the numbers against the Loan Estimate to be sure that costs have not changed. If they agree, they can sign the disclosure and get ready to close. People are allowed to decline the loan up until the point that they complete the final closing documents. Instead of providing money to purchase a home, the loan pays off the existing mortgage.
In many ways, refinancing a mortgage is much like the original loan process. The biggest difference is that homeowners can evaluate the new loan and see how their options can help them better meet their financial goals. Choosing the right time and making the necessary preparations makes for a smoother experience.