Good NestingThis process allows homeowners to renegotiate the original repayment terms on their mortgages. The result can be lower monthly payments or, if the family has a higher credit score, lower interest rates or additional financing.
Refinancing is a popular practice among homeowners. In 2017, refinance requests represented almost 40 percent of all mortgage applications. However, the benefits of this process are unknown to many families, who miss out on thousands of dollars in savings by not refinancing on time. In this article, we explain why and how to refinance your mortgage, steps to complete the process, and more.
Why people refinance their mortgage
Homeowners must understand why they want to refinance their mortgage before starting the process. The reason to refinance will have significant ramifications along the way. Most families refinance their mortgage to lower payments. However, some homeowners do so to obtain additional funding under the same loan instead of applying for an unsecured personal loan or second mortgage.
Families refinancing their mortgage to lower monthly payments should avoid some common mistakes. For example, it may seem attractive to reset the term and get lower monthly payments, but doing so means it will take longer to pay off the loan. Also, it will increase the total amount of money paid as interest. In general, homeowners should calculate how much interest they’ve already paid before making a decision to refinance.
Financial institutions front-load mortgage loans with interest to reduce risk. The longer a family has been paying off their loan, the more each payment contributes to the principal. Resetting the term while refinancing will also affect how much each payment contributes to reducing the principal. In some circumstances, it might be better to continue with the current term and negotiate lower interest rates.
Using a mortgage refinance calculator
Finding a compelling reason to refinance is only the first step. Next, they have to work out the details using resources such as a mortgage refinance calculator. In general, homeowners should know what interest rate they expect to get, as well as the size of the new loan, after refinancing is complete. Using a mortgage refinance calculator, the family can determine how much money will be saved through refinancing, as well as other details such as new monthly payments and interest rates. The calculator usually includes the cost of refinancing.
Calculating the potential outcome of a mortgage refinance before submitting an application is always a good idea. Doing so gives families a clear picture of what benefits will be obtained when the process is complete, and whether it’s worth it to refinance in the first place.
Sometimes, refinancing a mortgage means spending thousands of dollars in exchange for an insignificant payment or interest rate reduction. In such a case, it may not be reasonable to move forward. However, the most effective way to reach such a conclusion is by calculating the costs and estimated benefits beforehand. Whether the calculation is performed using a refinance calculator or manually is up to each homeowner.
Shopping for the best refinance rates
Once the decision to move forward has been made, what follows involves shopping around for estimates from financial institutions. Nowadays, most lenders allow customers to request an estimate though their website or by making a phone call. By law, financial institutions are obliged to issue an estimate within three days of being sent the required information.
In general, estimates are three-page documents informing the customer what the financial institution can offer according to their credit history. It usually includes loan terms, estimated monthly payments, interest rates, closing costs, and other fees.
With information provided by financial institutions, customers can improve their calculations to determine which one has the best mortgage refinance rates. Homeowners should keep in mind that closing costs and fees vary according to how each financial institution operates. For example, some lenders will charge customers no closing costs.
The process of refinancing
As we´ve already mentioned, homeowners should calculate the estimated benefits of refinancing before contacting a financial institution. Checking their credit score and financial history is a good way of anticipating the potential interest rates offered by a bank. Appraising their homes is also necessary to determine whether the house has increased in value, giving homeowners access to more equity.
After the shopping period is complete, homeowners should know how much exactly will cost to refinance their mortgage. This process often triggers many hidden costs, including appraisal and origination fees. In general, financial institutions are required to disclose those costs when they issue an estimate. However, some tell customers there are no closing costs, while they charge higher interest rates.
Once a specific bank has been selected, what comes next is to gather the required documents. Financial institutions usually request all sorts of documents, including personal identification, bank statements, and more. Nowadays, some lenders allow customers to submit paperwork through their website. However, some still require visiting a local branch to finish the application process.
Getting a mortgage rate lock
After the necessary paperwork has been submitted, homeowners have to decide whether they want to lock the mortgage refinance interest rate. A mortgage rate lock is a compromise made by a lender where they guarantee the interest rate of a loan for a period of time. Families who refinance an FHA loan are often given a mortgage rate lock once they start the process.
Some financial institutions charge customers a fee to perform a mortgage rate lock, although homeowners with high credit scores may receive this guarantee at no cost. Mortgage rate locks generally last from loan approval and until closing. Their purpose is to streamline the underwriting process, shielding it from mortgage interest rate fluctuations, which happen quite often.
Homeowners can take advantage of mortgage rate locks to save thousands of dollars when refinancing their home loan. However, if interest rates are expected to go down during the application process, locking them might result in a loss of additional savings. Predicting how mortgage interest rates will behave requires a comprehensive understanding of local housing markets, which average families don’t have. Making the decision to lock a mortgage rate will depend on what homeowners consider to be the best course of action.
Refinancing a mortgage is a comprehensive process that, when done right, can save thousands of dollars on monthly payments. As a result, families need to do whatever they can to make sure they understand the process and aren’t ignoring any important details.
Having cash on hand is critical to complete the process without much hassle, as property taxes, insurance, closing costs and other fees will have to be covered out of pocket. In some cases, these expenses can be added to a mortgage balance, but doing so might defeat the purpose of refinancing in he first place.
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