There’s no doubt the housing market is booming. Houses are selling within days of hitting the market and sellers are having their pick of offers to accept.
So, what’s driving this crazy housing market? Historic low-interest rates certainly help many bring many new buyers to the table.
It’s also a great time to decide to take advantage of refinancing your home. Why? Again, because the rates are so low and houses are appraising so high, you may have even more equity in the home.
Are you wondering how to refinance a home and whether it’s something you should consider doing with your mortgage? Are you hoping to take advantage of those low-interest rates for your mortgage?
Read on to learn what you need to know about a home loan refinance.
What’s Your Reason for Refinancing?
There are a number of motivations for refinancing a mortgage. Before you jump into the process, it makes sense to evaluate your goals for refinancing.
Your goal might be to finance your mortgage with a lower interest rate. This would likely lower your payments per month. You want to factor in the savings you get from refinancing at a lower rate and compare that to the costs for refinancing. How long will it take to break even on the refinancing? Then you know if it’s worth the cost.
You might want to refinance because your goal is to get a lower monthly bill. This would allow you more room in your budget each month. Some people who have this goal will extend the life of their loan. If that’s the case, you might consider how much more you’ll pay in interest because you’ve extended the terms of your loan.
Another common reason for refinancing is to tap into the equity in your home. Maybe you want to do a big home improvement project or pay down debt. You can either do this by opening a home equity line of credit, taking a home equity loan, which is like adding a mortgage or doing a cash-out refinance.
Each option comes with some pros and cons, so as you consider your goals, also weigh the associated costs.
Consider If You’d Qualify
The next step before you jump in again is to consider if you’d qualify for refinancing. There are three factors that might impact your eligibility for refinancing.
Like the first time you got a mortgage, the first factor is your credit score and credit history. You want to take a look at your credit report and make sure there are no inaccuracies.
Then consider your debt-to-income ratio. This figure is used industry-wide to calculate how much debt you have compared to your income. For nearly all lenders, a potential lender can’t go beyond the 43% debt-to-income ratio and still qualify to refinance or get a new mortgage.
Finally, again like the first time you got a mortgage, your income will be considered. Do you make enough money to show the lender you’ll be able to repay this debt?
How Much Is Your House Worth?
The next thing to evaluate is the current market value of your home. You know how much you currently owe on your mortgage. Once you calculate your home’s current value on the market, you’ll have a better idea of the equity you have in your home.
If your goal for refinancing is to tap into equity, you’ll want to calculate your loan-to-value number (your lender can help you calculate this figure). This will help you to know how much equity you could potentially use from the value of your home.
Shop for a Mortgage
While the rates are historically low, they can still vary from lender to lender. Even the smallest difference in an interest rate can cost you more. So, you want to do your due diligence and find a lender who provides the best option for you.
Remember, too, refinancing a mortgage will cost more than just the interest rate. You will want to know about what fees and closing costs will be a part of refinancing with each lender.
You can opt to do this research yourself. You could also go to a mortgage broker who can search for the best deal for you based on your credit, income, and available equity.
Applying and Loan Estimates
Mortgage lenders can provide you with something called a loan estimate. This is a standard form that provides you with all the financials of creating a mortgage with that lender.
You do have to do a loan application to be provided the loan estimate. It’s worth noting that completing a loan application puts a hard hit on your credit, which can impact your credit score. However, you might be able to apply for the same type of loan multiple times in one time period and it only hits your credit once.
The loan estimate will help you select a lender and narrow down exactly what it will cost to refinance your mortgage.
Completing the Mortgage and Preparing for Closing
Once you’ve decided on a lender, you may need to provide them with documentation to complete the mortgage and be prepared for closing. The lender may want to see:
- W-2 forms
- Tax return forms
- Account statements from your checking, savings, and retirement accounts
- Investment information
- Driver’s license copy
Then you can prepare for a closing date. Typically, the lender will work with a title company to organize closing. You may need a notary to notarize your closing documents. Once you’ve signed all the paperwork and the notary notarized your signatures you have successfully completed one of the last steps of refinancing your mortgage.
How to Refinance a Home So You Have the Best Deal
With low-interest rates, it can be a real savings to opt to refinance your mortgage. Follow these steps on how to refinance a home and get the best mortgage options.
To learn more about the services a notary can provide, or to schedule an appointment with a notary, contact us today.