Refinancing your home: Buying a home is one of the biggest milestones for people residing in the USA. However, this comes with the added financial responsibility of a mortgage. While the mortgage allows you to achieve your home ownership dreams, things change over time. With evolving circumstances like growing families, better jobs, changing interest rates, and more income, you might want to reconsider your current home loan.
This is where refinancing your home comes into play. It allows you to explore better ways to make your mortgage work by replacing your current loan with a new one. The new loan generally comes with benefits like low monthly payments, reduced interest rates, or the ability to pay off the loan earlier than intended.
According to a Freddie Mac report, borrowers refinancing their homes saved more than $2700 annually. Thus, a little paperwork now is bound to save you from financial stress later in life. In this blog, we will explore refinancing in-depth by getting an overview of the reasons for refinancing and the right time to do it.
Top reasons to consider refinancing your home
There are many reasons why people prefer to refinance their homes. Let’s see some of them:
1. Reduce monthly mortgage payments
It is one of the top reasons why people consider refinancing. A percentage or two drop in interest rates can help you lower your monthly payments. This will help you save money while building your equity faster.
2. Benefit from improved credit score
If you have been consistent with your current loan mortgage payments, you will likely have an improved credit score. A higher credit score can help you get lower interest rates when refinancing your home and save you more money.
3. Pay off the loan more quickly
If you decide to shorten the period of loan payment from, let’s say, a 30-year mortgage to a 20-year mortgage, then you can reduce the total interest you would have to pay on a 30-year loan. However, this will increase your monthly payments, so ensure you have enough finances.
4. Convert ARMs into Fixed Rate Mortgages
An adjustable-rate mortgage generally starts with a low interest rate for a specific time period. Once the set time ends, the interest rate adjusts according to the market conditions. Most of the time, the interest rates will go up. By refinancing, you can switch to a fixed-interest mortgage that stays the same for the entire mortgage duration, presenting you with steady payments throughout.
5. Eliminate Private Mortgage Insurance (PMI)
Lenders require a PMI to safeguard themselves from defaults if you bought your home with a conventional mortgage but could not make a 20% down payment. If you have built more than 20% equity in your home now, refinancing your mortgage can save you from costly PMI premiums.
6. Consolidate their mortgages
At times, home buyers who cannot arrange a 20% down payment take an 80% loan on the home price and an additional 10% mortgage. They pay the remaining 10% as a down payment. Typically, the second mortgage of 10% has a higher interest rate than the initial loan. Refinancing helps you consolidate these two mortgages under one loan with a more feasible interest rate.
7. Cash-out refinance
Once you have built equity in your home, you can refinance and draw out money against your home equity to cover other expenses like medical bills, remodeling your home, paying tuition fees, or starting a new venture.
The Refinancing Your Home Process
Hopefully, you have made up your mind to refinance your home. While the process of refinancing is similar to getting a mortgage loan for the first time, let us go through the process so that you avoid any last-minute troubles:
1. Evaluate your finances
When you opt for refinancing your home, you must submit documents about your financial health. These will help your lender understand that you can repay your loan without defaulting.
Here is a list of documents you need to prepare before applying for a new loan:
- W-2 Forms
- 1099 Forms
- Profit and Loss Statement
- Bank statement
- Investment account statements
- Retirement account statements
- Asset statements
- Home and mortgage documents
- Other documents like child support, alimony, or bankruptcy paperwork
2. Check your credit score
Your credit score is likely to change since the time you took your first home loan. Ensure that you check your credit score, as it will help decide the terms of your new loan. An increased credit score means lower interest rates, while a decreased credit score means unfavorable loan terms.
3. Know your home equity
Calculate the equity by subtracting the amount you need to repay on your current loan from the home’s fair market value. Your home equity can determine your loan eligibility and loan terms, influence interest rates, and guide the loan options available to you.
4. Shop around for mortgage lenders
You don’t have to refinance your home with the same lender or the first one that comes your way. Shop around and compare different lenders to get competitive interest rates in the market.
5. Appraisal and Underwriting
You need a new home appraisal when you decide to refinance your home. Here, the lender will order an appraisal of your home to verify that the new loan corresponds to the current home price. The lender will also conduct underwriting to assess your risk as a borrower.
6. Closing the loan
Once your application is approved, you will be expected to review and sign all the loan documents and pay closing costs. Further, you will need to provide proof of your home ownership at this stage.
At Bond Street Mortgage, we serve the lending needs of all real estate professionals, first-time home buyers, and builders with our wide range of services in mortgage financing. With us, you can refinance your mortgage and find the best loans for your needs with the lowest interest rates, lowest monthly payments, and suitable loan terms.
But this is not all! We guide you at every step of the loan application process and provide you with regular updates and progress reports so that you know the status of your application. For more information, reach out to our mortgage professionals and get the best service for your mortgage needs.