Mortgage Refinancing: What Is It And How Does It Work?
When you refinance your home mortgage, you're essentially trading your existing mortgage for a new mortgage, often with a new principal and a different interest rate. The lender then uses the newer mortgage to pay off the old one, leaving you with one loan and one monthly payment.
There are several reasons why people refinance their homes. You can use a cash-out refinance to take advantage of your home's equity or refinance based on price and term to get a better interest rate and/or lower monthly payment. Refinancing can also be used to remove someone else from the mortgage, which is often the case in a divorce. Finally, you can add someone to the mortgage.
How does home refinancing work?
The refinancing process is often less complicated than buying a home, although it involves many of the same steps. It can be difficult to predict how long a refinance will take, but the usual time frame is 30 to 45 days.
Let's take a closer look at the refinancing process.
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The first step in this process is to review the types of refinancing to find the best option for you. When you apply for a refinance, your lender asks for the same information you gave them or another lender when you bought the home. They will look at your income, assets, debt and credit score to determine if you qualify for refinancing and if you can repay the loan.
Some of the documents your lender may need include:
The latest two pay stubs
The most recent two types of W-2
The two most recent bank statements
The lender may also need documents from your spouse if you are married and jointly owned (whether your spouse is on the loan or not). More income documentation may be required if you are self-employed. It's also a good idea to have your tax returns for the past two years handy.
You do not need to refinance with your current lender. If you choose a different lender, that new lender will pay off your existing loan, ending your relationship with the old lender. Don't be afraid to shop around and compare each lender's current rates, availability and customer satisfaction.
Lock in your interest rate
Once approved, you may be given the option to lock in your interest rate so it doesn't change before the loan closes.
Price locking lasts from 15 to 60 days. The lock-in period depends on some factors such as your location, the type of loan and the lender. You can also get a better rate by choosing to close for a shorter period of time because the lender doesn't have to hedge against the market for long. Be careful, though: If your loan doesn't close before the closing period ends, you may have to extend the rate lock, which could cost you money.
You may be given the option to change your rate, meaning you don't lock it in before proceeding with the loan. This feature may allow you to get a lower price, but it also puts you at risk of getting a higher price. In some cases, you may be able to get the best of both worlds with a float option, but if you're happy with the rates at the time you apply, it's generally a good idea to go ahead and lock in the rate.
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Once you submit your application, the lender begins the foreclosure process. During underwriting, the mortgage lender checks your financial information and makes sure everything you've provided is correct.
Your lender will check details of the property, such as when you bought your home. This step involves an appraisal to determine the value of the home. Evaluating refinancing is an important part of the process because it determines the options available to you.
If you're refinancing to take out cash, for example, the value of your home determines how much money you can get. If you're trying to lower your mortgage payments, the value can affect whether you have enough equity to get rid of your private mortgage insurance or qualify for a particular loan option.
home assessment
Just like you bought your home, you should get an appraisal before you refinance. Your lender orders an appraisal, the appraiser visits your property, and you receive an estimate of your home's value.
To prepare for the appraisal, you'll need to make sure your home looks its best. Arrange and complete all minor repairs to make a good impression. It's also a good idea to compile a list of upgrades you've made to the home since you've owned it.