When a homeowner refinances a mortgage, the existing home loan is replaced with a new one. One advantage is that, since you don’t have to refinance with your current lender, you’re free to choose another. Since refinancing offers you several benefits in addition to a lower interest rate,
Here are some things to keep in mind before you apply to refinance your home mortgage.
- Set your financial goal. Do you want to reduce your monthly payments, remove your current home loan’s mortgage insurance, or both? Or do you plan to shorten your home loan’s term, so you can pay less money over the life of your loan and own your home sooner? A professional loan originator can help you compare these options and can suggest refinance loan product options to help you meet your short- and long-term financial goals as well.
- Check your credit score. Higher FICO scores can earn you a lower rate when refinancing. To ensure your reports don’t contain errors, go to AnnualCreditReport.com to download copies of your Experian, TransUnion and Equifax credit reports. AnnualCreditReport.com is authorized by federal law to provide you free copies of these three reports every 12 months. The site also contains links to each credit bureau so you can contact them to request corrections for any errors you find.
- Estimate the amount of your home’s current equity. Equity is defined as the amount you’ve repaid on your mortgage, plus any increase in your home’s appraised value. To get a general idea of your current equity, check your mortgage statement to see how much you currently owe. Next, research your home’s current value. You can do this online by locating homes for sale or that recently sold that are similar in size and location to your home, or you can ask a real estate agent to provide an analysis. Although you may be able to refinance with less than 20% equity, you could end up with a higher interest rate, loan fees, plus private mortgage insurance.
- Shop for the best rates and lowest fees. Refinancing your home loan can be a mistake if you aren’t able to significantly lower your interest rate. And remember, refinancing will incur most if not all of the costs incurred with your existing loan. These may include origination fees, an appraisal, title insurance, taxes, and other costs.
- Gather your documentation. Your new mortgage lender will need to verify your financial assets, income, and employment to approve you for refinancing. Although some lenders are now able to request proof of your income and assets online, you may need to provide recent pay stubs, W-2s and/or two years of federal tax returns and bank statements. Your overall finances will also be reviewed, so start gathering documentation relevant to your assets and liabilities.
- Choose a lender. After you discuss your refinancing strategy with potential mortgage lenders, you’ll be presented with a completed Loan Estimate or Cost Analysis Worksheet. This will include details of your new mortgage, including its interest rate, the APR (the cost of borrowing) and all of the closing costs and prepaid items you’ll pay at closing, or as part of the new mortgage. You can preview an example of a completed Loan Estimate here.
- Prepare for a home appraisal. Your mortgage lender may order an appraisal to determine your home’s current market value, especially if it hasn’t been recently appraised. Be sure to tell your loan officer about any recent improvements or repairs, as these may increase your home’s market value and help ensure your new loan is approved.
- Contact your homeowners’ insurance provider or agent. Your mortgage lender will require an updated Homeowners Insurance policy to close your refinance. It will include details of your coverage, a revised annual renewal premium and mortgagee clause.
- Lock your rate. A good loan officer will discuss interest rates with you, but you determine when to lock your rate. Delivering your documents early and selecting a lender with a reputation for closing loans on time will help to ensure your loan closes before the rate lock expires.
- Close and celebrate! Closing on a refinance is like closing on a purchase loan, but with one main difference: No one hands you the house keys at the end. But you still get to celebrate, so pop the champagne and toast yourself for being a savvy homeowner!
Ready to refinance your mortgage? Contact a Gibraltar Mortgage loan originator to get started!