If your credit has improved or your financial situation has changed since you first took out your mortgage, you may be considering refinancing your home. We put together a step-by-step guide to help you through the process.
Step 1: Is refinancing the right choice?
Before you fill out an application, you must first decide whether refinancing is in your best interest. First consider, why do you want to refinance?
For many, the goal is to lower their monthly payment. If you take out a new 30-year loan, you might be able to decrease your payments. However, when you factor in interest costs, you may be paying much more for your home in the long-term. Interest on loans is front-loaded, which means you pay more of the principal balance the longer you have been paying on your loan. When you refinance your home, you essentially start from scratch, which means you will once again be paying primarily interest.
A better reason to refinance your home is to lower your interest rate or shorten the term of your loan. If you can do either of these things, you will save yourself interest costs, which means you will end up paying less for your house.
Step 2: Gather necessary information
To determine whether you will be eligible for a lower interest rate, check your credit report and score. You will need to know your score to get estimates on your interest rate, and it is important to address any inaccuracies on your credit report before you fill out a loan application. If you find erroneous information that could negatively impact your score, you can dispute the information with the three credit bureaus. Disputes should be reported 60 days before you plan on applying for a refinancing loan, though, as lenders generally will not start the loan process until disputes are resolved.
You will also want to take this time to gather the documents needed to refinance. These include:
- Up-to-date pay stubs
- Tax returns and W2s for the past two years
- Bank, investment and/or retirement account statements
- Most recent mortgage statement
- Current homeowners insurance declarations page
- Explanation letters for any derogatory credit issues or if you have applied for credit within the past 90 days
- If you are divorced, you will need your divorce decree and separation agreement
- If you have filed bankruptcy, you will need the court documents
Step 3: Crunch the numbers
Once you have decided refinancing is for you, and you have the accurate information about your financial situation that is needed, it is time to crunch the numbers. Mortgage calculators, such as the one offered by Zillow, can help you determine what your new monthly payment will be. You will need to know how much you will pay in loan origination fees, the new loan amount and your interest rate.
While it is easy to figure out your new loan amount (you can just check your latest mortgage statement to see how much you currently owe on your home), there are a number of calculators available online to help you fill in the other blanks. FICO offers a calculator to help you determine your refinancing closing costs, and you can check out refinancing rates on Zillow by inputting your credit score.
Step 4: Start shopping
Contact lenders to see who can offer the most competitive loan rates. Each lender will provide you an estimate within three business days of receiving your request. The estimate will include the loan terms, projected payments and estimated closing costs and fees.
Step 5: Complete the application
After reviewing the estimates, choose the lender who can offer the best loan terms and fill out the application. Since you have already gathered all of the necessary information, this should be a relatively painless process. As you fill out the application, make sure you are working carefully and accurately, as even small mistakes can slow down the refinancing process.
Step 6: Order an appraisal
After you have submitted your application, your lender will ask you to order an appraisal, which generally costs between $300 and $400. This document will establish the value of your property to make sure you have ample equity to support the new mortgage. Before the appraiser arrives, you might want to straighten up your home and complete any minor projects so your house is in the best, and most valuable, condition.
Step 7: Underwriting review
At this point, the work is out of your hands. Your lender will send your application and appraisal to an underwriter for review. They will examine each document to make sure your house is worth the amount of your loan and that you are financially capable of repaying the mortgage. Be prepared to provide additional information in a timely manner, if your underwriter has questions.
Step 8: Loan approval and lock-in interest rate
Once the underwriter approves your loan, they will send you an approval letter and conditions, which will list any additional information you need to provide and detail the terms of the loan. Carefully review this document to make sure the terms are what you expected. Also, review any conditions and make sure you can satisfy these requirements before closing.
If everything looks good, contact your lender and lock your new interest rate. A rate lock lasts for a specific period of time, anywhere from 7 to 60 days, and ensures that your interest rate and terms will not change before closing. Choosing a lock rate period can be a bit tricky. You want to make sure you are requesting enough time to complete any conditions provided by the underwriter, but you do not want to ask for an excessive period of time, as you will have to pay more in closing costs. If you cannot close within the lock period, you may end up losing your rate or paying lock extension fees. Thus, it is important to review the conditions, create a realistic timeline for meeting these conditions and add a few days for unexpected emergencies.
Step 9: Order documents
Ask your lender for a preliminary closing statement that will outline the terms and expected closing costs. Again, it is important to carefully review this information to make sure it is what you had expected so there are no surprises on closing day. If you do have any questions or concerns, contact your lender. If everything looks good, select a signing date and order the documents.
Step 10: Closing
When you go to the closing, make sure you have your driver’s license, state-issued identification or passport, and block off enough time in your schedule to review each document carefully. Typically, you will sign with a notary or attorney who can help answer any questions you may have.
After signing, you will have a three-day period in which to cancel if you change your mind. If you do decide refinancing is not for you, you must contact your lender immediately. After this period has expired, your lender will fund your loan, and the closing agent will apply those funds to your existing mortgage. The closing agent will then send you your new mortgage or deed to be recorded against your property.
The official closing statement, the HUD-1 form, should arrive a few days after closing. Make sure you keep a copy of this and your loan documents on hand for tax purposes.